Timing History, The Long-Range Thinking of Buffett And Munger

Today, we’ll look at two gentlemen who’ve invested not for weeks or years but for decades. Warren Buffett and Charlie Munger built one of the most successful investment vehicles ever, the Berkshire Hathaway Company. And they did it by understanding the historic times they were in. Today, we’ll look at the mountains and valleys of investing: timing history.

Many years ago, Charlie Munger, who was Warren Buffett’s partner at Berkshire Hathaway (Charlie recently passed away), said about 20 years ago or so that investors should be willing to lose half their investment’s value. Charlie’s point was that we should be so convinced of the worth of an investment that we’re willing to hold on to it through thick and thin, to be willing to wait for its value to return.

Buffett echoed much the same sentiment when asked how long he planned on holding a particular investment: “Forever,” he replied.

Munger and Buffett are two of the most successful investors in history. Buffett’s track record, in particular, is second to none. He built a relatively small initial war chest into one of the largest fortunes on the planet. His investment company, Berkshire Hathaway, is ranked as the tenth most valuable stock and is closing in on a trillion-dollar market cap.

Ask Buffett what the key to his success was, and he’ll tell you that he “won the genetic lottery.” He was lucky enough to be born in the United States, a country that rewarded free enterprise and innovation. This country built a system where even the average American can invest capital. They can obtain wealth beyond their wildest imagination if they utilize some common sense and an understanding of financial principles.

Certainly that’s true, and every time I hear Buffett’s litany, it makes me proud to live in this country. The United States has created more wealth for more of its people than any other country in history. Buffett himself has created a legion of millionaires from those who were insightful enough to just “stay with Warren” through the good and bad times.

Yet, there is another dimension to Buffett’s success, one that is becoming increasingly relevant.

Warren Buffett had exquisite timing. I don’t mean timing like you hear about it on Wall Street. Most often, one hears about timing services, a frenetic buy-sell program that tries to profit from the market’s ups and downs on a monthly, weekly, or even daily basis. Buffett was adamantly opposed to that type of “investing,” which he called the gross kind of speculation, and railed against such “timing” on a regular basis.

No, when I speak of Buffett’s timing, I mean it in the sense of “history,”
those long-term moves that can change the course of a nation. Buffett began Berkshire Hathaway in the middle of one of the worst bear markets ever. I know because I became a stock broker at exactly the same time. Back then, “playing in the stock market” was considered a fool’s game, a sure way to lose all you invested. My grandparents, who had lived through the 1929 Stock Market Crash, advised me to try something else.

An old joke made the rounds: “You know how to make a small fortune in the Stock Market…begin with a large fortune.” LOL

What A Stroke Of Luck

Although it certainly didn’t seem like it at the time, starting when we did was a pure stroke of luck. Everything was cheap, and as it turned out, during the mid-70s, the markets bottomed out, never to see those levels again. In the mid-70s, the Dow Jones Industrial Average bottomed out at less than 600. Today, it trades at more than 40,000, over 70 times higher.

Incidentally, Buffett and I weren’t the only ones to begin when markets were historically at a low point. A gentleman in San Francisco named Charles Schwab also started his firm at the same time.

We all hit one of the best historic moves in the market of all time. If the secret of investing is “buy low, sell high,” we certainly nailed the “buy low” part.

At this point, some may wonder, “What’s the point?” That’s all history; what’s the relevance for today?

The “point” was a subtle one buried in our earlier discussion: it runs counter to conventional thinking: the best time to invest is when no one wants to. Remember when I said that my grandparents tried to talk me out of becoming a stock broker? That was far from an isolated event.

Americans wanted nothing to do with the Stock Market. For a decade, mutual funds went “net redemption,” that is, more funds were sold than purchased. Brokerage firms went out of business, and we ended the 1970s with fewer than half the number of stock brokers than we began the decade with.

Few, among them Warren Buffett, saw that these were the “bargains of the century.” By investing when no one else wanted to, you were bound to make money when the country recovered. They saw that it would be an exact replica of the 1930s when the country recovered after the severe depression that followed a stock market crash.

So, If the 70s were the valley, what was the “mountain?” The answer: the 1960s. The ’60s were the “go-go” years, when Mutual Fund Managers became celebrities,  and stock brokers were the most popular members of the country club. It was a time of easy money and fast profits, when everyone had a new “hot stock” and was happy to tell you about it. Conglomerates and big mergers were all the rage.

Incredibly, the late 1960s were among the worst times ever to invest. Certainly, everyone wanted to put their money in stocks, but after hitting one thousand for the first time in 1966 (and again in 1972), it would be years before the Dow reached that level again in 1982.

That became their historic investing model: invest in the valleys when no one else wants to buy, and sell in the mountains when everyone wants to put their money in the stock market.

Warren Buffett hit the “buy side” just right, beginning his firm at one of the deepest valleys in history. So, where is he today? You guessed it: he’s selling. From Buffett’s perspective, we are on top of a mountain today. How big a mountain is it? He doesn’t know. But he is committed to removing as much of his firm’s capital from the market as possible. (see our article of June 24, 2024).

To date, Buffet has removed $200 billion from stocks (sold) and placed it in US Treasuries (primarily T-bills). Buffett now holds in cash more than the entire net worth of 90% of the S&P 500 companies.

It’s a remarkable move to safety and a sure indication that Buffett feels it’s time to get off this mountain.

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