“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
— Warren Buffett (this represents an increase of 17,320 percent)
Great investors build wealth over the long haul. As one illustration, over the period from 1926 through 2015, the annualized total return for large-cap stocks was approximately 10 percent, which produced remarkable growth when compounded. The total return for the S&P 500 (with dividends reinvested) applied to $10,000 beginning in 1970, results in more than $400,000 at the end of 2005 and $800,000 at the end of 2015. While, of course, future stock performance may not match these past results and investors always face the possibility of loss, a 19-year-old who had put away $10,000 on the last day of 1969 and earned the S&P return over the period of 1970 through 2015 would have more than $800,000 at age 65 with no additional investment after 1969. Why, then, do so many investors fail to take advantage of this potential?
The purpose of this blog is to focus on the great investors of the last half century and explore their stories, techniques, challenges, and triumphs. There are many different approaches to making money in the stock market. In subsequent blogs, I intend to explore the approaches great investors used to build wealth.
Many investors fall victim to several common errors. They don’t consistently remain in the market, they may chase the hottest fad, or perhaps they don’t pick an investment style and stick to it. It is important, therefore, to draw the distinction between investing and speculating. Speculators guess what might be in favor in the near future and hope that their guesses are correct. Speculators often seek quick profits in strategies where they may risk substantial loss. Investors put money to work over long periods and expect to earn a return on their capital through capital appreciation and growth of income.
The great investors of the late 20th and early 21st centuries witnessed tremendous social and economic change, but they nonetheless grappled with questions that are just as relevant today as in the post-World War II period. What techniques should we use to find the best companies? How expensive is too expensive for a great company? Is a company’s competitive advantage sustainable? What if an industry — or the world — changes? The great investors of the last half century were not always right all of the time, but they instead built success and wealth on good judgment, skill, and hard work.
Warren Buffett has built his record — and his following — on evaluating the operating characteristics of the businesses in which he invests. He looks for strong brands, which have intrinsic value but are perhaps out of favor. This approach requires diligence, flexibility, and a contrarian viewpoint. Buffett is famously quoted as advising others to buy companies that they would be happy to hold if the market were to close for the next 10 years, noting that “time is the friend of the wonderful business, the enemy of the mediocre.” He is the consummate long-haul investor and has stated, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” In the next edition, I will profile Buffett and explore where he has found opportunity and challenge, and how his well-quoted investment philosophy has worked out in his portfolio.
Josh Peteet
Josh Peteet is a Portfolio Manager at Bradley, Foster & Sargent, Inc. The views expressed in this column are his own and not those of the firm.
