OPINION:Equities will certainly outperform cash over the next decade, writes Warren Buffett
THE FINANCIAL world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general US economy, and the leaks are now turning into a gusher. In the short term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So I've been buying American stocks. Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of America's many sound companies make no sense. Most major companies will be setting profit records five, 10 and 20 years from now.
Let me be clear on one point: I can't predict the short-term movements of the stock market. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.
A little history here: During the Depression, the Dow hit its low, 41, on July 8th, 1932. Economic conditions, though, kept deteriorating until Franklin D Roosevelt took office in March 1933. By that time, the market had already advanced 30 per cent. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the US endured two World Wars and other traumatic and expensive conflicts; the Depression; a dozen or so recessions; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that governments will follow in efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring the great Canadian ice hockey player Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been."
Again I emphasise that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: "Put your mouth where your money was."
Today my money and my mouth both say equities.
(
New York Times)
Warren Buffett is the chief executive of Berkshire Hathaway