Buffet Advises Investors to Expect Less

Regular readers will know that this journal holds Warren Buffet’s market acumen in high regard. In recent comments, he has talked about a long recession or slowdown, his plans to acquire (through his investment vehicle Berkshire Hathaway) a few more companies, and alternative energy. Of all of his remarks the oine that stands out was his belief that investors may just have to get used to lower rates of return.

Speaking at the Q&A session of last week-end’s Berkshire Hathaway annual meeting, Mr. Buffet said, “We would be very happy if we earned 10%, pre-tax. Anyone that expects us to come close to replicating the past should sell their stock; it isn't going to happen. We'll get decent results over time, but not indecent results.” At the current US tax rate for profitable businesses, that means a rate of return to investors of just under 7%.

His long time business partner Charlie Munger echoed that sentiment, “You can take what Warren said to the bank. We are very happy at making money at a rate in the future that's much less than the past... and I suggest that you adopt the same attitude.”

The very idea of such a low ROI is anathema to the guys in the $2,000 suits in the skyscrapers of Manhattan. Their motivation is to outperform the market. Making 20% in a year is a good way to attract more investors, and hedge fund managers get a cut of the overall amount of money they manage. A bigger pot means a bigger slice (or skim if one prefers).

However, for the regular investor, 10% over 30 years is a pretty decent compounding. Shopping around for a bargain is how Mr. Buffet made his money, not on following the crowd to a stellar money manager. He recently said, “There’s no reason we should become fearful if a stock goes down. If a stock goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” The reason: he’d be buying because he believes in the companies he owns. And because he doesn’t expect more than 10% pre-tax growth.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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