Warren Buffett made another $10 billion from the investments he made during the financial crisis of five years ago. That headline in the Wall Street Journal, and their analysis of Buffett's investment returns likely caused a groan from most ordinary investors who perhaps dumped the stock funds in their 40l(k) plans, fearing further disaster.
How does Buffett do it? And can you learn a lesson for next time? (Because there certainly will be a next time, perhaps sooner than you think if this debt ceiling crisis persists.)
Buffett has famously said he invests by the rule, "Be fearful when others are greedy, and be greedy when others are fearful."
You're probably thinking that's easy for Buffett to say. First, he's a genius, and second, he has tons of money so it must be easier for him to make these huge bets. Well, I'm not so sure it was that simple.
Think about what courage -- or investment sense -- it took to pour $5 billion into Bank of America in 2011 when it was feared that the nation's banks would collapse. Several already had, and even the government's huge TARP program left the banking system in a precarious position. Yet Buffett stepped in. And today, according to the WSJ, his investment in preferred shares has more than doubled in value, plus it gives him a $300 million annual dividend.
Buffett wasn't playing with "throwaway" money. The $25 billion in cash he invested in the midst of the crisis belonged to his investors, as well as himself. He made the investments in B of A and other major companies, including Mars/Wrigley, General Electric, Dow Chemical, and Swiss Re, at a time when they were in dire financial straits. And the money was a significant percentage of Berkshire assets.
One other point of note: Buffett had the cash to make the investments. Instead of being overloaded with stock investments in 2007, when everyone was so bullish, he wisely kept some cash on the sidelines, available to buy bargains in the next decline.
Today he -- and his investors -- are rewarded.
If you want to hear Buffett's thinking back in October 2011, click on the video interview on my website, www.TerrySavage.com, and you can hear him express his belief in the future of America, even during the most fearful times.
Can You Be Buffett?
So, does Warren Buffett have a special market genius, or could you perform as well?
I immediately thought back to that scary period in March of 2009, when the Dow Jones Industrial Average fell to just above 6700. If an investor had just continued contributing the same amount monthly to his or her 40l(k) plan, invested in the S&P index fund, those contributions would have had a return similar to Buffett's gains! And Buffett himself made that point, in the WSJ interview.
But emotion prevailed among ordinary investors. Despite my own pleas at the time that people should continue those regular monthly 40l(k) contributions, the outflows from equity mutual funds became a flood, as scared investors rushed to save what was left of their retirement plans.
It's only human nature to try to preserve capital -- and that's what Buffett does best: He remains logical and unemotional when the pressure is on.
Buffett Makes Mistakes
Even Warren Buffett makes mistakes. He's often and publicly said that his worst mistake was the purchase of the Maine-based Dexter Shoe company in 1993 for $433 million in stock. Buffett misjudged the product and its market, and within a decade it ended shoe production in the United States and Puerto Rico. The remaining parts of the company were folded into the H.H. Brown shoe company, which Buffett controlled.
But it wasn't just the Dexter loss that rankled Buffett. He has always said that his biggest mistake was in paying for the company with Berkshire stock! That purchase price of $433 million became stock worth $3.5 billion!
There's a happy ending to this story, and I came across it by chance at a dinner last night in Winter Park, Florida, of all places. Our host was raving about a small, new, boutique hotel that had recently been built in the small town, home to Rollins College, which his daughters attend. The Alfond Hotel, he explained, was built as a joint venture between the college and the Alfond foundation -- with all profits going to the school's scholarship fund.
Now, here's the "kicker" -- literally. Harold Alfond, for whom the hotel is named, was a great philanthropist for Rollins College. He was also the founder of the Dexter Shoe Company -- the man who sold out to Warren Buffett in 1993!
Alfond put most of his Berkshire stock into his private foundation, which over the years has given away hundreds of millions to causes including Rollins, various universities and educational programs in Maine, and cancer research. The foundation continues its charitable work today.
And that's what came of Buffett's worst mistake! Don't you wish you could say the same thing?
Listen to the video, and hear Buffett's words: Never give up on America. That's a good thing to remember today as we create another fiscal crisis. And that's The Savage Truth!