Warren Buffett: Takeaways from a stellar 50-year track record

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Source: Wall Street Journal, MSCI.com *Annualized **USD

What comes to mind when you hear the name Warren Buffett – investor,  CEO, entrepreneur, stock picker, philanthropist, or billionaire? Or maybe something else comes to mind? Whatever you think, one thing is clear: he has made a lot of money investing over the years.

If you’re counting, Forbes’ 2015 ranking places his net worth at $72.7 billion, which makes him the third wealthiest person in the world behind Mexican telecom king Carlos Slim ($77.1 billion), and Bill Gates ($79.2 billion).

Buffett’s success over the last 50 years undoubtedly enhances his credibility, and when we think of Warren Buffett, “patience” and “value investor” are among our first thoughts.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Buffett once remarked.

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” he has advised. That compliments another one of his quips, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

He sure seems to have mastered the art of patience, eschewing worries about the daily twists and turns in the market in favor of the long term.

Now, there will be times when we make specific buy or sell recommendations regarding various investments, some of which may have to do with economic fundamentals or your personal situation.

Still, his “forever” philosophy is a guideline that beckons us to be patient investors, keeping our eyes on the long-term prize.

There generally aren’t hard and fast rules that apply to every situation, but a focus on the fundamentals has typically proven to be among the wiser paths one can take.

Even with severe bear markets in the mid-1970s, 2000-02, and 2008-09, stocks have still registered strong returns over the longer term.

We can’t say for sure where the market will be in 12 months—who really can?However, an investment in a broad-based portfolio is akin to grabbing a stake in the global economy.

While we’ll see setbacks from time to time, the global economy continues to plow forward, supporting corporate earnings rewarding investors who practice patience.

Inflation, the Fed, and low rates

While we never want to miss the forest for the trees, we believe it is important to keep tabs on the crosswinds that influence shorter-term market action.

One topic that has been influencing markets right now has been the unusually low rate of inflation. That’s right, low inflation.

Just the mention of inflation, especially “unusually low inflation,” and we’ve probably conjured up all kinds of worrisome thoughts.

While we are all aware of the steep drop in gasoline prices, other items seem to be rising in price.

Your favorite restaurant may have just hiked prices, or the cost of a movie ticket, popcorn, and a drink may leave you gasping for breath. Has the price of your health insurance jumped? Or maybe the check you just wrote for your son or daughter’s college tuition comes to mind when you hear someone utter “unusually low inflation.”

Well, according to the broad-based Personal Consumption Price Index, which is the index the Federal Reserve favors when it’s gauging price pressures in the economy, price increases have been holding below its 2% annual target for 34 months straight, per data supplied by the St. Louis Federal Reserve.

If we throw out the more volatile food and energy components and look at what economists call core inflation, we’re still below the Fed’s 2% target for the same 34 months.

The Consumer Price Index is more familiar to most folks, especially to those of us who remember the high inflation of the 1970s. The CPI tends to run slightly higher than the PCE Price Index, but it is also currently running below the Fed’s target of 2% (BLS).

But what if you’re thinking that government numbers simply aren’t accurate, or worse, government data are purposely being skewed to the downside. It is something we hear from time to time.

Such a hypothesis seems unlikely if you review data compiled by two MIT economists, whose pricing gauge has been dubbed the Billion Prices Project (BPP). BPP monitors daily price changes of several million items sold online by about 300 online retailers.

Unlike brick and mortar stores, prices online can be changed instantaneously, offering more of a real-time look at inflation.

Reality:  The BPP has closely tracked official government pricing indexes, strongly suggesting government statisticians aren’t cooking the books.

So what’s the point? Well, whatever you think the real rate of inflation is–and of course it will vary from person to person based on the individual basket of items and services he or she consumes–how the CPI or the PCE Price Index records inflation directly affects stocks, bonds, and Federal Reserve policy.

Therefore, these are the relevant measures of inflation for an investment viewpoint.

The Federal Reserve was quite explicit in its statement that followed the March meeting when it noted it won’t begin raising the fed fund rate until it sees further progress in the job market and “is reasonably confident that inflation will move back to its 2% objective over the medium term.”

Clearly, low inflation is playing into the Fed’s low-rate equation. Plus, long-term bondholders want to be compensated if they expect much higher inflation. Right now, that’s not the case.

While the Fed’s take on inflation and raising rates is vague, the Fed doesn’t need to see 2% inflation; it just has to be “reasonably confident” that inflation is moving toward its target.

In some respects, it reminds me of the 1960s Supreme Court decision on the definition of obscenity. Fed Chief Janet Yellen seems to be implying she will know inflation is rising when she sees it.

Europe still matters

Low inflation isn’t the only thing that’s holding yields down in the U.S. If you think it’s bad at home, take a look at Europe. Want to buy Germany’s 10-year bond? You’ll get a yield of less than 0.20%. That’s right, less than 0.20% for 10 years (Bloomberg). In Switzerland, the 10-year yield is just below zero!

In fact, in a number of countries in Europe, you’d have to pay the government (a negative yield) if you were to buy shorter-term debt (CNBC, Bloomberg).

It’s another reason why we are grappling with low bond yields, as investors in Europe look for safe debt that earns a much better return than what they receive at home.

What does all of this mean?

We always recommend that you stick to the plan that our team has recommended. For starters, it takes the emotion out of buying and selling. It also reduces anxiety and risk, and is the foundation of your plan to achieve your financial goals.

While U.S. markets have performed quite well in recent years, diversification outside the U.S. helps to reduce overall risk and allows us to take advantage of growth opportunities that aren’t available at home.

No one can accurately forecast which markets will be winners and which will be losers, but a stake in global equities enables us to maximize your return over the longer term.