Warren Buffet recently published his much-anticipated annual letter to shareholders. Per usual, it was chock-full of wisdom.
Mr. Buffett started investing 77 years ago with an investment of $114.75 in Cities Service Preferred Stock. Had he invested this amount in an unmanaged S&P 500 Index fund it would have grown to $606,811 at the end of January 2019 – a gain of 5,288%!
He discusses deficits and gold: “Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.”
He’s no fan of gold. To be fair to the price of gold, it was fixed at $35 per ounce from 1944 to 1976 before President Nixon abandoned the gold standard. Since Nixon set it free, gold has averaged an annual return of 8.8% per year. The S&P 500 averaged 8.3% per year, before dividends, during this same time frame.
Time frames matter. From January 2005 through January 2019 Gold (GLD) outperformed the S&P 500 (SPY) by 56%. If the start date is changed to January 2009, stocks outperformed gold by 164%. Gold has posted a negative return for the past 5 years while stocks have risen 51%.
Had you purchased Amazon in 2000, you would’ve lost 86% of your investment by the end of 2001. A $10,000 investment dropped to $1,421. If you told anybody you owned Amazon, they would’ve called you an idiot. However, from January 1, 2000 to January 31, 2019 it returned 2,157% to investors. The S&P 500 rose 181% during this stretch.
Last year, cash outperformed stocks – a first since 1994. Since 1926 cash has generated a negative return after deducting taxes and accounting for inflation.
It’s important to watch time frames when comparing investments because it’s easy to make any investment look good for a while. Rather than focusing on investments that appear attractive in the near term, concentrate on the ones that can help you reach your financial goals. Here are a few guidelines to help you make better portfolio decisions.
- If you want to own gold, or some other alternative investment, limit it to 3% to 5% of your account balance.
- Stocks outperform bonds and cash over time. If your horizon is three years or more, allocate a healthy portion of your assets to stocks.
- International stocks make up half of the world’s equity market capitalization, so allocate a portion of your assets to companies outside of the United States.
- If you need money in one year or less, invest in short term cash investments like T-Bills, CDs or money market funds.
- Adding tax-free municipal bonds to your account can improve returns, especially if you’re a high-income earner living in California or New York.
- To reduce risk, add bonds and cash to your account.
- Rebalancing your accounts once or twice per year will keep your risk level and asset allocation in check.
- Keep your fees low. You can check the fees of your holdings at Yahoo! Finance, Morningstar, or several more financial websites.
Mr. Buffett made a fortune by buying and holding great companies that can raise their earnings over time. His time frame has been forever. He bought investments that fit his model and shunned things that didn’t, like gold. Following the investing habits of Mr. Buffett will pay dividends. A great place to learn about his philosophy is by reading his annual letter. Here’s the link:
“Facts are stubborn things, but statistics are pliable.” ~ Mark Twain
February 27, 2019
Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.
 Berkshire Hathaway Letter to shareholders, accessed 2/27/2019, http://www.berkshirehathaway.com/letters/2018ltr.pdf
 https://www.thebalance.com/gold-price-history-3305646, Kimberly Amadeo, 1/7/2019
 YCharts, GLD & SPY, accessed 2/26/2019
 Morningstar Office Hypothetical Report