In our recent article titled “The Sky is Not Falling”, we discussed the need to avoid panic
during turbulent market times such as what we have been experiencing. It is very
difficult to be calm when you see your 401(K) balance dropping daily, hear talk of
recession and in some cases even the mention of a possible depression.
In the article, we quoted one of our favorite investors, market guru Warren Buffet, one of
the wealthiest men in the United States. Warren’s Berkshire Hathaway stock is in some
ways like a mutual fund. Berkshire Hathaway owns sizable portions of very profitable
companies such as GEICO Auto Insurance, Johns Manville, Benjamin Moore, NetJets
and a host of other companies. Many of the companies Buffett has invested in are not
the flashy names you hear on Wall Street everyday. But they are typically well
managed, steady producers of solid profits.
Buffett does not believe that paying dividends or splitting stock shares adds value. As a
result, Berkshire Hathaway share prices are not for the faint of heart. The Berkshire
Hathaway Class A shares recently sold for an eye-popping $133,300 each and the
Class B shares sold for $4,475! There are many investors who have become
millionaires by buying Berkshire Hathaway stock in its early years.
Buffet’s quote that we mentioned in our article was: “I will tell you the secret of getting
rich on Wall Street. You try to be greedy when others are fearful, and you try to be very
fearful when others are greedy.” What Warren was really saying was that you should
buy low and sell high. We explained in our article how average investors can effectively
buy low and sell high by maintaining a well-diversified portfolio with specific target
percentages for each asset class. Then, with regular periodic balancing, either annually
or semi-annually, over-allocated asset classes should be trimmed to their target
percentage and under-allocated asset classes brought up to their target percentage. In
essence, over time, this forces you to buy low and sell high. The strategy takes the
emotion out of investing but it also requires solid discipline.
Recently, during the market meltdown and bailout attempt by Congress, Warren Buffet
acted true to his own advice. While many contemplated pulling everything out of the
market, Buffet invested $ 5 billion in Goldman Sachs. Amidst the market turmoil,
Goldman Sachs’ stock had dropped a whopping 36% over a ten day period! Buffett
drove a very hard bargain that bought him preferred shares in Goldman that can not be
converted to equity and it pays a 10% dividend. The dividend is equivalent to $1.3
million a day to Berkshire Hathaway. At the time of this writing, it was just announced
that Buffet had made a similar investment in General Electric.
Buffet’s investment in Goldman and GE was a vote of confidence that our market crisis
will soon be resolved. Buffet practices what he preaches: “Be greedy when others are
fearful”. He views troubled times as an opportunity, not a threat. It is a good lesson for
us all to heed.
David C. Patterson, CFP® and Erin Preston, CFP® are the owners of Patterson
Advisors, LLC, a fee-for-service-only financial advisory firm. Patterson Advisors, LLC is
a Registered Investment Advisor, registered with the State of Michigan, helping clients in
Waterford, Clarkston and Royal Oak, Michigan as well as other Oakland County,
Michigan communities . Visit www.pattersonadvisorsllc.com for more information or call
248-674-2108.
Published in the Oakland Insider, October, 2008
A Lesson from Warren Buffett
By David Patterson and Erin Preston (formerly Patterson)