Spend Like It’s Old Money
At the end of 1974, most shares had lost half their values in two years. After such a horrendous time, nobody wanted to touch stocks. Nobody, except Warren Buffett. His timing was perfect.
16 March 2009
As a money manager, Buffett told his investors "there's nothing left to buy" in the late 1960s. He gave his investors their money back. But in late 1974, Buffett saw incredible bargains and got back in business. Armed with plenty of cash, he went on a buying binge.
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His purchases included Dean Witter, National Presto Industries, Detroit International Bridge, Sperry & Hutchison, U.S. Truck Lines, J. Walter Thompson and Grand Union.
As Maggie Mahar explains in her book Bull, Buffett was simply behaving like Old Money. He stood aside in the giddy late 1960s, and got back in business big time at the market bottom in 1974. "While most investors are motivated by a desire to make money, Buffett focused first on not losing money," Mahar notes.
"The very rich don't fret so much about making money," she says. "Their greatest fear is losing it. This explains why, when the bidding escalates - whether in a stock market, a "hot" real estate market, or at a Sotheby's auction - Old Money tends to step aside, letting New Money carry the day."
However, this time around Buffett HAS lost money. It is a measure of how absolutely pervasive the current financial turmoil has been that not even Buffett found a way of protecting his assets. But the losses have not changed his policy and only recently he wrote about the immutable law that governs long term growth in the US economy, and why investing in its best companies makes more sense now, when everyone is nervous, than before.
Smart people buy when things are unpopular with the public, even hated. For example, in the 1990s one of NZ's leading financial commentators wrote a book about property, which contained statistics to show residential property is a total dog, and should be avoided in favour of industrial and commercial property. In fact, many New Zealanders forget that for a long time residential property was a dog.
The boom in 1987 had left it over valued, and for many years its growth was quite pedestrian. But then time passed and the factors needed to kick start the market all lined up and property started booming again. That article by a property expert telling you not to touch residential is called "capitulation," marking the very bottom of the market.
Smart investors watch for these signals of capitulation and then start buying into an asset class. At the moment we are approaching capitulation in shares and property, but we are not quite there. These markets have fallen but not to the point where newspapers are writing articles warning people to avoid investment altogether.
The right course of action could be to avoid being too heavily invested right now in "traditional" investments and to build up cash in anticipation of capitulation by other investors, when shares and property reach extremely low prices.
The boldest action now might be to act like the Old Money and protect what you have, first and foremost, but be ready to invest when the time is right.