The following paragraphs, relating to long term investing, are excerpted from Warren E. Buffet’s most recent Berkshire Hathaway Inc. letter to shareholders.
“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period that included the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.”
“Stock prices will always be more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong. Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”
“It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. Any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.”
“For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.”
Please click the following link if you are interested in reading Mr. Buffet’s letter to Berkshire Hathaway shareholders in its entirety (http://berkshirehathaway.com/letters/2014ltr.pdf).
All comments and suggestions are welcome
Walter J. Kirchberger, CFA®