I think it is always interesting to go back and look at historical comments from successful investors. When I say historical comments, I mean comments these investors made several decades ago.
These comments can offer interesting case studies of why it is essential to take a long-term perspective with investments in the stock market. It is challenging to stand here today and imagine what the world will be like in three or four decades. However, it is easier to look back and see what investors were projecting the world might look like in three or four decades, three or four decades ago.
For example, in 1994, at the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting, a shareholder asked Warren Buffett (Trades, Portfolio) if he had any opinion about the state of the economy and its prospects over the next couple of years. "Are you bullish or bearish?" the shareholder asked the Oracle of Omaha.
Buffett responded by saying that he never had an opinion about the state of the market. Instead, he tried to focus on business qualities:
"If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do or anything of that sort."
He went on to add that when he first started investing, in April of 1942, the Second World War was raging, and the prospects for the global economy looked terrible.
As he was only a young man at the time, Buffett speculated that he probably did not factor this into his purchase of the shares at the time. Still, since the end of the Second World War, the economy has been through numerous peaks and troughs, periods of inflation, political uncertainty and other major wars.
And despite all of these macro headwinds, the U.S. economy has continued to grow, and equities have continued to reflect the growth. Buffett went on to add:
"I mean, we are going to be buyers of things over time. And if you’re going to be buyers of groceries over time, you like grocery prices to go down. If you’re going to be buying cars over time, you like car prices to go down. We buy businesses. We buy pieces of businesses: stocks. And we’re going to be much better off if we can buy those things at an attractive price than if we can’t."
Put simply, Buffett advocated buying great businesses at great prices and ignoring any macroeconomic uncertainties. This might seem like a simplistic view. After all, if the economy struggles, companies will struggle, which will impact their shareholders. However, understanding how individual businesses work is a lot easier than understanding the complex machine that is the global economy.
The success of an individual company can be dictated by its competitive advantages, brand strength, customer relations and the quality of the management. In comparison, trying to estimate the trajectory of the U.S. economy over the next five years would require millions of different data points, some of which would be impossible to collate.
Buffett made his comments in 1994, and he has been proven right over the past 28 years. During this period, despite multiple economic contractions and political uncertainty, the economy has continued to grow and well-managed companies have been able to take advantage of this.
This is probably the best case study of why it is crucial to concentrate on the long-term fundamentals of individual businesses rather than speculate on macroeconomic changes and developments.
Buffett's track record stands testament to the success of his approach that has endured almost everything the market can throw at it over the past seven decades.
