What can we learn from Warren Buffett in 2016?

Feb 4, 2016

By Dr. Harold Wong
Sound Money

Warren Buffett is considered the best stock market investor of the last 50 years. His Berkshire Hathaway is a holding company that owns more than 80 businesses.

In addition, Berkshire has a portfolio of public securities that was valued at $110.3 billion, down 6.1 percent from year-end 2014.

“Unlike the year 2014 when the stock gained 27.8 percent, Berkshire struggled to post positive gains in 2015. In fact, Berkshire lost 11.5 percent last year compared to a decline of 0.7 percent for the S&P 500 index.” Source: Buffett Fans Take Note: “5 Stocks That Crushed Berkshire Hathaway in 2015,” 1-5-2016 Zacks Equity Research. However, Buffett does not lose any sleep. One of his many sayings is “Don’t own a stock for 10 minutes if you were not willing to own it for 10 years. My favorite holding period is forever.” The average investor would be concerned about losing 11.5 percent of one’s life savings; Buffett isn’t. 

Live frugally and you will be able to save. For about 30 years, Buffett has not raised his annual $100,000 salary by 1 cent. However, his income was an estimated $62.8 million in 2015, mostly from dividends spun off from his own personal holdings. Source: “Special Report: How Warren Buffett Survives on $1,923.09 a Week,” 2016 Outsider Club. Even though he was ranked the third wealthiest person in the world, Buffett has lived in the same house for about 50 years, and he paid $31,500 for it. 

In contrast, the U.S. average savings rate was 5.5 percent in November 2015. There was a negative savings rate for two years during the Great Recession. If we look back 30 years ago, the national savings rate was about 6 percent. This simply won’t work. If you earned $100,000 annually for 30 years, saved $5,500 annually; and got a 3 percent rate of return, you would have $269,515 at retirement.

Your annual investment income, if earning 3 percent, would only be $8,085, or $673 a month. If one receives the average $1,294 a month Social Security check received in 2014, one first has to subtract about $104 a month for Medicare Part B. Now, one’s total income is $1,190 plus $673 equals $1,863/month. Most employees, unless government employees, have no old-fashioned pension. Your retirement income will be Social Security plus whatever income can be derived from your life savings. In contrast, if you could save $15,000 annually for 30 years and average a 5 percent return, you would have a little more than $1 million for your retirement.

“Be fearful when others are greedy and be greedy when others are fearful” is one of Buffett’s many famous sayings. Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Buffett. Back in 2001, he remarked in a Fortune Magazine interview that “it is probably the best single measure of where (stock market) valuations stand at any given moment.”

From 1950 to the end of 2015, the mean ratio was 69.5 percent. It reached a high of 151.4 percent in early 2000, just before the 2000-2002 dot-com crash. At the low of March 2009, after the 2008 stock market crash, the ratio was 61.3 percent. In late 2015, it reached a 129.8 percent ratio, just before the stock market started to wobble because of concerns about China’s economy slowing. At the end of 2015, the ratio was estimated to be 114.3 percent.

Based on the Buffett ratio, the stock market seems to be significantly overvalued. Because of the 6.5 year stock market boom from March 2009 until August 2015, people got greedy.

Now, it may be wise to be fearful and decrease one’s exposure to the stock market. © Dr. Harold Wong 2016

Harold Wong may be contacted for a consultation at 480-706-0177 or at haroldwong1@yahoo.com.