Warren Buffett’s Words of Wisdom During the Worst Part of the Financial Crisis and How They Relate to 2013

There’s no doubt that 2013 was an incredible year for the financial markets. The S&P 500 entered its fifth year of a bull market, and gained some serious ground by going up 30%. It had its best year since 1997.

Nobody predicted that this would happen. The majority of the bullish strategists believed that the S&P would only reach 1615, but the market easily surpassed that level in May 2013.

It is understandable that analysts and investors had a conservative forecast entering the year because of the “fiscal cliff,” which continued to threaten massive budget cuts on a federal level and a government shutdown during the fourth quarter.

Jeff Saut of Raymond James fame provides us with a nice summary of all of the worries that were plaguing the markets in the recent past:

“Speaking to the new backdrop, consider this. For the past two years the markets have been confronted with numerous issues. The debt downgrade, the fiscal cliff, the sequester, the government shutdown, Dodd-Frank, rumors China would implode, the call that interest rates would skyrocket, Europe’s debt crisis, a potential US debt default, Fukushima, the Arab Spring, Iran, North Korea, Iran, Egypt, Syria, etc., yet the equity markets traded higher…”

Tobias Levkovich from Citi had a similar outlook in his note to clients this past Friday:

“Who would have “thunk” it? A market soaring 28% was not in almost anyone’s calculation back in late December 2012 since the possibilities of such a gain were extremely low given S&P 500 history. Imagining a bipartisan budget agreement in Washington without rancorous rhetoric similarly was not on any pundit’s prediction list, especially after a nasty government shutdown. And, yet, the Murray/Ryan bill was worked out. Moreover, despite the botched roll out of the Affordable Care Act/Obamacare program, the economy seems to be gathering some steam even in the face of health care uncertainty. In this context, it has been a year of surprises…”

The big rally in 2013 amongst so much worrying reminds us of the 2008 New York Times Op-Ed piece from Warren Buffett, which he published during the scariest days of the financial crisis. Here’s an excerpt that is valid even to this day:

“A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30%. Or think back to the early days of World War II, when things were going badly for the United States and Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

We are not trying to say that Buffett would’ve or could’ve predicted a specific year that would have seen large returns on investment.

The lesson to learn is that there are plenty of reasons to be worried. But the markets always seem to manage to bounce back. The people driving the economy aren’t going to let the world come to an end. That’s just not going to happen.

“A simple rule dictates my buying: Be fearful when others are greedy and greedy when others are fearful,” Buffett said.