Buffett’s Conviction

Warren Buffett is without a doubt one of the greatest investors to walk the planet. Writing about him on a personal finance blog is cliché to say the least. His track record, a 21.6% annualized rate of return over 50 years, is incredible and likely never to be repeated. What I find more impressive than the returns and dollars he’s generated is his temperament. His common sense wisdom, supported by his actions and behavior provide investors of all levels with some valuable lessons.

A prime example of this was how Buffett acted during the dot-com boom of the late 1990’s. At the time new internet technology companies helped fuel massive returns in the US stock market. Buffett wasn’t so quick to join the party. As Alice Shroeder wrote in The Snowball

“In private, he had been critical of the gunslinging, promoter-driven market that had sent technology stocks galloping toward delirious heights all year. The stock of his company, Berkshire Hathaway, languished in their dust, and his rigid rule of not buying technology stocks seemed outmoded.”

In a now famous speech given at the Sun Valley retreat in 1999 Buffett reminded the leaders of technology companies that they’re still businesses providing goods and services. He compared the new technologies used by internet companies to the automobiles and air planes of the early 1900’s. Technologies such as these improved our lives tremendously but failed to make investors wealthy over the long-term. In other words the shares of these internet technology companies were grossly overvalued compared to what they actually produced. As a consequence they were unlikely to continue providing the high returns that many in the technology sector expected would continue. [1]

Ultimately Buffett was justified. After doubling in 1999 the NASDAQ 100 index declined for three straight years with returns of -37%, -33% and -38% in 2000, 2001 and 2002 respectively. Technology stocks had come back to Earth from their astronomical highs. Meanwhile Berkshire Hathaway produced market value returns of 26.6%, 6.5% and -3.8% in those same years.

Buffett understood what he was doing and avoided the things he didn’t–technology stocks that had ridiculously high valuations. He didn’t abandon his philosophy and was rewarded in the end. It can be tempting to leave a long-term investment plan when it begins to under-perform and buy into the asset du jour. We can take away the following: have a well understood plan, exercise patience and execute with conviction.

Fortune: Mr. Buffett on the Stock Market…
by Warren Buffett and Carol Loomis, November 22, 1999

1. Schroeder, Alice. The Snowball. Bantam Dell. New York, NY. 2008. pp. 7-23.