10 years ago this week, I wrote a post here that I’m sharing again now because I think it’s important to remember just how difficult it is to do the right thing in the markets at the right time. Things were so bleak back then that if you were optimistic you sounded and felt like an utter fool. Sometimes, however, there can be no better confirmation of your thesis. This was clearly one of those times.
Published March 12, 2009: “Fortitude In The Face Of Crisis”
To quote Charles Dickens, we are currently facing “the worst of times.” By any measure, this is the worst economy America has witnessed in decades. However, for prudent investors in both stocks and real estate, “it is the best of times,” as we are now faced with a once-in-a-lifetime opportunity.
The financial world has seemingly come crashing down around us. The current bear market for stocks is the worst any living professional investor has ever seen. Real estate prices have been in free fall for the past couple of years, and foreclosures are growing at a record pace. Employment and the general economy have suffered mightily as a result. Not surprisingly, consumer sentiment has never been more negative than it is today. I could name all the melancholy records the financial markets and the economy have set recently but I will refrain.
Rather than lament the past, I am more interested in appraising the situation we face right now. Warren Buffett, the most successful investor of the 20th century, once wrote, “We like pessimism, but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.” After the bursting of the real estate bubble of the past few years, Bendites should know this lesson well. The effects of the horrific performance of both stocks and real estate, combined with the concomitant economic malaise, have created an equally dramatic degree of pessimism pervasive among investors and consumers alike.
Boy has the rampant pessimism produced some attractive prices. The median price of a home in Bend is now roughly half what it was only a couple of years ago. It’s a 50 percent off sale! By my calculations, the after-tax mortgage payment on the median-priced home in Bend is essentially equal to the median rent here in town. This is not to say prices can’t fall further, but by my reckoning, they are no longer overvalued. There are many properties that now “pencil” for real estate investors.
Mr. Buffett has indeed lived up to his preference for pessimism. Back in October, Mr. Buffett wrote an Op-Ed piece for The New York Times titled “Buy American. I am.” In it he wrote that he has, in gambling parlance, gone “all in.” His entire personal, liquid net worth is now invested in American common stocks for no other reason than he finds them extraordinarily attractive at current prices.
I can think of one especially compelling reason for Mr. Buffett’s enthusiasm: For the first time in more than 50 years, the dividend yield on stocks is greater than the yield of the 10-year U.S. Treasury bond. In other words, for investors younger than 70 or so, this is the most attractive buying opportunity in the stock market of our lifetimes. (Please read that last line again and, when your friends speak about how horrible the current environment is, repeat it to them.)
Mr. Buffett’s fortitude in the face of crisis is a rare quality, however. It is just as easy to allow the pervasive pessimism to intrude into our psyches and prevent us from taking advantage of rare opportunities as it is for rampant optimism to inspire us to dive headfirst into an investment bubble. Great investors are thus great defenders of independent thought.
We currently find ourselves at an important inflection point in history. These are precisely the times fortunes are made and lost. We can react to the financial crash as victims do, with shock or fear, or we can view it as the greatest of investors do, as a rare opportunity. I strongly believe that the latter mindset must be the primary focus of those intending to prosper in the future. We should all be doing our best to channel the fortitude of great capitalists and great Americans like Warren Buffett in our business, investing and personal lives.
