But it’s his steadfast belief in the U.S. economy that ultimately bolsters Buffett’s view on our financial markets. And why Buffett doesn’t fear the sometimes scary volatility that can come to the market.
Earlier this year, Yahoo Finance’s Andy Serwer spoke with Buffett in Omaha, and during this conversation Buffett explained the magic of compounding by illustrating how a $114 could’ve turned into $400,000. All it would’ve taken is an investment in the S&P 500 and a 76-year wait.
Of course, the road between 1942 and 2018 was anything but smooth. The stock market crashed in 1987, investors endured a multi-year bear market in the 1970s, the tech bubble burst in 2000, and the global economy ground to a halt in 2008.
“The market’s gone down many times [between 1942 and today],” Buffett said.
“People have panicked during that time. Headlines have been terrible. You know, it looked like we were losing the war when we first bought it. But America is a powerful economic machine that, since 1776, it’s worked and it’s gonna keep working.”
Through the volatility of the last 76 years, the S&P 500 has still returned about 11% a year and an investor who stuck with the market would’ve done just fine. The key to not fearing the market, however, is sticking with it.
“You don’t want to buy to hold for a year,” Buffett said. “You don’t want to buy with the idea that you could sell it in two years or three years and make money. You could lose money that way. But if you buy [the stock market] and just keep buying the S&P 500 and forget about all the other nonsense that being sold to you… it will carry bigger fees than what I’m talking about.”
Buffett added that, “The S&P 500 companies have earned well over 10% on equity, often 15% annually, for years and years and years. They’ve done it with Democratic administrations, with Republican administrations. Now, you get money compounding at that kind of rate underlying your investment, and you get a diversified group of that, you’re going to do well.”
Give yourself the benefit of time, and to Warren Buffett the stock market is nothing to fear.
So while today’s market might seem fragile, unstable, or flying too high, a 10% annual rate of return in the S&P 500 today will see one share of the S&P 500 ETF SPY (SPY) which costs around $266 today rise to around $12,000 in 40 years.
And the longer you wait, the more you make, and the less Warren Buffett thinks investors have to fear.
More with Warren Buffett:
- Buffett: Women make me ‘very optimistic’ about this country
- Buffett: I made a mistake not buying JPMorgan stock
- Buffett: ‘I don’t speak for a million Berkshire shareholders’
- Buffett: It takes an ‘Educator-in-Chief’ to explain the benefits of free trade
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