An article in Advisor Perspectives takes a look at what Warren Buffett did in the face of inflation in the 1970s, and offers several key takeaways. Buffett, who was then chairman and CEO of Berkshire Hathaway as he still is, continued investing throughout the era of high inflation. Though he often wrote to his shareholders about the damage inflation could inflict on returns, he was also adamant that short-term decisions wouldn’t pay off.
Buffett’s main advice throughout the 1970s consisted of the following:
- Even during volatility, keep investing. Buffett invested in the public equity markets from 1975 to 1980 and earned back more than double. He recently said that he’s never allocated less than 80% to equities.
- Set an investment strategy and stick to it. Buffett has always been focused on selecting high quality companies that he understands, with solid management teams, rather than looking for a quick fix or a hedge against inflation.
- Don’t worry about short-term results at the expense of long-term gains, even in the face of destruction to equity returns by inflation.
- Look for industries that have a strong tailwind. In the 1970s, that industry was insurance for Berkshire Hathaway—a sector they are still committed to.
- Play the long game. If you’d invested $1000 in Berkshire in 1970, you would have earned $30,000 by the end of 1983—if you’d held the stock and hadn’t been tempted to sell off in a panic during the volatility of the 13 years in between.
This year, Buffett has been on a buying spree. While he’s been putting down stakes in the oil industry—something he avoided in the 1970s—he’s also taken multi-billion-dollar positions in the tech sector through Paramount, HP Inc., and Activision Blizzard. He’s increased holdings in more than 20% of Berkshire’s portfolio this year, accounting for over $40 billion, or just over 10% of the total $325 billion portfolio. Meanwhile, he’s decreased positions by less than 0.2%, according to 2nd quarter data acquired by Bloomberg and cited by Advisor Perspectives.
But remaining invested has always been the priority for Buffett, whose “favored status” for investment is 100%—both in the 1970s, and now. In fact, the only reason he’s down to 80% this year is because of his “failure to find entire companies or small portions thereof…which meet our criteria for long-term holding,” he wrote in his annual letter to shareholders this year. That criteria includes solid growth prospects for the long-term without the need for too much capital, appealing valuations, and a skilled management team. Buffett’s focus on finding those companies during challenging times 40 years ago and hanging onto them provides a blueprint for a solid investing strategy in the challenging times of now.
———————————————
Validea runs stock and ETF models based on investment strategies with proven long-term track records. If you’re new to Validea, consider taking a look at our product overview or introductory videos.
