Buffett’s right — investors today are gloriously lucky

Posted by TEBI on June 16, 2023

Buffett’s right — investors today are gloriously lucky



Most of us have no choice but to invest in equities. To fund the lifestyles we aspire to, and to ensure we have enough money to last us for the rest of our lives, we have to take that risk. And the sooner we start investing the better.  

Yet people come up with all sorts of excuses for why they shouldn’t invest. For example, “I’m worried the markets will crash”, “I’m waiting for the current uncertainty to subside” or “I’m too busy to research which stocks or funds I ought to invest in”.

But none of these reasons is valid. There’s actually very little research involved in building a simple portfolio. Yes, of course, markets may crash — eventually they’re bound to — but nobody knows when. As for uncertainty, that never goes away; there will always be plausible reasons for not putting money into equities.

True, investing can be hard, especially when markets are highly volatile. But we certainly shouldn’t exaggerate how difficult it is.


A catalogue of challenges

Think, for instance, of all the challenges the world has faced in recent years. The COVID-19 pandemic is the obvious one. But we’ve also seen growing tensions between east and west, war in Ukraine, rising interest rates, a cost of living crisis, raging wildfires and increasingly grave warnings on climate change. 

Given all of those things, you might have expected carnage on global stock markets. Of course we have seen short-term falls, particularly in 2020 as the reality of the pandemic sank in. Some markets have fared worse than others. But, generally speaking, stock prices have proved to be remarkably resilient.

Take for example the United States. The main US equity index, the S&P 500,  has gone from strength to strength. At the time of writing £1,000 directly invested in the S&P 500 five years ago would have grown to £1,763.46 — an increase of 76.35%.

Just think about that. You didn’t need to be clever, subscribe to any investment magazine, or pay for professional “expertise” to benefit. All you had to do was to park your money in a low-cost index fund. Nothing else.


The American Tailwind

The most famous living advocate of index funds is Warren Buffett. In his 2018 letter to shareholders in his company Berkshire Hathaway, referred to what he called “The American Tailwind”

“Let’s travel back to 1788,” he wrote, “a year prior to George Washington’s installation as our first president. Could anyone then have imagined what their new country would accomplish in only three 77-year lifetimes?”

Throughout America’s brief history, Buffett explained, there have been countless occasions when investors had reason to panic, not least in March 1942.

“The US and its allies were suffering heavy losses in a war that we had entered only three months earlier. Bad news arrived daily,” he wrote.

“Despite the alarming headlines, almost all Americans believed that the war would be won. Nor was their optimism limited to that victory. Leaving aside congenital pessimists, Americans believed that their children and generations beyond would live far better lives than they themselves had led.” 

The rest, as they say, is history. Post-war growth propelled the US economy to heights that were scarcely imaginable in the middle of World War II. 

“The nation’s achievements,” wrote Buffett, “can best be described as breathtaking.”


An extraordinary return

Buffett chose March 1942 for a reason. That was the month in which he bought his first stock. The business in question was called Cities Service, and Buffett, then aged 11, paid $114.75 for three shares.

“If my $114.75 had been invested in a no-fee S&P 500 index fund,” he wrote, “and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019. That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time — say, a pension fund or college endowment — would have grown to about $5.3 billion.”

By any standards, that is an extraordinary return.

Note, Buffett is not talking about investment skill here. No, that’s simply the return that American business delivered, and that investors would have earned if they had been able to invest, in March 1942, in a no-fee S&P 500 index fund.

With typical modesty, Buffett was acknowledging his good fortune at being an investor during such an extraordinary period. “I happily acknowledge,” he wrote, “that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind.”


“Gloriously lucky”

What, then, of the future?

“There are also many other countries around the world that have bright futures,” wrote Buffett. “About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders. Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind.”

“We are lucky — gloriously lucky — to have that force at our back.”

No one can predict the future with any degree of consistency. Sooner or later, the United States is likely to be overtaken by China, India or both as the world’s biggest economy, just as the US overtook Great Britain at the end of the nineteenth century. But which country has the biggest economy is irrelevant. The point is that, throughout its history, capitalism has shown extraordinary resilience in the face of setbacks, and it’s hard to think of any reason why it shouldn’t continue to do so.

The takeaway for investors? Catch the tailwind and keep riding it. Whatever headwinds lie in store, the future looks bright for patient, diversified investors everywhere.



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