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Be prepared to lose half of your money – The Motley Fool



Few investors can match the track record of investment performance that Warren Buffett has achieved and longtime shareholders of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) ] Know first-hand how successful long-term investment can lead to life-changing wealth. But the oracles of Oracle have gone through both good and bad times, and instead of getting into the prevailing stance of market participants that the nine-year-old bull market could continue indefinitely, Buffett warned Berkshire investors 50 in his most recent annual shareholder letter % or more are not only possible, but inevitable in the future.

The Berkshire Stock Movement

Buffett would be the first to tell you that Berkshire has made extraordinary returns over time. Between 1

965 and 2017, the company increased its book value at an average annual rate of 19%, translating into average price gains of nearly 21% per annum. This market growth is more than twice as high as the average annual return of the S & P 500 of about 10% over the same period.

However, if one looks more closely at the short-term movements of the shares, one does not move nearly as expected upwards. Buffett describes it as follows: "The stocks are rising and weakening, and from year to year they do not seem to stick to their underlying value." The result is a short-term price-randomness for stocks, and investors can not trust that the price of a stock on the market at any point in time has any connection to its intrinsic value.

  Warren Buffett close-up with other people

Source: The Motley Fool

That's even true of the Berkshire Hathaway stock. Despite its large profits for long-term shareholders, the company has seen several periods in which Berkshire worked horribly on an absolute basis. Some of the worst periods are the following:

Period

Loss in Berkshire Stock

March 1973 to January 1975

59.1%

Oct. 2-27, 1987

37.1%

June 1998 to March 2000

48.9%

Sept. 2008 to March 2009

50.7%

Data source: Berkshire Hathaway 2017 Annual Letter to Shareholders

Most of these declines came at a time when the overall market was also running poorly. The bear market of the 1970s, the crash of 1987 and the financial crisis of 2008 and 2009 punished stocks across the market, many much more so than Berkshire.

Nevertheless, the decline from 1998 to 2000 falls outside this rule. At that time, the technology sector was booming and attracting the entire market. The Berkshire share temporarily underperformed the S & P 500 during that period, losing as much as 20% in 1999, despite the S & P 500 gaining 21%. Many people called Berkshire a dinosaur in a way of thinking about the old economy – an opinion only strengthened by Buffett's claims that he would not invest in tech stocks he did not adequately understand.

How to Profit from Great Losses

Buffett explicitly warned investors to expect similar crashes. "Over the next 53 years," said Buffett, "our stocks (and others) will experience similar declines as those in the chart. No one can tell you when that will happen ] at any time go from green to red without pausing at yellow. "

But the Oracle of Omaha does not see these drops as a negative for long-term investors. Instead, those who have the financial resources to capitalize on these declines by investing money at attractive valuations can be one of the biggest sources of long-term outperformance. Countless times, Berkshire has been able to cash in on its large war chest to become a capital source of last resort for ailing businesses desperate for a financial lifeline. The conditions that Berkshire negotiated have brought impressive profits to its shareholders.

Prepare Now

The problem for most investors is that the most inconvenient time to invest in the market is when it drops. The fear of putting money into stocks and immediately seeing more significant losses can deter even the most seasoned investors from becoming the catalyst for what may become their most successful investments.

Preparation in advance is the key. If you mentalize in advance what you are likely to feel in the midst of a sharp downturn, you have a better chance of overcoming your feelings at the moment.

Warren Buffett has always been able to emotionally detach from him his investment decisions, and that has been an integral part of his success over his career. If you can do the same, you will see better results in your portfolio and be better able to keep track of the long-term price.

Dan Caplinger owns Berkshire Hathaway shares (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B-shares). The Motley Fool has a disclosure policy.


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