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  • Writer's pictureRobert Baharian

Buffett Admits He Has No Idea

It's been a super rough ride for investor so far during 2022. What did you think was going to happen? A repeat of 2021 and a 27% increase in prices excluding dividends? Probably. As we close off the month of April, we see the S&P 500 finish the month with an 8.79% decline, the biggest one-month decline since March 2020, but the last trading day of the month was one for the record books, falling 3.70%. The last time we saw such a fall, although much bigger, was in August of 1998 where the market fell 7.13%.

There is so much going on in markets today - there is always so much going on in markets today, but the availability and access to information and opinions of everyone is far more accessible I believe, and so I feel like the average investor is more involved in investing than they have ever been. And I guess all of this feels new. And maybe it is.

Since 1980, the stock market has been up 32 out of 42 years, or 76% of the time. During that time, the stock market has finished the year down, 10 out of the 42 years, or 24% of the time. Statistically, you're more likely to get a 20%+ return on your money in any given year than you are a loss for the year.

Notwithstanding whether the stock market finished the year up 20%+ or down, we have experienced an intra-year drawdown every year as represented by the blue dots above. The most recent experience will be one that most if not everyone recalls - during the pandemic, the stock market fell 35% yet finished the year +16%. We saw a similar outcome during 1987, 1998, 2009, and history is littered with examples, so I won't go through all of them, hopefully you get the idea.

In fact, the average intra year drawdown is 14.01%, which I've plotted in the chart below. And as you can see on the far right hand side, 2022, that's exactly where we are so far this year. As gut wrenching as it feels right now, I'm sorry to break it to you, but it's actually very average. What's not average is the landscape we find ourselves in - inflation, rate hikes, and so on, I won't list everything that is going on in the world right now, as I mentioned above, you're probably well across it.

Historically we've seen 27 years out of 42 that have had a maximum drawdown of 14% or less, or 64% of the time. Of these years, we have only ever seen the market finish the year off negative, twice - in in 1994 and in 2015, or 7.14% of the time. In other words, 92.59% of the time, the market finished the year off in positive territory. Of these 27 years, the market has finished off the year with an average return of 14.62%.

If the year ended today, it would be the 3rd worst return since 1980 sitting behind the 2002 tech wreck, and the 2008 GFC. Could things get worse? Sure, of course they can. But what the data also show us is that we bounce back from these drawdowns. Each and every time. We just don't know when. And I don't think anyone does.

We haven't the faintest idea what the stock market is gonna do when it opens on Monday - we never have.

Warren Buffett and his partner, Charlie Munger, were quoted at the Berkshire Hathaway annual shareholders meeting.

I don't think we've ever made a decision where either one of us has either said or been thinking: 'We should buy or sell based on what the market is going to do, or, for that matter, what the economy is going to do.

Buffett added:

If I had any sense of timing, I totally missed, you know, March of 2020. We have not been good at timing. I totally missed that opportunity, I totally messed up in March of 2020. We haven't ever timed anything. We've never figured out insights into the economy.

I encourage you to watch this 5 minute snippet from the annual shareholders meeting where he speaks more about market timing:

Ironically, Buffett revealed that Berkshire bought $51.1 billion worth of stocks during the first quarter of 2022, stretching from 21 February to 15 March. In fact, they spent a whopping $4.6 billion on 4 March alone.

What I'm about to say is not profound at all - markets do not go up in a straight line. Markets also do not produce the average. You can get smoked in the short-term, yet the long game remains undefeated. There is always going to be something to worry about, and the most severe risks are the ones that no one is talking about. Yet as investors, we think the market only goes up, and it goes up at a steady 10% pa. Understanding how the machine works can go a long way in compounding your returns.


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