Stocks are the best bet for long-term investors

Table of Contents

M books related to long-term investors

Chapter on long-term investing

From my book “The Rules of Super Growth Stocks Investing“:

Long-term compounding is discussed on pages 36-44 in Sections 1-3, with detailed examples.
Sections 1-4 on pages 45 to 58 discuss the advantages of long-term investing.

In another book “The Rules of 10 Baggers“, I even spent a lot of space explaining that long-term investment is the key factor for investment success:

Section 4-1, pp. 184-192, the discussion about wanting to own a 10-fold stock only needs to “buy right” and “long hold”.

Chapter on long-term compound interest

It is recommended that friends read my book “The Rules of Super Growth Stocks Investing“:

Sections 1-3, pages 36-44, a description of a whole section and a description of an example.

And the book “The Rules of 10 Baggers“:

Section 4-1, pages 188-192, on the relationship between frequent trading and compound interest.
Sections 4-4, pages 214-218, on the relationship between portfolio rebalancing and compound interest.
Section 6-1, 274 pages.
Sections 6-7, pp. 317-336, on capital operations.

Smith’s famous book

Edgar Lawrence Smith, in his 1924 book “Long-term Investment with Common Stocks“, should be a more famous work on long-term investment in stocks.

Holding stocks for a long time is the best investment method, which has already been confirmed by many figures and actual data. Buffett is not the first to say so; economist Edgar Smith, in his 1924 book “Long-term Investment with Common Stocks” advocated long-term investing in stocks. This initiative has influenced many people, including Buffett and economist John Maynard Keynes.

When Smith wrote the book, he was trying to prove that stocks would outperform during periods of inflation. in bonds; and in a deflationary period, the returns on bonds are higher. But the results of Smith’s actual research
Surprisingly, stocks still outperform bonds in deflationary times. his book with a paragraph The confession begins: “These studies are a record of failures, and failures do not support a preconceived notion theory. “

Fortunately, the failure prompted Smith to think more deeply about how stocks should be valued. He argues that several factors account for the outperformance of stocks over bonds, both in times of inflation and deflation, but the key factor is the compounding effect common stocks have.

Buffett’s view

2018 Shareholder Letter

The American tailwind

On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.

Let’s now travel back through the two 77-year periods that preceded my purchase. That leaves us starting in 1788, 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?

During the two 77-year periods prior to 1942, the United States had grown from four million people – about 1⁄2 of 1% of the world’s population – into the most powerful country on earth. In that spring of 1942, though, it faced a crisis: The U.S. and its allies were suffering heavy losses in a war that we had entered only three months earlier. Bad news arrived daily.

Despite the alarming headlines, almost all Americans believed on that March 11th 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 nation’s citizens understood, of course, that the road ahead would not be a smooth ride. It never had been. Early in its history our country was tested by a Civil War that killed 4% of all American males and led President Lincoln to openly ponder whether “a nation so conceived and so dedicated could long endure.” In the 1930s, America suffered through the Great Depression, a punishing period of massive unemployment.

Nevertheless, in 1942, when I made my purchase, the nation expected post-war growth, a belief that proved to be well-founded. In fact, the nation’s achievements can best be described as breathtaking.

Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the
latest data available before the printing of this letter). 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.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have
been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods.
That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 31⁄4 ounces of
gold with your $114.75.

And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.

Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times
with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.

Christopher Wren, architect of St. Paul’s Cathedral, lies buried within that London church. Near his tomb are posted these words of description (translated from Latin): “If you would seek my monument, look around you.” Those
skeptical of America’s economic playbook should heed his message.

In 1788 – to go back to our starting point – there really wasn’t much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend.

Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled “savings.” And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.

Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.

There are also many other countries around the world that have bright futures. 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.

2019 Shareholder Letter

What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.

That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control
his or her emotions. Others? Beware!

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