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The Power Of Investing In The American Economy According To Warren Buffett

“The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age 6,” said Warren Buffett in his recent annual letter to Berkshire Hathaway shareholders. “I bought three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.”

Buffett is clearly a life-long believer in the power of the American economy.

In the Sage of Omaha’s latest letter, he talks about “The American Tailwind.” It’s my favorite part of Buffet’s annual message as he focuses on what he calls “our country’s almost unbelievable prosperity.”

Naysayers aside, America is rich in resources and home to an ever-expanding economy.

Take energy, for instance. Our energy exports now match – and will soon exceed – what we import from the rest of the world. We’re currently generating about 12 million barrels of oil a day, a number that represents more than a 100% increase in just a decade! Now, that’s progress. And that, folks, is America.

Sure, there are setbacks. And when there are, it is our nature to become worried investors. We are vulnerable to letting negative emotions, like fear, get the best of us. But if we can remember that, as American investors, we are incredibly lucky, and if we can stay buckled in for the long-haul, we typically fare better than our fair-weathered peers who constantly jump in and out of the market.

Buffett offers this perspective on his initial youthful investment:

“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. 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.” That’s with the S&P 500 delivering an average annual return of 11.8%.

Since 1942, the American economy has experienced drops and plummets, corrections and recessions, and even the Financial Crisis of 2008. Yet, the gains Buffett would have realized in his scenario are astounding. This is a testament to the power of the American economy, and to the American Tailwind.

Buffett also casually addresses the influence of politics on investing. When speaking about our “almost unbelievable prosperity,” he goes on to say that this “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.”

I’ve long preached that, no matter how passionate you are about your politics, do not allow your views to influence your financial choices. Buffett’s letter echoes this sentiment – we have done well under both Democrats and Republicans.

Buffett goes on to address other gloom-and-doomers, who may have stayed away from the market because of steadily creeping government budget deficits. And he lets us know exactly how he feels about the option of stocks versus gold:

“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 3¼ 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.”

Buffett is on his own soapbox, and the takeaway here is that investing in America is investing in growth, despite scary predictions or frightening realities. Over the long haul, an investment in the US economy is one generally that’s worth those short-term periods of turbulence. From where Buffett stands (and I stand beside him), the American Tailwind is strong.

“Charlie [Munger, Buffett’s partner in Berkshire Hathaway] 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’… 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.”

I couldn’t agree more, Mr. Buffett.

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