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Buffett’s World War II Debut

At this year’s Berkshire Hathaway annual meeting, Buffett did something I wish he did more often: he put up some very educational slides. The first showed the front page of the New York Times on Sunday, March 8, 1942, three months after Japan attacked Pearl Harbor. If you think today’s headlines are scary, you’re in for quite a shock:

The following day, Monday, March 9th:

Tuesday, March 10th:

Buffett had his sights on Cities Service preferred stock, which was trading at $84 the previous year and had declined to $55 in January. And now, on March 10th, it was selling at $40.

That night, 11-year-old Buffett decided it was a good time to invest. As Buffett recounted, “Despite these headlines, I said to my dad, ‘I think I’d like to pull the trigger, and I’d like you to buy me three shares of Cities Service preferred’ the next day. And that was all I had. I mean, that was my capital accumulated over the previous five years or thereabouts. And so my dad, the next morning, bought three shares.”

The following day was not a good one for the markets. The Dow broke 100 to the downside, sliding 2.28 points (bottom right of this image):

And here’s what happened to Cities Service preferred:

Buffett successfully top-ticked the market at $38 ¼, with the shares closing at $37 (down 3.3 percent). This, he joked, “was really kind of characteristic of my timing in stocks that was going to appear in future years.”

The world’s greatest-investor-in-training would eventually see the shares called by the Cities Service Company for over $200 per share more than four years later (these images are from the slides shown at the annual meeting):

But the story doesn’t have a happy ending. Here’s what actually happened:

From the 38 ¼ Buffett paid, the stock went on to decline to $27 (down nearly 30 percent from his cost!).

What Buffett didn’t say at the annual meeting is that he had enlisted his sister Doris as a partner in the idea of buying the shares. Every day on the way to school, Doris “reminded” him that her stock was down. (This story is recounted in the excellent book Snowball).

After enduring so much pain, he was happy to sell at a profit only a few months later, in July, for $40. “As they always say, ‘It seemed like a good idea at the time,’” Buffett joked.

Despite the ugly headlines, Buffett said everyone at the time knew that America was going to win the war. The incredible economic machine that had started in 1776 would see to it. So imagine, in the middle of this crisis, you had invested $10,000 in the S&P 500. There were no index funds at the time, but you could have bought the equivalent basket of the top 500 American companies.

Once you did that, imagine you never read another newspaper headline, never traded again, never looked at your investments.

How much would you have today? Buffett again: “You’d have $51 million. And you wouldn’t have had to do anything. You wouldn’t have to understand accounting. You wouldn’t have to look at your quotations every day like I did that first day when I’d already lost $3.75 by the time I came home from school.”

The massive number — most people I polled guessed far less than $51 million — is the result of compounding over long periods of time. In this case, 76 years at a compounded rate of 11.9 percent per year.

Of course, Buffett’s advice to buy the S&P 500 is the best advice for most people. (Buffett notes that it’s an advice that’s easy to give in hindsight. He didn’t mention that for extended periods of time, like the ten years from 2000 to 2010, the S&P 500 returned exactly zero percent including dividends.) Enterprising investors — like Buffett himself — can do better by picking superior businesses and running a more concentrated portfolio.

But at least three very important lessons come from this short presentation.

First, scary headlines are just noise. What really matters is the long-term performance of the underlying businesses you invest in. Don’t act — or fail to act — because of short-term price action or scary headlines. Easier said than done, of course. But that’s why it’s such a valuable lesson.

Second, pick your partners wisely. Having partners with the same long-term approach as you can make a huge difference to actually achieving the long-term in the first place.

Finally, always remember the power of long-term compounding. Patience and compounding is how one turns $10,000 into $51 million in a lifetime.

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