What Would Warren Buffett Do?

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We want to explore what investors did during the last period of extended inflation in the U.S., the 1970s. Did they alter their strategy or materially change holdings? We reviewed Warren Buffett’s annual letters, then and still chairman of Berkshire Hathaway. The below summary represents some key takeaways as well as noteworthy quotes from our review:

Key takeaways from Warren Buffett’s Letters:

  • Invest throughout the hard times – Buffett more than doubled the invested capital in the public equity markets from 1975 to 1980. He made investments throughout the period, including finding some of his most successful investments in GEICO and The Washington Post. Recently, Warren Buffett noted his allocation to equities across his entire net worth has never been less than 80% (see quote below).
  • Maintain a consistent investment strategy – Buffett did not materially pursue new sectors, such as oil, just to hedge against inflation. In fact, we found only one reference to oil in his letters during the 1970s. He stayed focused on finding good, understandable businesses with favorable tailwinds and good management teams (see a great quote outlining his strategy from his 1977 letter below).
  • Regarding inflation – He described the destructive nature of inflation on equity returns but cautioned against focusing on short-term results at the expense of long-term gain. While he acknowledged he couldn’t provide a solution to inflation for his investors, he remained diligent and optimistic on Berkshire’s job to invest on behalf of his shareholders.
  • Look for areas where industry growth is providing a tailwind – For Berkshire, strong tailwinds in the insurance industry in the 1970s powered much of its growth and ability to consistently reinvest through the decade.
  • The strategy paid off incredibly well over time – A $1,000 investment in Berkshire Hathaway in 1970 would go on to be worth $30,000 by the end of 1983, once the U.S. had emerged from the inflationary recessions of the 1970s and early 1980s.

Please read on to see more information and direct quotes from Buffett.

We focused on Buffett for his preeminence in U.S. equity investing over more than 60 years and his well-documented annual letter1. The letters were his main form of communication with the public then and provide a consistent “play by play” through the years.

Let’s set up the macroeconomic situation in the 1970s. As described by former Federal Reserve Chairmen Ben Bernanke in his June New York Times op ed, the 1970s were a period where the Consumer Price Index increased by more than 7% per year before peaking at over 13% in 1980. There were two major recessions and over a decade where the S&P 500 only returned 20% in absolute price terms (an annual rate much lower than inflation). The period finally ended following the 1980-1982 recession induced when former Fed Chief Paul Volker famously raised the federal funds rate to over 20%. Following June of 1982, the S&P 500 rallied more than 50% in 12 months and more than 200% over the next seven years through 1990.