The Sage of Omaha (Warren Buffet) has experienced the affects of a market downturn. The general economic performance of the country has directly impacted the general profitability of one of the titans of industry. The profits for the year of 2007 were reduced by 18% from the previous year. One of the largest conglomerate holding companies experiencing a substantial negative shift in profitability during an impending recession might at first glance indicate that the stock market is not an inviting place for financial investments. To the contrary, the bear market is the perfect time to buy into the market. For the long-term investor this is an opportunity to buy into stocks as a sound investment vehicle. These regular fluctuations in the market are an inevitable result of the reflection of the overall strength of the economy on the stock market. Mr. Buffet is evidently modifying his investment strategy now in 2008 just as in the bear market of 2002.
During the last bear market the Dow Jones Industrial Average reached a low of 7,528.40 on Oct 4 2002 from its previous height of 11,722.98 on Jan 14 2000 at turn of the new millennium. The factors involved in 2002 downturn were a result of the change in presidential administration combined with the economic correction from the stock market bubble of the late 90’s. Six years, nine months and 11 days elapsed until the previous high was finally surpassed on Oct 3 2006. Then the market suddenly skyrocketed to its next pinnacle of 14,093.08 by Oct 12 2007. Within the span of 1 year the market had increased by 20.2% from its previous peak level to its new high point. The previous high in Jan of 2000 took approximately 2 years to achieve the return of 20%. The exceptional finding is the percentage return from the market low in 2002 to the market high in 2007 which is a hefty 87% within the span of 5 years. To put it in tangible terms an initial investment of $250,000 would now be $468,020. This is enough of a return to buy a respectable suburban home in one of the major US urban housing markets. A similarly invested principle in a Certificate of Deposit with a solid 5% year over year compounding interest rate will take 13 years for a comparable yield of 87% and a minimum of 4 years to gain 20%.
Collectively contributing to stock market as financial entity or group drives the economy forward by freeing capital for business growth and reinvestment and creating wealth for people committed to a long term investment. This allows society to contribute the well being of the economy by creating sustainable growth in business activity thereby increasing the standard of living of the fellow human. There is an opportunity cost in all individual decisions with time and capital expenditures. The choice in life is the decision to incur the price now to reap the reward in the future.