include the 21% return of 1999.Given that themarket has lost 3.6% per year for the last nine years versus the 1.7% annual loss sufferedbetween 1928–1938,currently the worst decadeon record,this is not a bold prediction.Sowhy should such data give investors confi-dence? The answer is that low prices may increase future returns.
Because investors arebuyers,they should welcome the opportunity to buy the same businesses at lower prices,asdoing so raises their returns.Consider a busi-ness that generates $100,000 of income.In goodtimes,such a business might be priced at morethan $2 million,leaving the buyer with only a5% return on investment.But if the price fallsby half,the return doubles to 10%.This samemath applies at the level of the stock market, which is after all simply a collection of busi-nesses,the majority of which will be earning more money 10 years from now than they dotoday.The data shows that it has always beenprofitable to invest in the stock market after adecade of poor returns.
Specifically,there pre- viously have been ten rolling 10 year periodssince 1928 when the S&P 500
Index (and beforethat the Dow Jones Industrial Average) returnedless than 5% per year.In
case,the 10 yearsthat followed produced satisfactory returns aver-aging approximately 13% per year and ranging from a low of 7% per year to a high of 18% per year.
While we cannot know for surewhat thenext decade holds,it is highly likely to be farbetter than what we have suffered through inthe last 10 years as we are starting at much moreattractive valuations.We are hopeful that ourshareholders who have endured these hardtimes will be there with us for the rebound.
The Year 2008
While capital market downturns are nothing new,the dislocation and panic that swept throughthe markets in 2008 were unique in scale,sever-ity and pace.The vast majority of major financialinstitutions collapsed,were taken over,raiseddilutive capital,and/or required some sort of government intervention.The combined marketcapitalization of the top 25 financial institutionsin the United States (excluding Berkshire Hath-away,which we do not consider a pure financialinstitution) fell 75% during the last two yearsfrom $2 trillion to less than $500 billion (as of January 22,2009).The loss to shareholders hasbeen even greater than these numbers indicateas most of these companies now have meaning-fully moreshares outstanding,including war-rants held by the U.S.government.The amount of direct investments,pledges andguarantees announced bythe federal governmentnow approaches $5 trillion.Toput this sum inperspective,previously the most expensivefinancial debacle in U.S.history,the savings andloan (S&L) crisis,cost the government about$185 billion in today’s dollars,about 1/27thas much.The long-term consequences of thegovernment’s ownership interest in privatebusinesses are unlikely to be positive and theextension of such vast amounts of credit mustalmost certainly lead to higher inflation.Turning to the economy,as is often the case,the capital markets have been leading indica-tors.What began as a financial crisis tied tofalling real estate prices is swiftly becoming abroad-based economic crisis.Consumer andcorporate spending are in a free fall.Auto sales,
Thereis no guarantee that low priced securities will appreciate. Equity markets are volatile and an investor may lose money.
Past per-formance is not a guarantee of future results.
Individual securities are discussed in this piece. While we believe we have a reason-able basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. Thereturnof a security to a portfolio will vary based on weighting and timing of purchase. This is not a recommendation to buy or sell anyspecific security.
Past performance is not a guarantee of future results.