Don’t Sell Based on Today’s Headlines

Warren Buffett was on CNBC last week just as the market rout due to coronavirus concerns was escalating. Asked about the situation, his advice for investors was timely:

“Don’t buy or sell your business based on today’s headlines.”

His point is that investors in stocks should have long-term time horizons. The last 24 hours, week, or even month shouldn’t change your outlook on a company’s prospects 10 or 20 years from now.

Peter Diamandis makes clear in his books (Abundance, The Future is Faster than You Think) people have a difficult time predicting the future, often underestimating the amount of change about to occur. It is especially difficult for humans, who tend to think linearly, to grasp exponential change. Long-term stock market returns, however, exhibit more of an exponential than linear curve. This makes it near impossible to imagine the level of stock prices in the future. Does Dow 200,000 sound attainable to you?

It likely doesn’t, but should.

Instead of trying to imagine where stocks will be in 10 or 20 years, let’s run through a quick mental exercise making today the future and view the stock market from a long-term investor’s point of view through time.

We’ll start small, going back five years to the beginning of 2015. There are plenty of reasons to be concerned about stocks. The Ebola virus is spreading, global growth is weakening. Falling oil prices are crushing oil stocks and the strengthening dollar is making US exports less competitive. The S&P 500 just crossed 2,000, surely it is overvalued.

S&P 500 5-Year Returns

Fast forward five years and a thousand index points later, none of these concerns mattered.

At the beginning of 2010, the S&P 500 opened just north of 1,000. The world is reemerging from the depths of the Financial Crisis, but the future looks uncertain. How will companies perform in the face of more strict banking regulations? Europe is going through a debt crisis and there are concerns about global growth.

S&P 500 10-Year Returns

An investor 10 years later is up 175%.

Twenty years, which is certainly long-term, brings us right into the peak of the dot-com bubble. Surely, investing at the top of a bubble is a bad decision.

S&P 500 20-Year Returns

In what was maybe the worst time to enter the market in modern history, our long-term investor more than doubled their money.

Finally, let’s go all the way back to 1990. Thirty years may seem like an impossibly long time but a fully employed person a decade into their career still has thirty years before retirement. A person nearing retirement will need to plan on their portfolio lasting them another thirty years into the future. For many, this is the correct time horizon.

The level of the S&P 500 at the beginning of 1990 was just 350. 350! Our investor’s portfolio increased nearly eight-fold.

S&P 500 30-Year Returns

There were negative headlines and things to fear in 1990, just as there are today. And, yes, 2020 is a different time and a different economic environment. Past returns are no guarantee of future returns. But if you are invested for the long term, take Warren’s advice.

Don’t sell based on today’s headlines.