The Truth Behind Warren Buffett’s Success
Written by ABC Audio All Rights Reserved on January 28, 2022
“Just $20,000? That’s not a lot of money.” That’s 25-year-old me.
I was talking with my dad about prospective investments. He mentioned one particular investment that would have required an initial $20,000 commitment.
That’s when I unleashed my cocksure and naïve comment. He glared back at me and said, “It is if it’s your last $20,000.” I felt like an idiot — and I’ve never forgotten those words.
While he didn’t come out and say it, my father was letting me in on one of the essential truths about investing…
Always keep some cash on hand.
Cash occupies a unique — and essential — place in the world of investing. There’s nothing like it.
Cash is both the repository of accumulated wealth and the seed of future wealth creation.
Almost every success story begins with cash. If you don’t have any, you won’t ever achieve investment success. That’s a cold, hard fact.
Yet most investors fail to appreciate the value of cash. They think of it as “dead money” that yields nothing. “Cash is trash” is a phrase that often circulates when stocks are soaring.
But cash isn’t always trash.
The Real Story Behind Warren Buffett’s Fortune
In fact, cash is essential — both as a buffer against downturns, and as a source of future investment gains.
It is what enables savvy investors to pounce on excellent opportunities and to gobble up the tasty investments that can turn modest investments into millions, if not billions, of dollars. Without cash, every investment opportunity is a nonstarter.
That’s why you should have a healthy respect for cash, bordering on worship. Right now, you should devote yourself to preserving cash, so that it is available when great investment opportunities present themselves.
It’s just a matter of time before we experience another bear market — we’re already in a bearish period. If you go into the next crisis with hardly any cash, you’ll be a victim. Plain and simple.
Moreover, you can’t buy cheap stocks with cash you don’t have, no matter how cheap they become. It’s a fool’s game to rue the “lost opportunity” you never actually had… to regret the “one that got away” when you didn’t have the capital to pull the trigger anyway.
That’s why I recommend maintaining significant cash levels at all times…even when stocks are flying high. (We talked about like Intelligent Asset Allocation methods last week.)
Every legendary story of investment success begins with an individual who had amassed enough cash prior to a financial crisis that they were able to use to buy stocks on the cheap during the crisis.
Warren Buffett was one such investor.
According to the popular narrative, Buffett made his billions by buying great stocks and then hanging on for the ride. But that story isn’t entirely accurate; one of the most brilliant investments Buffett ever made was to sell stocks, not buy them.
Throughout the 1960s, Buffett compiled a spectacular investment record: A $10,000 investment in his partnership in 1957 became $1.7 million by 1969!
With that kind of success, most professional investors would have continued to play the game.
In May 1969, Buffett told his shareholders that he had run out of “first-class ideas.” Stock market values had run so high that he couldn’t find the bargains he craved. He wrote:
“I just don’t see anything available that gives any reasonable hope of delivering a good year, and I have no desire to grope around, hoping to ‘get lucky’ with other people’s money. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”
So Buffett shut down his partnership and returned money to all his investors.
In other words, Buffett raised cash. He managed to book a gain of 6.8% in 1969, even though the Dow Jones Industrial Average fell 11.6%.
Then he bided his time.
After closing his fund, Buffett became chairman of Berkshire Hathaway Inc. (NYSE:BRK-A, NYSE:BRK-B), but he didn’t initiate any major new investments until 1974… after the market had tumbled 45% from its 1969 peak.
In a 1974 interview in Forbes magazine, Buffett famously declared, “This is the time to start investing again.” And so he did. He put Berkshire Hathaway’s cash hoard to work — scooping up depressed blue-chip U.S. stocks.
The rest is history.
Buffett would not likely be a billionaire today if he hadn’t raised cash in 1969, while awaiting better opportunities.
Bottom line: Clearly, cash isn’t always trash.
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.
— to investorplace.com