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WARREN BUFFETT: The stock market is 'virtually certain' to be worth far more

Myles Udland
Markets Reporter

Warren Buffett’s annual letter to Berkshire Hathaway shareholders is out, and it’s full of wisdom from the Oracle of Omaha.

In it, Buffett, the 86-year-old CEO of the company, offers his thoughts on American business and, by extension, the US stock market.

And the view is simple: stocks will, over time, go up.

“America’s economic achievements have led to staggering profits for stockholders,” Buffett writes.

“During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By year-end 2016, the index had advanced a further 72%, to 19,763.

Buffett adds that, “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.” (Emphasis added.)

These latest comments on the stock market from Buffett come as the Dow this week extended its streak of record high closes to 11. In the Dow’s history, there have been only eight other streaks of 11 or more straight days with positive closes, according to Bespoke Investment Group.

We wrote this week, ahead of Buffett’s latest letter, that the Oracle of Omaha was likely to address the stock market but would not make a market call. And, of course, he hasn’t.

But also this week, we noted that market history tells us there will, in time, be a decline in the stock market. There has, in all but one of the last 89 years, a decline of at least 4.4% in the S&P 500. In three-quarters of those years, the decline has been more than 10%. David Rosenberg, a strategist at Gluskin Sheff, wrote that, “The question is only one of timing and magnitude.” Buffett reinforces this view.

And for Buffett, this inevitable decline will be a time to avoid your worst personal fears and simply remain calm, writing:

“Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.” (Emphasis added.)

“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well. (Emphasis added.)

“As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.”

Yahoo Finance will host the exclusive live stream of Berkshire Hathaway’s shareholders meeting on May 6, 2017.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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