Buffett’s advice on how to get through recessions because of America’s strengths.
Warren Buffett said “businesses came back very well from 5 years ago when the panic hit. It was a panic like nobody’s ever seen, whatever you think about it, it was worse. I’m dead serious about that, we were right on the edge of the cliff” in this 2013 interview with Brian Moynihan, CEO of Bank of America, at Georgetown University.
We can take inspiration from Buffett to get us through the bad economic times of a bear market in stocks and also potential recessions in the US and around the world that we’re in now.
And like Buffett mentioned his New York Times Op-Ed piece called “Buy American. I Am.” October 16, 2008: “Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
Buffett said that President George W. Bush came out with one of the greatest economic insights of all time in 10 words in September 2008: “If money isn’t loosened up, this sucker could go down.” This was a call to action to The Fed to print money and use quantitative easing tools to stimulate the economy experiencing the Great Recession (aka Great Financial Crisis).
Even though businesses recovered from the GFC, Buffett said that the “American populace as a whole has not come back. Inequality is getting wider.”
The Forbes 400 of aggregate wealth was $2 trillion in 2013, and by 2021 it ballooned to $4.5 trillion. Comparatively, the median income was the same place in terms of real purchasing power as it was in 1989. It hasn’t changed, Buffett lamented as the rich and businesses are doing well. Business profit margins were at records (and still are in 2022) and are terrific compared to historical values.
What Buffett meant when he said income inequality is getting wider: If you take the bottom 20% of households, Buffett said was 24 million households of 60 million people, the top income level was $22,000.
You wouldn’t want to live on that amount of income with a couple of kids. By 2019, the bottom 20%’s income went up about 16% to $25,500 compared to the Forbes 400 wealth going up by 225%. (I couldn’t locate the bottom 20% income for 2021).
He said the US economy was delivering $50,000 of GDP per capita in 2013, and that had gone up to $69,375 GDP per capita in 2021, “and we’ve got an awful lot of people who aren’t living well.”
“We have learned how to turn out lots of goods and services, but we haven’t learned as well how to have everybody share in the bounty that we have.”
While the US economy is growing, and Buffett said people are unhappy with 2%, but the population is growing by 1%, so in 20 years or in a generation, there’s a 20% gain in GDP per capita. This isn’t bad in a generation, Buffett said, but the question is how it gets distributed.
In spite of ongoing economic challenges America faces, Buffett said that “this system works.” Since Buffett was born in 1930, real GDP per capita increased 6x compared to centuries before where nothing happened.
Buffett considers “the luckiest person on a probabilistic basis that ever lived is the baby that’s born today in the United States.”
The main lesson Buffett has for young people is “people will continue to make the same mistakes they’ve made.” This was a result of greed with the massive housing bubble of the 2000s. When everyone becomes fearful, the economic collapse happens all at once as the bubble pops. “That’ll happen again,” saying “we’ll have periodic recessions, an occasional panic. All recessions don’t come from panics.”
The good news is, despite all the bad things that happened in the 20th century, that “America works.” The trick is to make sure nobody gets left too far behind in a society as prosperous as America’s. But our economy will come back, Buffett assured us, “don’t ever worry about America. You’re in the right place.”
Buffett also talked about why GEICO, the car insurance company, is one of his favorite companies of all time. I expanded on why he and his mentor who was GEICO’s chairman, Benjamin Graham, loved it so much.
Being that car insurance is a commodity business, you win if you’re the low cost producer. GEICO formed their competitive advantages (moat) by having a direct to consumer business model in primarily getting their niche target audience of government employees by mail and phone in the 1950s.
Since they had reduced overhead expenses, they were able to afford offering policies at a 25%-30% discount to the competition while gaining market share and then expanding to more audiences. GEICO had high profitability where their operating profit margins were nearly 30%.
Berkshire still owns GEICO and their insurance policies are available to people who aren’t government employees.
Moral of the story: have hope because it is quite amazing how well America’s economic system works in spite of how we go through up and down economic cycles. Buffett has confidence we’ll get through it, as we always have in America’s short existence in the world so far.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki