Warren Buffett American Tailwind: No one can predict stock market movements with 100 percent accuracy, and when it comes to individual stocks, even the most successful investors only get it right some of the time. However, in an environment known for dizzying rises and catastrophic falls, there is one underlying truth. Historically, the stock market has always gone up long-term.
Does that guarantee indefinite increases? Perhaps not, but professionals operate under the assumption that long-term growth is a sure thing. Their confidence is based on what Warren Buffett calls the “American Tailwind,” which is the certainty that the American ingenuity powering the United States economy will always create value if given enough time.
What Is The American Tailwind?
The heads of publicly traded companies have a tradition of writing letters to shareholders when annual results are released. They generally devote a page or two to the highlights of the preceding 12 months and share plans and goals for the year to come.
Whether because of the nature of Berkshire Hathaway’s business model or simply because Warren Buffett is generous with sharing his perspective, the annual Berkshire Hathaway letter to shareholders is often a dozen pages or more.
In addition to business results, Warren Buffett offers wisdom and guidance on all things financial, from the state of the economy to best practices for investors and entrepreneurs from every walk of life.
In his 2018 letter to shareholders, Buffett coined the term “America Tailwind.” He went on to identify key events in American history that support his position, which, simply put, is his confidence that the United States economy can be relied upon to grow over time.
Why Does Warren Buffett Believe In The American Tailwind?
When the letter was written, Buffett was in his 88th year. He pointed out that he made his first trade when he was 11, so he had been a part of American capitalism for 77 years. Buffett noted the extraordinary accomplishments of the United States in his 77 years of trading, and he pointed out that the nation was born from practically nothing just three 77-year lifetimes ago.
Buffett looked back at the United States in 1788, which he pointed out was “two 77-year periods” before his first stock purchase – and the year before George Washington became the nation’s first president. There were just four million people who considered themselves part of the new country – a mere one-half of one percent of the world’s total population at that time.
In the two 77-year periods that followed – from 1788 to 1942 – the United States became what Buffett called “the most powerful country on earth.” That’s not to say that life was easy in 1942. The US had just entered World War II, and the situation was dire – and this was on the heels of the Great Depression and, before that, the Civil War. Nonetheless, Americans continued to be optimistic about their own futures and the futures of their descendants.
That optimism gave 11-year-old Warren Buffett the confidence to invest his life savings, a total of $114.75 that took him five years to accumulate.
In his letter to shareholders, Buffett calculated that had he invested that amount in a no-fee S&P 500 index fund in 1942, the pre-tax value of his portfolio in 2019 would have been $606,811.
This is based on the S&P’s average annual return of 11.8 percent for the 77-year period. Buffett explained that this conclusively demonstrates that “the nation’s achievements can best be described as breathtaking.”
What Does The American Tailwind Mean For Investors?
Buffett’s trust in the American Tailwind gives context to his investment strategy. All of his guiding principles trace back to this underlying concept. Buffett chooses quality companies that have shown their ability to survive troughs in the economic cycle, and he ensures they have the financial resources to weather future market downturns.
Buffett knows those downturns will come, but based on the American Tailwind theory, he is equally confident that the market will eventually recover. He invests in companies for longevity rather than immediate gratification because he believes that strong companies will deliver solid returns given enough time.
Conversely, Buffett doesn’t bother with short-term trends, and he doesn’t gamble on startups and IPOs that are hyped as the next Apple or Amazon. He isn’t interested in what might happen – he focuses on what he knows will happen with quality companies: they will grow.
Those who want to invest like Warren Buffett can build portfolios based on the certainty that the US economy will grow long-term. That means choosing companies with the attributes required for survival in the competitive global market. Aside from basic financial soundness and effective leadership, the most critical attribute for longevity is a wide moat.
Buffett coined the term “economic moat” to describe competitive advantages that can be sustained over time. The wider the “moat,” the more difficult it is for other companies to chip away at market share. Examples of competitive advantages that contribute to a wide moat include exclusive patents, a strong brand, high switching costs, efficiencies of scale, and a networking effect that makes the product more valuable as the number of users increases.
Based on Buffett’s American Tailwind premise, investing in financially stable companies with wide moats will ensure long-term portfolio growth.
How Does Warren Buffett Invest During a Bear Market?
It’s easy to have confidence in the American Tailwind during a bull market, but for many investors, that confidence gets shaky in a bear market. It’s common to be fearful during an economic downturn, and investors often trade in stocks for assets that carry less risk. However, bear markets present tremendous opportunities for those who trust the American Tailwind.
Warren Buffett summed it up best in this quote, which dates back to his 1986 letter to shareholders: “Be fearful when others are greedy, and greedy when others are fearful.” Those who lack confidence during a bear market sell their stock, which drives prices down. Buffett scoops up those shares at bargain prices, which amplifies returns when the market eventually recovers.
As he said in the closing of his 2018 letter to shareholders:
Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.
In other words, a bear market is just a temporary dip that offers opportunities for investors, as Buffett is firm in his conviction that the United States economy will always bounce back.
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