How Much Have You Really "Lost"?

 

Ten billion dollars.

 

Seems like a nice, tidy sum, does it not? And what, you ask, does it represent? Well, in big, round numbers, it is the decline in the value of Warren Buffett's personal shareholdings in his Berkshire Hathaway, Inc., from its 2007 peak at about $150,000 a share to its recent trough at $84,000.

 

Now, take out a pencil and paper, because we're going to have a spot quiz. It'll be very simple; there's only one quiz question, and it's true/false:

"Over the last year, Warren Buffett lost ten billion dollars in the stock market. True or false?"

 

The answer, of course, is false. As he would be the first to tell you, he hasn't lost anything. Why? Because he hasn't sold. Berkshire Hathaway is a portfolio of ownership in good businesses. Some are public companies, of which Berkshire owns pieces (Coca-Cola and Wells Fargo, for example). Some are private companies which Berkshire owns outright (GEICO Insurance and Fruit of the Loom, for example).

 

In a fifty percent equity market decline, such as we have suffered in the past fourteen months, it's fair to say that everything goes down a lot. A great company like Berkshire, flush with cash and run by the greatest equity investor who ever lived, may go down a tad less than do most equities-off 44% vs. 52% for the S&P 500. But a 44% hit is still a staggering decline by any measure.

 

Maria Bartiromo of CNBC recently put that issue directly to Buffett. How did it feel, she asked him, to see his stock go down over 40%? Buffett allowed as how it felt pretty much the same as it did the half-dozen other times it's happened since he took over the company, upwards of fifty years ago.

 

The smile never left his face.

 

That may be because Buffett is pretty confident that the ten billion dollars will ultimately be back-that as the great businesses Berkshire owns continue to grow and prosper through the years, their increasing earnings and cash flows will sooner or later show up in the price of the stock. In fact, that's always been the case, and one may cite several dramatic examples. Buffett "lost" $347 million on Black Monday, October 19, 1987. Berkshire stock closed that day at $3170.

 

A decade later, in just 45 days during the summer of 1998-when Russia defaulted, Long-Term Capital Management imploded and the emerging markets uniformly cratered-Buffett really stepped up in class. In those six weeks, he "lost" $6.2 billion, as Berkshire stock closed out August at $60,500.

 

This past year, as we've observed, Buffett "lost" $10 billion, as Berkshire's stock price declined 44% to $84,000 a share. Are you starting to see the pattern? If not, simply write down the three prices at which Berkshire stock bottomed at the end of Buffett's three biggest "losing" streaks of the last twenty-odd years: $3170, $60,500, and $84,000. That exercise should convince you that, far from "losing" anything in these very significant bear markets, Buffett was simply experiencing temporary price declines, which were dwarfed by the wealth he accumulated when the long-term uptrend resumed.

 

Granted, Berkshire isn't typical. But it certainly is symbolic. The broad market didn't appreciate nearly as much as Berkshire did over the period since the bottom of the 1987 crash. But, even if you don't count dividends, at today's depressed levels (S&P 850 at this writing), the broad market is up about five times since its close on October 19, 1987. And there've been no fewer than three additional bear markets between that one and this one-during each one of which, people wailed about how much they'd "lost."

 

Consider the possibility that you haven't lost anything until you sell out in a panic and lock in the loss. And that if you don't panic and don't sell, in the fullness of time a broadly diversified portfolio of quality equities will not merely erase the temporary "loss," but will go on to accrete wealth for the patient investor as no other asset class has historically done. Consider this thesis...because history admits of no other conclusion.

 

The average retirement age in the US is 62, which means the average person retiring this year was born in 1946-the first year of the fabled baby boom. Many such investors are bewailing how much they've "lost" over the last year or so, and this is only human. But just before you're tempted to give in to that psychology ("I've 'lost' X dollars, and I'd better get the heck out before I 'lose' any more!"), please consider this:

 

There have been thirteen bear markets in US equities between 1946 and now. That is, thirteen major declines in which frightened investors have added up their "losses" every night, to mounting horror. Today, as noted, we are late in the largest of those thirteen declines, and the broad market, as denominated in the S&P index, is around 850.

 

It closed out 1946 around 18. And of course, that ignores dividends.

 

If one stayed broadly diversified among high quality equity holdings, there was really only one way for the long-term investor genuinely to lose anything. It was to mistake a temporary decline for a permanent loss, and panic out. But the market didn't do that to anyone. People did that to themselves.

A huge part of successful long-term equity investing is simply the decision not to do that to yourself.

 

© 2008 Nick Murray. All rights reserved. Used with permission.
 
 

       There is a change in the Federal and Illinois estate tax laws that could have a negative impact on existing estate plans beginning in 2009.
 
        If a person is married, has combined assets (including the face amount of life insurance) in excess of $2,000,000.00 and has an estate plan which creates at death a credit shelter trust designed to take advantage of the Federal estate tax exclusion amount upon the death of the first spouse, the change is important.  Because of a change in the law, sometimes called "decoupling", in 2009 the amount exempt from Federal estate tax will be $3,500,000 but the Illinois estate tax exemption will remain at $2,000,000.  As a result it is possible that upon the death of the first spouse an Illinois estate tax of over $200,000 may be incurred, even when there is no Federal estate tax liability.  In many cases, but not all, this is contrary to the clients' intent and best interests.
 
        Every estate plan should be reviewed so that an intelligent decision can be made.  If it is determined that it is in the clients' best interests to avoid all estate tax upon the first death, this can be accomplished through a relatively simple amendment to the existing estate planning documents.  There may be additional changes in the laws or personal situations that should be addressed in reviewing each estate plan to assure that it is most effective at the least cost.
 

 

The Worker, Retiree and Employer Recovery Act of 2008 (the 2008 Recovery Act) contains a tax law change that will give older taxpayers some much needed financial flexibility as they struggle to manage their finances during this difficult economic time. Designed to help alleviate the financial burden facing seniors who have seen their retirement savings shrink dramatically, the new provision allows senior citizens to keep money in retirement accounts that they are typically required by law to withdraw once they reach age 70½. Here's a brief summary of this new provision:

As you know, the tax laws generally require individuals with retirement accounts to make withdrawals based on the size of their account and their age every year after they reach age 70½. Failure to make a required withdrawal can result in a penalty of 50% of the amount not withdrawn.

The new provision waives the minimum distribution requirement for 2009. This means you can leave the amounts in your account without suffering the 50% penalty. This waiver applies to IRAs and defined-contribution plans, including distributions from 401(k), 403(b), and state-sponsored 457(b) accounts and is available to everyone regardless of their total retirement account balances. However, the waiver is only for amounts otherwise required to be distributed for the 2009 tax year. If you or your spouse turned age 70 ½ in 2008 and are planning to delay your 2008 distribution until 4/1/09 (the date the law requires that your first required distribution be made), this distribution must still be made. It is considered a 2008 distribution even though it is being made in 2009. Also, unless Congress extends this waiver, distributions will again be required after 2009.

Suspending the mandatory distribution requirement for 2009 will allow retirees to keep the money in their account if they choose, and possibly recover some of their losses. However, please keep in mind that this is only a summary of this new provision. If you would like to discuss this matter further, please do not hesitate to call.