The unfolding developments in the Middle East late last week, with the attacks on oil and gas infrastructure, first in Iran and immediately after in Qatar, led to a further downward movement in equity prices because of the evident deepening of the global energy crises since the start of the present conflict on February 28.
The escalation of the war in Iran took place on the day of important central bank meetings in the UK and Europe. In fact, although the European Central Bank held its deposit facility unchanged at 2%, a member of the governing council said that the central bank could hike rates at the next monetary policy meeting at the end of April if the Middle East conflict pushes inflation expectations sharply higher.
The ECB stated last week that in an extreme scenario where oil and natural gas supply disruptions persist until late 2026, the rate of inflation would peak at 6.3% in the first quarter of 2027.
Given the very uncertain times we are experiencing, it would be appropriate to highlight some important investment principles of Warren Buffett, who is widely regarded as one of the greatest investors of the modern era. In my view, these investing principles provide an important reference to navigate the extreme uncertainty being faced by many investors.
Essentially, the legendary investor, who has only very recently relinquished his role as CEO of Berkshire Hathaway Inc, has always spoken of the notion of investing in high-quality businesses with resilient balance sheets. In fact, Buffett has a strong track record of viewing periods of crisis as opportunities for long-term investment gains as he believes investors should avoid placing too much weight on political and economic forecasts, as such predictions often turn out to be inaccurate.
As Buffett often reminds investors, “the world has always been uncertain”. Unfortunately, in recent years, investors have had to deal with very troubling developments.
The current war in Iran is the fifth major episode of instability across the capital markets since the outbreak of COVID-19 in early 2020, which was followed by Russia’s invasion of Ukraine in February 2022, the attack by Hamas on Israel in October 2023, and the ‘Liberation Day’ tariffs in early April of last year.
“One of the most famous quotes of legendary investor Warren Buffett is ‘be fearful when others are greedy, and greedy when others are fearful’”
Shares as ownership, not speculation
The starting point of Buffett’s principles is very simple indeed, but somewhat different from how most investors nowadays behave in an era of an information overload from multiple sources.
When Buffett buys a share in a company, he is not acquiring an instrument, or what he refers to as a ‘trading symbol’ that is moved in and out of a portfolio according to the prevailing mood of the market. He views an investment as a fractional ownership interest in an operating business, with employees, customers, cash flows and competitive advantages that have been accumulated over several years.
If a company continues to function by producing its goods and/or services, then the underlying economic reality that gives that company its value has not disappeared.
The share price may indeed plunge as investor sentiment worsens. However, in most cases, the company itself survives, and the shares eventually reflect its value as long as the investor has the patience, and the financial resilience, to wait.
The market’s remarkable resilience
In some of his annual shareholder letters over the years, the legendary investor has made repeated reference to the equity markets’ resilience during the 20th century (despite two world wars, the Great Depression, the Cold War and oil shocks) and also at the start of the 21st century with the terrorist attacks of September 11, 2001, and the global financial crisis in 2008.
Buffett’s message is that a temporary chaotic environment does not erase the productive economies’ long-term upward trajectory. In fact, the compound annual growth rate of the S&P 500 over an extended period is circa 10% per annum.
Cash in not a safe haven
While many investors may instinctively increase their holdings of cash during a crisis, Buffett’s philosophy warns of the danger of large cash holdings during wartime.
He argues that wars lead to higher inflation that erodes the purchasing power of savings held in cash. Instead, he prefers to invest in companies with strong balance sheets and genuine pricing power with the ability to pass cost increases on to customers. A cash deposit, by contrast, is simply eroded by inflation.
This does not mean that Buffett is indifferent to cash, as he maintains substantial liquidity at Berkshire Hathaway specifically to deploy during times of instability. However, holding cash as a permanent refuge from uncertainty is, in his mindset, a form of “slow-motion capital destruction”.
Betting against humanity
Another fundamental principle advocated by Buffett is that investing in productive economies is a bet on human creativity and problem-solving.
Although several generations have faced times of crisis and extreme periods of instability that were believed to be terminal, each time, thankfully, economies are rebuilt and continue to expand through technological innovation, demographic growth, rising standards of living and the accumulated knowledge of modern capitalism.
As such, according to the legendary investor, pessimism about the long-term prospects for productive economies is not just bearish, but “historically unjustified”.
Fear creates the greatest buying opportunities
During periods of conflict and instability, the share prices of quality businesses very often drop to very low levels.
Buffett explains that during extreme market stress, these are the opportunities for investors who have the courage and ability to act when others are exiting the market out of fear. In fact, one of the most famous quotes of the legendary investor is “be fearful when others are greedy, and greedy when others are fearful”.
Given the fluidity of the situation in the Middle East, it is impossible to predict whether this can lead to an energy crisis over an extended period.
Most market strategists continue to believe that the conflict will be short as a diplomatic agreement will be reached between the parties. In fact, there were very sharp moves across different asset classes last Monday as the US President postponed attacks on energy infrastructure in Iran following “good and productive” talks.
Although it is very concerning to follow daily developments of wars and conflicts, and equity markets are extremely volatile in such times, Buffett has always opined that, over time, economies continue to grow as human beings continue to produce, innovate and rebuild as companies continue to serve customers.
Investors who understand this and have a clear view of the long-term value they own through equity ownership, are “on the right side of history”.
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