Warren Buffett is one of the most successful investors ever. He’s the CEO of Berkshire Hathaway, a holding company that Buffett uses as an investment vehicle with his investment partner, Charles Munger. A string of well-chosen investments has made Buffett the second-richest person in the world, with a net worth of $75.6 billion, according to Forbes.
His prescient calls about stocks and the market, in general, have earned him the nickname “The Oracle of Omaha,” in honor of the Nebraska city where he resides. Buffett’s most recent market prediction might seem like his most dramatic. In September 2017, Buffett predicted that by 2117, the Dow Jones industrial average would hit 1,000,000.
While Buffett won’t be around to see if his prediction will come true, it reflects his lifelong belief in the strength of the American economy and the long-term resilience of the U.S. stock market. Here’s a look at some of his most successful and biggest investment predictions.
Bank of America Shares Will Be of Great Value
In 2011, Bank of America was suffering from the after effects of the subprime mortgage crisis. Mr. Buffett swung into action that August and bought a significant position in the company. At the time, the stock was trading at below $7 per share, down from $19 the prior year. Through his investment firm Berkshire Hathaway, Buffett bought $5 billion in preferred shares in Bank of America.
The preferred shares paid a hefty 6 percent dividend, resulting in $336 million in annual interest payments to the company. Even better, the preferred stock came with warrants that allowed Buffett to buy 700 million shares of Bank of America at $7.14 per share.
At the time, Buffett made this prediction in his annual investment letter: “Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire.” When Buffett exercised the warrants in 2017, he earned $12 billion.
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This Is the Time to Start Investing
Buffett told Forbes magazine in late 1974, when the Dow was below 600, that he viewed the market “…like an oversexed guy in a harem. This is the time to start investing.”
By the time that interview was published, the Dow had climbed by almost 15 percent to 660. Buffett’s prediction came after a notorious bear market from 1973 to 1974. Perhaps more than any other prediction, this prognostication highlights Buffett’s philosophy to “be fearful when others are greedy and greedy when others are fearful.”
Stock Market Returns Will Be 6 Percent
In 1999, stocks were near the end of an incredible run. Stocks began a big upswing starting in 1982, and returns for 1995 to 1999 were 37.58 percent, 22.96 percent, 33.36 percent, 28.58 percent and 21.04 percent, respectively. The Oracle of Omaha made a dramatic, long-term, counter-trend prediction in the midst of all of this ebullience.
Buffett confidently predicted that stock market returns for the following 17 years would be nothing like the previous 17 years. In fact, he suggested that the “most probable return” for the next 17 years would be 6 percent.
By 2016, at the end of the 17-year period, stocks had returned 5.9 percent — an amazingly accurate prediction over such a long time period.
Index Funds Will Outperform Hedge Funds
Perhaps Buffett’s most dramatic prediction came in 2007, when he offered to bet $500,000 that over the following 10 years, the S&P 500 index would outperform a portfolio of hedge funds, when measured net of fees. Hedge fund manager Ted Seides, of Protege Partners, took the bet.
When 2017 rolled around, Seides was the one who had to pay up. In fact, the bet was so lopsided that Seides conceded the wager before the entire 10 years had expired. At that point, Seides’ collection of funds had earned just 2.2 percent per year, while the S&P 500 index had earned more than 7 percent per year, thus supporting Buffett’s point that indexing typically can beat actively managed funds.
Goldman Sachs Will Thrive
In late September 2008, Buffett made a move to take advantage of the nation’s financial crisis. Investment bank Goldman Sachs was floundering and needed funding. Predicting that Goldman Sachs could not only survive but thrive, Buffett invested $5 billion in the company. In exchange, Goldman Sachs gave Buffett preferred shares that paid an amazing 10 percent per year in income.
Additionally, Buffett was granted $5 billion in warrants, allowing him to buy the stock at $115 per share. By 2013, Buffett’s prediction had come true with remarkable accuracy — he walked away with a profit of $3.2 billion after investing when the market was low.
Coca-Cola Is A Long-Term Buy
Buffett’s biggest stock market win has come from an investment he began in 1988 and has added to over the years. While the stock has seen its ups and downs, Coca-Cola is Buffett’s biggest winner, returning 1,215 percent as of the end of 2016.
In many ways, Coca-Cola epitomizes the entire Warren Buffett investment approach — to take long-term positions in companies that you understand and that have large, established positions and strong performance. Buffett is an ardent consumer of Coke, drinking 750 calories of the soda per day on average. Buffett’s Coca-Cola purchases support his notion that you should invest in what you know.
Stocks Are Cheap
Another one of Buffett’s recent predictions has yet to play out entirely. But so far, it has been another home run for the legendary investor.
On Feb. 27, 2017, Buffett told CNBC’s Becky Quick that “…we are not in bubble territory, or anything of the sort,” despite many market observers saying that the current bull run was getting frothy. In fact, Buffett continued, “measured against interest rates, stocks are actually on the cheap side compared to historic valuations.” In other words, Buffett was predicting that stocks were undervalued and that it was time to buy again.
The Dow Jones industrial average closed at a price of 20,837.44 on the day Buffett made that prediction. As of the close of business on Oct. 6, 2017, the Dow was at 22,773.67, a gain of 9.29 percent in just over 7 months.
Home Capital Group Is Undervalued
In mid-2017, Buffett extended his reach beyond the United States to invest in Canadian lender Home Capital Group. As with many other Buffett transactions, he got a sweet deal in this purchase right from the outset.
Buffett lent $1.5 billion to the company at interest rates of 9 to 9.5 percent. Buffett also enjoyed the right to buy up to 20 percent of the company’s stock at a 20 percent discount to its market price, predicting that the stock would rise after his purchase.
As of Oct. 10, 2017, Buffett’s prediction already had panned out. The stock deal allowed him to purchase Home Capital at Canadian $10 per share, and the stock was trading at Canadian $13.79 — an increase of 37.9 percent.
Buy & Hold Berkshire Hathaway
One of Buffett’s best investments of all time was in the company that he now runs, Berkshire Hathaway. In 1964, the company offered to buy Buffett’s shares for $11.50 each, to which he agreed. Later, the company reduced the amount of their offer, and this compelled Buffett to not only cancel his sale but to buy enough stock to control the company and fire the manager who lowered his original offer. Buffett had made the prediction again with his wallet that shares in Berkshire Hathaway would rise over time.
Once again, Buffett’s prediction came true in spades. Now, just one share of Berkshire Hathaway sells for about $281,000. As Buffett’s longest-held investment, Berkshire Hathaway is a reminder to investors that “buy and hold” can indeed result in tremendous gains.
The U.S. Will Work Fine Under Trump
While Buffett supported Hillary Clinton’s candidacy for president in 2016, he predicted that even if Donald Trump won, stock market investors shouldn’t worry. According to Mr. Buffett, “America works … It’ll work wonderfully under Hillary Clinton, and I think it’ll work just fine under Donald Trump.”
The stock market’s performance since Election Day in 2016 should meet most anyone’s definition of “just fine.” As of Oct. 11, 2017, the Dow Jones industrial average had jumped from 18,332.74 to 22,830.68, a gain of nearly 25 percent since the election.
About the Author
After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.