Hundreds of billions in private equity and hedge fund money has been raised, and is bursting to be deployed in the market. Companies like Apple (Nasdaq:AAPL) with multiple billions of liquidity feel the need to find a home for it – in Apple’s case, possibly buying Disney (NYSE:DIS). Yet interest rates are too low, the market is overvalued and misguided investment is everywhere. The truly wealthy man is he who has liquidity in today’s market – and the patience to hold off investing until prices have collapsed and bargains abound.
The late Jean Paul Getty (1892-1976) at one time the world’s richest man, when asked how he became a billionaire, is said to have responded “Start as a millionaire and buy in 1932.” This in a nutshell is the key to truly successful wealth accumulation; if you can have uncommitted liquidity, free from any pressure to invest it, and wait patiently for the bottom of a depression (not necessarily as extreme as that of 1932) then you will end up very rich indeed. It is however much easier said than done.
Warren Buffett did “patient money” best, at least in his youth. When he had made his first fortune as an investment advisor, in 1969, he closed down operations and distributed the cash to investors (not coincidentally, at the beginning of a 13-year period in which the real value of the Standard and Poor’s 500 Index fell by 57%.) Consequently, Buffett had no need to buy during the 1970s until he saw really compelling opportunities, such as the Washington Post in 1973-74. The ability to have a pile of cash available at the beginning of a long period in which great deals became available is what propelled Buffett to his current net worth eminence.
In later life, Berkshire Hathaway continued in existence during downturns, making complete divestment impossible. Nevertheless, Buffett’s control of the vehicle was strong enough that when in 1999-2000, he saw no investment opportunities available he was able to remain on the sidelines even as contemporaries were piling in — and losing their shirt in 2001-02. Conversely, he had sufficient liquidity and financing capability available in the bear-market year 2009 that he was able to acquire Burlington Northern Santa Fe Co. that year, a $34 billion purchase that proved to be spectacularly successful, at least in its early stages.
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