Warren Buffett Warns Gen Z Investors To Remember This ‘One Fact of Financial Life’
Written by
Cynthia Measom
Edited by
Levi Leidy
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Many Gen Zers are at just the right age to start investing. And well-seasoned investor Warren Buffett, who has decades upon decades of investing prowess, knows what works best. Is what works best cutting-edge and exciting? Not hardly. But if your goal is to get rich, why not take a page from one of the most successful investors of all time?
Stock Markets Are Very Different Now Than Generations Ago
In Warren Buffett’s most recent annual shareholder letter, he wrote, “Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young.”
So what are the reasons that markets have more casino-like behavior now than when 93-year-old Buffett was a much younger man? What changes or technologies in the markets have happened?
Overflow of Information
“The biggest difference between now and generations earlier is the proliferation of information as a result of the advent and rise of the internet,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University. “When I first started operating in the financial industry there were few sources of information — ValueLine, S&P, Moody’s, firm annual and quarterly reports and Wall Street firm research.”
Johnson further explained that people now have immediate access to information and deciding what information should be viewed as trustworthy and what information shouldn’t is very difficult. “There truly is information overflow, and more is not better,” he said.
Speculation Is Encouraged
Johnson also said that the financial industry is now geared toward encouraging speculation over investing.
“That is how those firms get paid — either on commissions or payment for order flow,” he explained. “There has been a surge of young participants in the financial markets, but the vast majority are not investors — they are speculators. The distinction is very important and has consequences for the continuation (or lack thereof) of the trend.
“Many speculators in GameStop or the other meme stocks are trying to convince themselves that they are investors and that apps like Robinhood have democratized investing. What these apps have done is democratized speculation, as many of the ‘investors’ in Bitcoin or GameStop have no fundamental basis for making their decisions, they simply are investing because the asset is ‘going up in value.’ There are so many corners of the current financial markets that are rife with speculation.”
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Dramatic Predictions Are Just a Click Away
Johnson explained that the information overflow can also be attributed to so-called experts who make dramatic predictions about the direction of financial markets.
“The way to get attention in a crowded information marketplace is to make a dramatic prediction,” he said. “No one gets any ‘ink’ from suggesting that the best course of action is to dollar cost average into a broadly diversified index ETF.
“To this, I am reminded of the Buffett quote: ‘Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.’ In addition he said, ‘We have long felt that the only value of stock forecasters is to make fortune-tellers look good.'”
What Buffett Wants Younger Generations To Remember
Buffett also wrote in his annual shareholder letter, “One fact of financial life should never be forgotten. Wall Street — to use the term in its figurative sense — would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed — not by everyone but always by someone.”
Why Should This Fact of Financial Life Never Be Forgotten?
Johnson said that networks have “talking heads” who are consistently pushing ideas about what stocks their audience should be buying and selling. He also pointed out that the financial news media is fueled by the advertising dollars of crypto companies.
“Teens are especially susceptible to the crypto messaging championed by the likes of Steph Curry and Tom Brady,” said Johnson. “Logging on the Yahoo! Finance homepage, one finds the price of Bitcoin prominently displayed along with U.S. and global stock indices and global exchange rates. CNBC prominently displays the price of Bitcoin along with the index values for the Dow, S&P 500 and Nasdaq. Prominent CNBC talking heads routinely defend cryptocurrency speculators and provide them airtime.
“There is a siren’s song for quick wealth accumulation,” Johnson continued. “This is fueled by stories of individuals who have successfully accumulated quick wealth by speculating.”
Johnson explained that quick wealth achieved via speculation is an exception, not the rule. Instead, he said, consistency and patience are the virtues associated with amassing wealth over the long haul. That’s the same mindset that Buffett has.
Johnson said that Jeff Bezos once asked Warren Buffett: “You are the second-richest man in the world and yet you have the simplest investment thesis. How come others didn’t follow this?” Johnson said Warren Buffett responded: “Because no one wants to get rich slowly.”
“What Buffett is referring to here is his philosophy of investing in good companies and staying invested for the long run, letting compounding work its magic,” Johnson said. “To that end, another Buffett quote is classic. He once said: ‘No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.'”
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