Buffett and the Limits to 'Awaiting Better Times' 49 comments
Kevin S. Price
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With the publication of Warren Buffett's opinion piece in the New York Times, we'd like to revisit the question of selling equities into the maw of this growling bear. As we've written recently (here and here, for example), the big problem with selling at these levels is how and when investors would return to the market.
CNBC flashed a couple classic Buffett quotations this morning. This one is especially apt: "Those awaiting a 'better time' for equity investing are highly likely to maintain that posture until well into the next bull market." There's a basic, profound truth in this observation, one reflected in Dalbar's ongoing work on investor returns falling short of market returns (and short of their own funds' returns).
The issues here are straight out of behavioral finance: Loss aversion, regret avoidance, euphoria, despair.
Our general suggestion is that investors not liquidate at these levels. And those who have cash available, regardless of whether they've held that cash through the downdraft or raised it more recently, should establish a clear discipline for reinvesting it consistent with their risk acceptance and overall investment objectives.
An example would be to divide one's cash holdings into fourths, let's say, and commit to investing each of those chunks on a set schedule (say every quarter for the next year, or every month for the next four) whether the market goes higher, lower, or nowhere at all. If the market goes higher, you don't miss out on all of the rebound. If it goes lower, great! You're now reacquiring the merchandise at more attractive prices. If it goes nowhere in particular, you're back in the game after paying only some modest transaction costs.
The key here, as always, is elevating discipline over emotion. Investors once again feel burned, and that feeling is entirely understandable. They have been burned! But they shouldn't let their emotional demons exacerbate the problem. Read Buffett, and think hard about the implications of his simple, deep insight:
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
A sense of wariness isn't all bad. But investors shouldn't let caution turn into fear and fear turn into paralysis. By the time you feel that reassuring burst of confidence, it'll be late in the game once again, just as it now for panicked sellers.
Source
Warren E. Buffett, "Buy American. I Am." New York Times, October 16, 2008
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This article has 49 comments:
He has to start early just to have a chance to get everything invested before it's too late.
If you really believe that Buffett's style is the way to go then simply go buy stock in Berkshire B. at $3962.00 a share. You will get the exact same performance that Warren gets and you won't have to think about it.
How about the gov'ment just putting antidepressants in the water supply or maybe the air for us who drink distilled water?
Problem solved.
I'll go farther - the only people who have lost money in this market are speculators who bet with borrowed money and were forced to sell, and have nothing to get back in with. No one else has lost a dime.
You will say I am nuts, because the market value of your holdings, today, is lower than it was a year ago. First did you buy it all a year ago? Very likely you haven't lost anything, you just haven't gained as much as you hoped at one time. But even supposing you bought a large portion recently at higher prices, I still claim if it was your own money, that you haven't (yet) lost a dime.
How's that again? I mean, if the quote is lower than the cost paid, and you sold today you'd have gone money to money on a round trip and have less out at the end. True, but if you jumped off a cliff you'd die, it doesn't mean you are dead. Don't sell at these reckless fear driven low prices. If it is your own money not borrowed, nothing is going to force you to sell.
Lower price *quotes* are *offers* from Mr. Market. But it Mr. Market has lost his mind, who cares what he is saying? He says he won't pay you anything for your stock, OK, so you know you aren't selling to him. Where's the bad? Now, if his price is insane and you have cash or can save some, take him up on the other side of his insane offer and buy.
But you haven't lost anything, if the future price in normal times of your purchased assets is more than you paid for them. The current quote is irrelevant, and only quote that counts is the one on selling day. And you are in charge of when selling day is, not the market.
If is possible to overpay for a company, and for it to never earn out what you paid for it. It is possible for one or two to go bust and stick you with permanent losses, but all aren't ever going to. It may make sense to sell something you bought to immediately buy something more attractive, and that doesn't count as selling at a loss, it is just switching the form of your bet on the future, from that point on.
But as long as the prices of your assets are higher, overall, than what you paid for them years and years earlier, you haven't lost a cent.
Part of the panic idiocy in the financial sector right now is driven by mark to market valuation rules in their accounting, which force them to record losses in earnings whenever some bond they own declines in price, even if the bond pays as before. They are earning a higher rate on a smaller current value, but the same earning stream over all.
So are you. You previously owned all the future earnings of the companies you have stakes in, in proportion to your stakes in them. And you still do. Those future earnings have not been materially changed by fluctuating prices (full blown bankruptcies excepted, to be sure). You or others may have hoped they'd be higher than they are actually going to turn out to be, but you own the same full stream as you did a year ago.
You can call that stream a smaller capital earning a higher rate of return, or a bigger capital earning a lower rate of return. But it is the same future cash flows.
Don't get caught up in the panic idiocy of insane accounting.
Now is a great time to buy, and you haven't yet lost a cent. But if you got shaken out now, swore off the stock market, and never went back to it - then you'd have permanent losses. Not only from selling at current quotes, but from losing all the higher returns you could have had from a lifetime of stock investing.
Let the market buck and roar all it likes. It can't hurt you. Buy more if you can. This too shall pass.
Lacking that why not resort to re-runs of American Idol?
The issue is that most people buy high and sell low - look at mutual fund flows.
Does that mean Mr. Buffet is for the "little guy"?
Instead of the govt protecting stockholders, the treasury gave them a kick on the chin with BS, Fredie and Fan, and AIG. No wonder shareholders decided to get out of this anarchic anti-investor environment.
Joe six pack knows nothing of bonds and preferred shares and the mechanics of the stock market while he is being encouraged to invest hard earned cash while saying at the same time no guarantee at all he can make money and may actually lose everything in case of company bankrupcy. Also they dont have the ability to know when to get in and when to get out, thus the ordinary investors got crushed most of the time. Mutual Funds and Hedge Funds are no better than ordinary investors with many of them now on shaky grounds. ETF was another flavor with the same main ingredient which is stocks. Like softdrinks with main ingredient being water.
Banks tried the SIV (Structured Investment Vehicle) with guarantee of capital to investors but no guarantee of profit. Their biggest mistake is that they re-invested those cash in a no-guarantee stockmarkets during the boom days. Now the banks are in big trouble.
Govt has now guaranteeing bank deposits, commercial paper, cash flow to banks, etc. Nothing for the stock market investors. Look here, it is the stock market causing havoc in the first place. Everytime you turned on the TV, it is the stock market destroying the public confidence of the future. Then the inevitable recession/depression follows.
Govt has to protect common shareholders from companies going bankrupt. That is the minimum. To prevent total collapse of the stock market in this extremely volatile environment; govt has to guarantee in part or in full stock share purchases in the next 3 months for 3 years with minimum 1 year holding period.
Mechanisms should be installed to prevent stock prices running 10%, 20% or even 200% in 1 day during the 3 month period. Govt may also charge some insurance fees from those stock purchases to recoup loses from companies going under.
One way to do this is to use a 5% maximum rise/decline capped 20-day moving average as a guarantee price. Any shares bought below will be guaranteed at purchase price and those bought above will be guaranteed at 20-daycma closing price. So if the 20-daycma price is $20 and you buy stock at $22, it will be guaranteed at $20, if you buy at $18, it will be guaranteed at $18. After the price reached the 50-day simple moving average; a 50-day capped moving average kicks in with maximum allowed 3% rise/decline per day with same guarantee mechanics.
Free market will be allowed and daily stock prices can go 10-20-30% in whichever direction. Only that whatever purchases is done by investors - will be guaranteed at or below the government capped 20-daycma and the 50-daycma. After 3 months; the government or private entities may provide insurance policies against company bankrupcies for shareholders willing to insure their holdings. Insurance fees will be very low if not negligible since very few companies go bankrupt with a vibrant economy. Govt can use 50-year bankcrupcy percentage average to estimate how much risk will be taken and how much insurance fee can be charged. No guarantee against stock price fluctuations. Another insurance policy might be conceived for price fluctuations.
This is the very fast and easy way to restore confidence and give a solid ground to the hopes and aspirations of the common shareholders. Good for stock market dummies too. Also, it can be re-implemented during severe stock market crises like today.
Deal with the banks' CDOs, CDSs, and MBAs and the housing mortgage problems in the background. They will take years to unravel. Meanwhile, financial credit crisis is now spreading into commercial credit. This is extremely dangerous to the whole industrial world that depends on commercial credit for the transfer of daily food and necessities among farmers, manufacturers, suppliers and retailers.
"You could have been so much more." from a Joni Mitchell song.
Proud of yourself Alex Hamilton?
there are a bunch of shoes falling. watch their effects and then decide if you are ready to jump in.
Enjoy it while you can. When we get to an honest banking system, stock market volatility will great decrease. BUT, you will know that you are not being subsidized by Joe Six-Pack through the Treasury or the Fed.
as for the eternal optimists...you know who they are...the CNBC crowd and various pundits whose blogs or comments aren't worth the time it takes to write them because they are incapable of adjusting their mindset to new facts and circumstances.....i'll only say this: you were wrong every step of the way down, all the while insisting you were right. jason c's absurd notion that "you haven't lost a dime" in the face of a 40% decline from the peak speaks for itself. as if the holder of intel at $70 in the summer of 2000 hasn't lost a dime 8 years later because he still holds it at $15. not only has he lost capital, he has lost the opportunity of making positive returns elsewhere by refusing to sell. those with that kind of mindset belong in savings accounts...not stock markets.
investmentscientist.co.../
(or the My Website link above)
lol! Bad eyes, that wives tale is true apparently.
MISSION: Update your personal Balance Sheet, Income Statement & Investment Policy (Objectives, Time Horizons, Liquidity needs, Risk & Return Profile, Special Circumstances) to arrive at your Target Asset Allocation (Cash/Fixed Income/Equities).
RESULTING ACTION: Then RE-Balance to your Target Allocation in a disciplined method as the Writer suggests.
RESULT: Mindful Homework, Discipline & Definition PREVAILS OVER Emotion (Fear, Greed, Paralysis).
Now I did very well in the market by taking big risks. In August last year I thought hell I don't need to push the envelope any more, I'll invest a bit in some safe shares that I can just forget about. Two week later the subprime disaster surfaced and my shares which had nothing to do with subprime rocketed down $50,000. I could see this coming and I thought I'm out of here. Now I looked at the value of those shares today and if I'd stayed the course I'd be $325,000 down on the deal. If you want to be a successful trader, you have to take profits when times are good because the good times never last. And you have to know when to fold up your tent and head for the hills. And you can't necessarily trust what a genius ( no sarcasm intended ) like Buffet says. He is simply talking up his book because no one in the world has more to gain by share prices rising than Buffet does.
Stocks are reasonably valued right now considering expected earnings. However those earnings most probably will not stick with us till Q1-Q2 2009, at which time your past purchase now will seem much overvalued.
Buffett doesn't care, he's willed his moneys away at his death, doesn't stand to lose anything.
If you have access to 15 minute and 30 minute charts, take a look at the Dow from mid September (this year) through Friday. Now focus in on October 2 where the Dow begins a capitulative sell off. Then see the "W" formation formed from 10/8 through 10/17.
OK, this is just sort of interesting until you also look at volume bars on a weekly (5 day) basis. The positive volume (green) bar of last week has only been exceeded twice before in history.
The negative Dow volume of the week of 9/19 is the highest in history. The negative weekly volume of the week of 10/3 is second highest ever.
Quite likely Buffet had that article sitting in some file to send to press right when he felt the market had finally firmly bottomed (this time). I expect he is betting, as I am thinking, that we aren’t going to see the Dow at 7882 maybe ever again.
So we should be throwing everything we have and can borrow into the market, right? No. Few of us have the luxury of taking the chance, minute as it may be, that we are still only part way down a much longer slide. But chances are pretty good some day we'll look back and see we missed the buying opportunity of our lifetime.
One, I believe Buffett was buying with his own money as he said he was something like 100% in Gov't bonds until now. Further gains, I'm sure he doesn't really need in order to live the rest of his life in comfort. He doesn't need to promote the market. Bill Gates would always take him in. I think he's warning people about the risk of holding cash until the trend is clear - at which time the purchasing power of their cash may have dwindled significantly.
Two, Buffett has committed to giving to charity his BRK holdings - they will benefit more if markets take a further dive than if they recover quickly as BRK's cash flows will enable BRK to buy low.
Try to call the bottom with gann
Anyone knows an aunt, cant
Call the bottom with gann
But she's got high hopes, she's got high hopes
She's got high apple pie, in the sky hopes
So when your stock is gettin' low
'Stead of lettin' go
Just remember that aunt
Oops there goes another support line that can't
Job suffered hard.
At the end of his suffering,
Job had his job.
During the gread depression; stock market went down 80% or so for less than 3 year if I am right. However, if you look the yearly chart, Dow Jones made a sustained rally from 1932low to year 2000 high (from $42+ to $14,000+ in 68 years).
Technically speaking, highest probability for Dow is an expanding flat with 4950 target. However, that is only the highest probability. There are lots of possible scenarios that can happen and Dow 8000 or 7000 are good candidates too. You may even say Dow 1000 for extremely bearish scenario.
The point is; the highest probability after this 8+ years of consolidation (check the broader SnP500 on yearly chart with a very clear regular flat pattern either ending with a higher low or a lower low, Dow made higher high for a regular flat or expanded flat if things get worse) is that the US stock market will be in for another 68 years (more or less) of sustained rally.
You dont want to miss that potential 68 years of rally interrupted only by minor shocks in the 70's, 80's and early 90's.
How could this be possible to have another 68 years rally?
Just like in the 1930's. Investment went from business to housing. You know, everybody played safe. If I can see it and touch it (house and lot) it is hard asset. Problem with housing for the most part is that it is an EXPENSE and not a profit-generating investment.
Profit generating investment = BUSINESS enterprises.
The US invested (spent) $1.2T on housing from 2000 to 2007 while investments for business went to China, India and other develoing countries.
The sooner America realizes that house and lot is an expediture and business enterprise is an investment; the sooner they will be able allocate resources into the correct part of the equation.
Businessmen knew that they can buy many other businesses, houses, real state, cars, yatch, private plane, etc. with a successful business enterprise. By the time the business downturn catches up; most excess profits has already been allocated to other safe but less-profit generating investments (treasure, bonds, real estate) and again be re-allocated into risky but more-profit generating business enterprises as the economy recovers.
House and lot prices can go up but they cannot generate cash profit on a monthly or yearly basis. Only the builders, banks and flippers make money in rising house prices. That is, if you stick to house and lot investment - you are stuck.
I dont know what consequences will be once this bubble burst.
But for sure, those safe cash will start seeking profit generating investments such as manufacturing plants, technology, energy, etc.; rather than in safe hard assets but non-profit generating investments such as housing, gold, diamond, etc.