Finally, Three Reasons to Buy

Individual investors will be getting their statements from October.  The news is not good.

Most people react in the wrong way, looking backward rather than forward.  This is the main reason that the individual investor, attempting to time the market, gets about half of the average rate of stock market gains.

Three Factoids

Sometimes the picture can be captured in a snapshot.  Here are three facts to consider:

• Investors are bailing out of mutual funds.  The latest report is a massive sell off of $21.9 billion.
• Warren Buffett is buying -- not just for Berkshire Hathaway (BRK.A), but for his own account.  Doug Kass highlighted the Buffett performance on market calls.  (Full disclosure:  We are fans of Doug Kass, writing for a paid site at TheStreet.com. We write there also.  We were paid subscribers, profiting from the advice, before we joined the team.)  We are quoting at length with the suggestion that readers might wish to get this information in a timely fashion.  Here is part of  Doug's comment from October 20th:

Based on my analysis of his public quotes and opinion, the Oracle of Omaha has made only three boldly positive market calls in his career; the latest one was on Friday. The first two calls were prescient.

* Bullish call No. 1, 1974: Over the two-year period following Warren Buffett's 1974 call (see above quote), the Dow Jones Industrial Average and the S&P 500 soared by 86% and 70%, respectively, over the next two years.

* Bullish call No. 2, August 1979: In an interview in Forbes, Buffett stated:

"Stocks now sell at levels that should produce long-term returns far superior to bonds. Yet pension managers, usually encouraged by corporate sponsors they must necessarily please, are pouring funds in record proportions into bonds. Meanwhile, orders for stocks are being placed with an eyedropper.... Can better results be obtained over, say, 20 years from a group of 9.5% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, at around book value and likely to earn, in aggregate, around 13% on that book value?... How can bonds at only 9.5% be a better buy?

• Over the next two decades, the S&P achieved an annualized return of 17.3%, nearly twice the average 9.6% return for bonds.

• The Gong has Rung.  Our Gong model now indicates an attractive risk/reward environment for equity investors.  The Gong has patiently waited out the massive October volatility, so it deserves some respect.

Conclusion

There are many conflicting straws in the wind for investors.  Much of the media coverage emphasizes what has gone wrong, bailouts, and the potential for a massive depression.

Investors must ask whether equity prices already reflect a severe recession. For our investors we are finding plenty of stocks available at fire sale prices.

And of course, this approach may not be an "instant winner."  There is plenty of skepticism in the market and each investor's situation is unique.

Comments

[Loxomo:]

Arguing at all w/Buffet's decisions is like say Tiger can't golf and Jordan can't hit a foul shot no argument there. Fact is, this IS the perfect time to be buying great DIVIDEND YIELDING STOCKS while the 50-80% sale is going on in our favorite stores to shop the NYSE,NASDAQ, etc. When in you memory could you ever buy GE yielding close to 6.5%? The anser is almost NEVER. So, ignor the "sky is falling" and ignore "when are we at the bottom" and ignore the rest of the fear monerers telling you to avoid the market...buy in NOW and LOCK IN GREAT DIVIDENDS, then reinvest them and over time you will be a very wealthy person. Even if your 80 yrs old, buy safe companies-they will all go up in the next year or two, and it's better than a 4% CD return. GEA is another great one to consider for major safety and great yield.-loxomo

2008 Nov 02 09:09 AM

[David Roskoph:]

Give me a B -
Give me a U -
Give me a Y -

What does it spell ?
What should you do ?

Only you should direct your attention to US dollars.
This is a deflation.

2008 Nov 02 11:11 AM

[tblakeslee:]

Rediculous! Looking backwards at two previous successful calls by Buffet is not a reliable way to make decisions. This is a very different situation than the bottoms on regular business cycles.

2008 Nov 02 12:21 PM

[adan:]

ok, i'm also hopeful, of at least an interim rally worth wading into

but,

re: "Over the next two decades, the S&P achieved an annualized return of 17.3%, nearly twice the average 9.6% return for bonds...."

if the holder of those "puny" 9.6" riskless bonds sold them near or at the end of those two decades, how would the return compare then?

no contest i think

stocks held, with risk, would've had to done way better than 17.3%

2008 Nov 02 03:14 PM

[flow5:]

That is a terrible record. How could Buffett be in the top tier of investment forecasts?

I called stock market bottoms in Oct 74, Oct 82, & Jun 84. I called the bottom in bonds Sept 81. I called the market fall in 87. Robert Prechter had 200+ trades when he won a trading contest. It took one option trade to beat him..

I used bank debits. The cycles for real-gnp & inflation have never varied (they’re always exactly the same).

Both rates-of-change in real-gnp & inflation are synchronous.
.
It's impossible to miss significant changes in GDP, i.e., bubbles.

2008 Nov 02 03:56 PM

[flow5:]

First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.

The lags for monetary flows (MVt), i.e. proxies for (1) real GDP and the (2) deflator are exact, unvarying - respectively. Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).

Not surprisingly, adjusted member commercial bank "free/gratis" legal reserves (their roc’s) corroborate/mirror, both lags for monetary flows (MVt) –-- their lengths, or frequency, are identical -- (as the weighted arithmetic average of reserve ratios remains constant).

The lags for both monetary flows (MVt) & "free/gratis" legal reserves are indistinguishable or synchronous.. Consequently it has been mathematically impossible to miss an economic forecast (bubble, etc.).

There are no inaccuracies, just some non-conforming & unavailable data (e.g., revisions have been overlaid & lost, flawed deposit classification, data discontinued, etc.). This is the “Holy Grail” & it is inviolate & sacrosanct.

The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.

Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real-GDP. Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.

Because of monopoly elements and other structural defects which raise costs and prices unnecessarily and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 percentage points. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.

Some people prefer the devil theory of inflation: “It’s all Peak Oil's fault.” This approach ignores the fact that the evidence of inflation is represented by "actual" prices in the marketplace. The "administered" prices of the world's oil producing countries would not be the "asked" prices were they not “validated” by (MVt), i.e., validated by the world's Central Banks ( i.e., as Friedman maintained "inflation is always and everywhere a monetary phenomenon")

2008 Nov 02 03:59 PM

[henarl:]

Long term bonds now are a deathtrap when inflation finally arrives, as it eventually will.

2008 Nov 02 04:02 PM

[300mph:]

I like the gist of your article except for a small detail. At first you state that we will be presented with "Three Factoids", then you say "Here are three facts to consider." Facts being the opposite of factoids, what are they, facts or factoids?

2008 Nov 02 04:34 PM

[mkreisel:]

Retail suckers are now using the (in)famous "it's different this time" slogan to bash Buffett again!

What better buy signal can you get?

2008 Nov 02 05:57 PM

[bill d:]

Re: "Facts being the opposite of factoids, what are they, facts or factoids?"
Well - not really the "opposite"

Were the hell is NYKA when we could really use him ;-)
.
Merriam-Webster:
Main Entry:
fac·toid Listen to the pronunciation of factoid
Pronunciation:
\ˈfak-ˌtȯid\
Function:
noun
Date:
1973

1 : an invented fact believed to be true because of its appearance in print 2 : a briefly stated and usually trivial fact

2008 Nov 02 10:45 PM

[Bob Markman:]

Re Buffet's 1979 call: Yes, he was right over the succeeding twenty years, but let's not forget that he was very, very early (read: wrong) for the first three years. Recall that the Great Bull Market did not begin until August 1982! Can you imagine the pain if Buffet is 'right' in the same way today? Who could, at this point, stand another couple of years of losses before the whole thing finally turns. Maybe Waren can. But do you have a similar $40 billion cushion? Moral: be careful with your historic analogies; sometime they say exactly the opposite of what you intend.

2008 Nov 02 11:04 PM

[Jeff Miller:]

Concerning "factoids". Thanks for the comments and constructive criticism. I like to use words accurately and effectively. By "factoid" I was trying to suggest some interesting indicators, but not things where I wanted to do a comprehensive analysis. This is something like one of the definitions, but not my major theme. I'll find a different word.....

Thanks,

Jeff

2008 Nov 02 11:15 PM

[flow5:]

Guild of Scholars: Dr. Leland James Pritchard, M.S. Statistics - Syracuse, Ph.D. Economics - Chicago 1933 Milton Friedman was his classmate (while Friedman was getting his masters).

Theoretical Position:


The transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (1) M equals the volume of means-of-payment money; (2) V, the rate of turnover of this money; (3) T, the volume of transactions units. The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.

The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M). The product of MVI is obviously nominal GDP. So where does that leave us? In an economic sea without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process. I(contrary to Friedman).

To the Keynesians, aggregate demand is nominal GDP, the demand for serves (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.

But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M. Inflation analysis cannot be limited to the volume of wages and salaries spent.

To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.

2008 Nov 03 08:51 AM

[flow5:]

These trading dates are verifiable. The numbers are still the same as when I calculated them.

The Bank Credit Analyst & William Bretz (deceased) of Juncture Recognition both used the series.

The series was maintained by Ed Fry (retired)

2008 Nov 03 02:44 PM