Long-Term Investors Should Be Buying

The sell-off in September was bad, but things got much worse in October. Investors finally panicked and sold everything. Some sold out of fear. Others sold out of necessity. Hedge funds and mutual funds sold to meet redemptions. CEOs sold shares in their own companies just to meet margin calls. Selling begot more selling.

The economic news seems to justify all this selling. The housing market continues to struggle, corporate earnings have been less than stellar, jobless claims keep climbing, and consumer confidence hit the lowest level ever recorded.

Furthermore, recession looks certain. The Q3 GDP number was negative, due largely to a 3.1% plunge in personal consumption expenditures. I have been arguing that a recession began in December 2007 or January 2008. More than 10 months later, the National Bureau of Economic Research has yet to declare one. I really don’t know what they are waiting for.

However, not all is doom and gloom. One bright spot is the rapid plunge in oil prices. Not long ago, consumers were crying bloody murder when gasoline prices surged. They accused the industry of price fixing. CEOs of oil companies were dragged in front of Congress. No one is complaining now. Retail gasoline prices are down $1 per gallon in just one month. This works a bit like a tax rebate, putting extra cash in consumers’ pockets. But as I explain on my MoneyMasters blog, lower gasoline prices, more efficient cars, and fewer miles traveled are saving the average driver less than $100 per month. It is a nice sum of money, but it is not enough to make a mortgage payment and avoid foreclosure.

Yet I am also optimistic that housing prices are reaching a bottom. Once again, the S&P/Case-Shiller indexes showed prices fell at an accelerating rate in August. However, since then, we have seen vulture buyers enter the market. This is removing some of the excess inventory. No doubt prices are still falling, but there is a good chance that the rate of decline has already begun to slow. If we are lucky, housing prices should find a bottom around March. It is really quite amazing how much investor sentiment has changed. In Oct. 2007 when the Dow was above 14,000, I warned in this letter that investors were wrong to be so bullish. I worried about falling housing prices and rising mortgage defaults, I talked about the increasing risk of recession, and I even pointed out that investors were ignoring the risk that tax rates would rise no matter who got elected president. Some readers called me a perma-bear and said I was incapable of seeing good news even if it hit me in the face.

I am not bearish anymore. In hindsight, I turned bullish too soon. I still realize that stocks may go lower or simply remain stagnant for some time, yet I believe that anyone with an investment horizon of more than a couple of years should be buying now. One of Warren Buffett’s long-time favorite rules of investing is, “Be fearful when other are greedy,and be greedy when others are fearful.” There is a tremendous amount of fear in the markets right now. While it is true that “Even Buffett Isn’t Perfect,” when it comes to investing he is pretty damn close. We should all be encouraged that one of the greatest investors the world has ever known is committing billions of dollars to stocks right now.

Comments

[futurestrader:]

First off, you can call a recession any time you personally want to make that call, but if the word does have a definition and criteria. Why call one when the criteria has not been met.
Second, your gas price analysis is way off..I put together some very conservative numbers....Lets say 2 drivers, with 15 gallon tanks fill up once per week. That is roughly 120 gallons per month...I live in Texas so I will use our numbers..Gas, at its peak was right around 4$ (maybe a tad higher), and now it can be bought for right at $2. That is a very conservative $240 savings....A lot of people, especially here, have bigger tanks, and drive even more...So dont take away from this drop in oil...This is huge for the people and they should hold off on a second stimulus until the effects of this drop hit the economy..And we didnt even bring up the savings that will be incurred by corporations with huge transport costs...

2008 Nov 06 09:12 AM

[User 143167:]

This is a deflation + depression. So plunging oil price is really bad for the economy now as it begets more deflation fears.

2008 Nov 06 09:26 AM

[futurestrader:]

who gets 28 mpg? I know in texas, there are probably only 15-20% that get that...

2008 Nov 06 09:31 AM

[futurestrader:]

sorry...that last comment was to another article this guy wrote and I went to the wrong one,,,just ignore,,thanks

2008 Nov 06 09:31 AM

[doubleguns:]

We can not be at the bottom with so many on the Seeking alpa web site still preaching to buy. The pain has not gotten there yet. We have a long way to go to get to the bottom. There just isnt enough fear yet.
“Be fearful when others are greedy,and be greedy when others are fearful.” This doesnt mean when only half of the seeking alpha articles are fearful, this is when nearly all of them are fearful. A DOW 4500 would do it I believe.

2008 Nov 06 04:47 PM

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2008 Nov 07 03:16 PM