Second-Guessing Buffett's November Bottom Call 20 comments
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You know I think Warren Buffett was wrong when he called he market bottom in late November. As this blog argued yesterday there are the hedge fund redemptions from the year-end to fuel a big Q1 sell-off. Marc Faber thinks the US economy will implode early next year.
Indeed, with the S&P down 40 per cent this year there is quite a lot of downside to play with. Q-theory posits another 55 per cent fall to the bottom but we are all groping in the dark on this.
Auto deadline
It could be that the March deadline for the big auto US firms to come up with a viable recovery strategy will mark the bottom if these companies all end up in bankruptcy. It is perfectly possible that this might be the only way to restructure the US auto sector but the stock market would clearly take fright, with much justification.
Certainly anybody sitting on cash and thinking about venturing back into the market might like to think again. Even great companies at great stock prices can get cheaper in a sell-down, and they are not about to get more expensive in that environment.
Second-guessing Buffett
Now Buffett’s famous letter to the Wall Street Journal did have an escape clause, in that he said now was a good time to buy but he could by no means be sure that the market was at the bottom or when it might get there. But the world’s most successful investor said he was buying himself, though not who or how much.
Personally I feel extremely cautious going into the New Year, and am prepared to wait this one out in cash and precious metals. If that means missing the bottom then fine, I am not Warren Buffett. But if things take a really nasty turn then I will be in there buying, and throw some caution to the wind. I just do not feel the moment is right just yet.
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Warren Buffett has taken the time to write an Op Ed in The New York Times. The subject is 'Buy American. I am'. Here's the piece.
'The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why ?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
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.
Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: 'I skate to where the puck is going to be, not to where it has been'.
I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: 'Put your mouth where your money was'. Today my money and my mouth both say equities'.
In terms of exposure, I seem to recall that his strategy still includes 2/3 cash!
To me, he is playing ultra conservative - and that of which he has increased his exposure is in "sweetheart deals" with companies he already has a vested interested in preserving. In other words rich playing other rich like vipers.
After all, 15% returns in preferred stock is better than our good friend Scrooge-Bernard!
I think it would be helpful to highlight the "Grahamsian" distinction between investment and speculation: speculation is betting that an asset price will move up, regardless of value (think of the "greater fool" theory), while investment is buying something whose value will increase at a reasonable rate at a price that is fair, or, ideally, at a price where it is near;y impossible to lose one's capital. This is not to say Buffett cares nothing of price increases: as Graham says, in the short term the market is a voting machine, in the long term it's a weighing machine. The whole idea of value investing is that, eventually, price catches up with value.
Which gets us to the editorial. Buffett says, essentially, that the underlying assets of the stock market (American industry) is a better investment than cash at current prices. With regard to the direction of the market, he says "I have no idea what the market will do in the short term." Clearly, he was not calling the bottom. The idea is that, at today's prices, the market is offering an attractive long term return.
As to the macro-analysis: I am not saying it can't be done, but I will conclude with Peter Lynch: "Don't time the market. The real key to making money in stocks is not to get scared out of them." & "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."
Too many people still are hunting for the bottom and hoping to experience the rush of getting in on "the next bull market". You can count on one hand the number of times the entire world has entered negative growth over the course of the last 500 years. Folks, we are in very unchartered waters. All the normal indicators for bottoms will not work. Remember when everyone pointed to a VIX above 30 as the final sign that we had hit bottom - and what did it do? It went to over 70. Take everything you normally used to time bottoms and toss it out the window. Those who try to pick the bottom in this one will lose the most as it will amaze you how far it will go. To me, it looks like we are just in a pause before we continue downward.
A lot of people also think that Buffett lost big in his deal with Goldman Sachs, thinking that the options he was awarded AT NO COST have lost value, and thus have delivered Buffett real losses. I'd like to remind people with this idiotic framework in mind that Buffett's preferred in GS will still yield 10% regardless of what the stock does, and that those options are simply icing on the cake. If he doesn't exercise them, he still comes out ahead big time with the preferred. If you disagree, please give me FOR FREE 100 SPY calls for 800, expiring 2013, and we'll see if I lose anything more than my respect for you.
Thanks to Paul Price for posting the actual article to contradict this drivel.
alphadominance.com/?p=...
Buffet NEVER EVER called a bottom!!
He has repeatedly said that he is not in the business of predicting markets. What he called for instead, was that people focus on the value they can get in the marketplace these days and on the low prices they can get it at. He never ever claimed and he never ever will claim that stock prices could not go a lot lower.
His call that there are huge bargains out there, is valid as history will prove. Berkshire Hathaway's stock itself is a great bargain here, btw.
Stunning what some people waste their time with just a day before Christmas eve...
There is definable downside in the market. The market tends to go lower than it is presently, especially when faced with a recession of this magnitude. We could go down around 66% by my calculations to get to depression 1929 levels. That said, the government reactions then were "weak sauce." I think that seeing a decline down to Dow 7000 isn't out of question. That's the short term.
The long term actuality is that Buffett buys above average companies at bargain prices. So, when he's able to find these, he buys. He isn't buying the struggling companies.
Look to China. seekingalpha.com/artic...
Tell me that hasn't bottomed.
1) Marc Faber (who controls the economy from behind a sparkling green curtain I presume?)
2)"Q-Theory"
3) the possibility that a Democratic president and congress, in a deflationary environment, will somehow fail to approve additional loans to Detroit before the deadline, which is roughly equal to the possibility of an asteroid destroying the earth in the same time period.
4) not feeling "the moment is just right yet."
I demand $10 compensation for the 10 minutes of my life you just wasted.