kuvholt

Buffett and the Limits to 'Awaiting Better Times'

The interesting thing is Buffett actually 'awaited better times' to invest - which is why he's buying now. The bottom line is you're supposed to 'buy low, sell high' and Buffett does this (although it's mostly buy low and hold forever). What he's saying boils down to telling people "this is when it's low".

The issue is that most people buy high and sell low - look at mutual fund flows.

What Equity Risk Premium?

I think you're missing something big here. The equity risk premium does get exhibited in long term outperformance of stocks vs. bonds, but there is a cause of this effect - that earnings of companies grow, and that earnings yields of stocks tend to be higher than interest yields of bonds. In other words, you're correct in saying that stocks in hindsight look bad and bonds look good. Follow that and you'll buy growth stocks in 2000 or banks in 2006. An investor's job is to determine what should perform better than other options in the future, rather than the past, and to act accordingly. Today stock earnings are in a trough, which provides opportunities as people extrapolate poor earnings into the future. Today the earnings yield on the S&P 500 is over 70% higher than the interest yield on the 30 year Treasury. If history offers any lessons, the exact time to buy a quality asset class (like large cap domestic equities) is when it looks like everyone who purchased them in the past was wrong - and that's the point of your article - anyone who purchased stocks since the 1970's appears to have been foolish. I take this as a massive buy signal.