by Louis Basenese
Details of Warren Buffett’s 2008 Letter to Shareholders (pdf file) have been grossly exaggerated. Most media outlets - financial and mainstream alike - opted for the anti-Bing Crosby angle - accentuating the negative, and virtually eliminating the positive.
In fact, every article I read couldn’t keep from latching on to this single doom and gloom line: “We’re certain, for example, that the economy will be in shambles in 2009 - and, for that matter, probably well beyond.”
But don’t be so quick to label Mr. Buffett as a sudden convert to the permabear camp. A careful study of his most recent letter - because they all warrant much more than a casual read - reveals he is unmistakably optimistic and bullish about the future for the markets.
4 Reasons Warren Buffett Loves Stocks… And You Should, Too!
To be clear, I’m not suggesting we’ve hit the bottom after Monday’s 299-point rout. No one will know for sure until it’s too late. Instead, I’m proposing we’re darn near close. And albeit this is an unpopular stance, I’ll take comfort knowing Warren Buffett is on my side…
1. “America’s best days lie ahead.” (pg. 3)
There is no way to misinterpret this line. As Mr. Buffett advises, “Never forget that our country has faced far worse travails in the past.” Like wars, panics, recessions, “virulent inflation” and a Great Depression. And “without fail… we’ve overcome them.” This time will be no exception. And as Mr. Buffett revealed in his October New York Times Op-ed, he’s deploying up to 100% of his portfolio to stand by this conviction.
2. “Stocks recover before the economy.” (pg. 4)
You’ve no doubt heard this market wisdom before. But it’s true. Data back to 1900 confirm stock markets tend to bottom four to six months before the end of a recession. And Mr. Buffett reminds us of the same, when he explains the economy “will be in shambles throughout 2009… but that conclusion does not tell us whether the stock market will rise or fall.” In other words, the market’s forward-looking tendency could result in a rally while the economy still sputters along.
3. “When investing, pessimism is your friend, euphoria the enemy.” (pg. 5)
No doubt we’re in a period of extreme pessimism. It’s yet to be determined if we’ve hit the point of “maximum pessimism” a la John Templeton. Nevertheless, as Mr. Buffett realizes, and so should we, “The disarray in markets [gives] us a tailwind in our purchases.” Or as Alex Green wrote on Monday, “From these depressed levels, stocks will almost certainly deliver generous returns in the years ahead.”
4. “Clinging to cash is a ‘terrible policy’.” (pg. 16)
The temptation to retreat into or cling onto cash is great right now. But it’s a “terrible policy if continued for long,” says Mr. Buffett. It yields close to nothing and purchasing power will surely be eroded. That’s why Mr. Buffett “is always a buyer of both businesses and securities.” Given his 44-year track record, with only two down years, we should take heed and be just as acquisitive.
But where should we invest to weather the tail end of the storm and position our portfolios to profit? Here, too, it pays to take cues from Mr. Buffett.
Warren Buffett: The Ultimate Dividend Investor
Aside from Warren Buffett’s self-professed blunders in 2008 - investing in ConocoPhillips (NYSE:COP) and “two Irish banks that appeared cheap to me” - Mr. Buffett made four investments that will stand the test of time, although they’ve largely been forgotten.
Without getting into the specifics of each deal, just realize this, he’s earning above average yields - Wrigley (9.4%), Goldman Sachs (10%), Constellation Energy (14%) and General Electric (10%) - without taking big risks.
Case in point, he’s not impacted one bit by GE’s recent 68% dividend cut (which I predicted here) because he invested in preferred stock.
I don’t have to tell you that we don’t have access or the resources to capitalize on such sweetheart deals. But we can get pretty close…
All we have to do is buy recession-proof businesses, with decades of dependable cash flows, little or no debt, steadily increasing earnings and paying handsome dividends. That’s a tall order, I know. But such companies do exist.
And forget that dividend investing is not glamorous. No one ever graced the cover of Forbes for his or her sanguine dividend-stock picking skills. But that’s a good thing, as Warren Buffett explains, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
Next week, I’ll detail exactly how to find total yawners in this market that pay a hefty, yet safe, dividend and come with a nice equity kicker, too.
So stay tuned.