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alstry (35.02)

Analyzing a Buffett Analysis

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October 21, 2008 – Comments (9)

The following is the ENTIRE Buffett op ed piece in the NY Times.  My comments are inserted in bold type. 

THE financial world is a mess, both in the United States and abroad. I agree completly!!!!  Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. Absolutely!!!!!  In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. Very appropriate for Halloween season.

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 represents a relatively small portion of Mr. Bufett's net worth.  (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.  My guess is that it will be a small selection of very strong US companies with an emphsis in finanicials...ie GS, GE, AXP ect......

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. Warning!!!  This accounts for most publicly traded companies!!!!  But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. How many is many????  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. But if you stuck it in a CD paying 7% in 1900....your $66 would become over $50,000.00 by 2000....Just having a little fun with selective hindsight compounding.  By the way, the Dow was less than 9000 when Buffett wrote his piece last week.

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. This is key...if we start down an inflationary path...which seems likely at some point......then clearly a shift from cash to other investments will be warranted.  My guess is that Buffett has a little better insight into future Fed actions than the rest of us....this will be an important area to pay special attention to going forward.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. At current rates....that seems likely...however, if cash rates increase....than careful comparisons will have to be made.  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.”  If the puck is going deflation....than stay at the station.

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. This could mean years for Buffett...many of Buffet's important public holdings have done basically nothing for the past ten years such as Coca Cola and the Washington Post.  Much of Buffet's profit has come from his private businesses...especially his insurance holdings.  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.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

9 Comments – Post Your Own

#1) On October 21, 2008 at 1:24 AM, alstry (35.02) wrote:

I decided to save my comment for the comment section.  I have to admit, I think I understand what Buffett was trying to accomplish by this op ed piece...however, becareful when reading it without absorbing the appropriate caveats.

For example, according to the piece....the market started out the 20th century with the DOW at 66.  32 Years later it was down by about 1/3 to a low of 41.  IMAGINE IF YOU STARTED INVESTING IN 1900.....AND 32 YEARS LATER THAT DOW WAS DOWN BY OVER 1/3?????

To be fair...for much of Buffett's career, especially from 1960 to 2000....that period accounted for much of the market's rise in the twentieth century and the vast majority of Buffet's percentage gains in his public investing.

My key point of this comment is that in the past, Buffett has been extraordinarily careful about presenting his facts in a more than fair fashion....this is the first time I have ever seen him sign off on something that was not overly protective of the reader.

Again, we are facing extraordinary challenges.  With that there will be extraordinary opportunities to invest in great businesses.  But just as you shouldn't throw the baby out with the bath water, don't drink the bath water to search for the baby.

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#2) On October 21, 2008 at 2:13 AM, ikkyu2 (99.36) wrote:

Holding the Dow for 100 years looks a lot better than 66 to 11497 if you account for dividends (reinvesting them, ideally.)  I'm sure you already know that.

Buffett has a vested interest in bullishness.  BRK holds hundreds of billions of dollars worth of equities, and also wrote large amounts of S+P calls that will expire worthless - if the S+P gets back to 1500.  If it doesn't, BRK is on the hook for billions.

And Buffett himself has nothing to lose.  He is the richest man in the world.  If the US raises taxes on him, you and me - as he is happy to urge, repeatedly and at length - he will still be the richest man in the world.  If the market loses another 50% he will still be the richest man in the world.  He will be the richest man in the world until he dies.

This is an enviable perspective to have, and I admire the savvy that got him there.  It does not, however, necessarily qualify him to give advice to poor slobs like you and me. 

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#3) On October 21, 2008 at 2:26 AM, awallejr (82.99) wrote:

It does, however, make him a man to listen to, as opposed anonymous bloggers.

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#4) On October 21, 2008 at 3:19 AM, alstry (35.02) wrote:

Ikky,

If I bumped the yield to account for the 10% expected returns many think their equity investments would provide...that would account for dividends.  Then if I carried it to 2007...the disparity would be twice as much.

Just playing with numbers.

Remember, if you started investing at the beginning of the 20th centruy, you had to wait almost 40 years to break even... not accounting for dividends.  Do you think the current generation is willing to wait that long???

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#5) On October 21, 2008 at 8:46 AM, jstegma (29.41) wrote:

If a CD paying 7% was offered, you might want to put some of your money in it.  Unfortunately, it's not available as far as I know.

Dividends are what makes stocks valuable.  Disregarding them is idiotic.

Warren Buffet knows what he's talking about.  He made billions of dollars by investing in stocks.  He did it by buying stocks when the price was right and holding them year after year, even when plenty of "experts" were saying it was time to sell.  Buffet is extremely steady and that's what makes him tick.  He didn't get into internet stocks, so he missed out on a decade of huge returns, but he also missed out on an 80% drop in the NASDAQ.  He didn't start blithering about "peak oil".  He wasn't buying last year when the Dow was at 14000.  And now he isn't panicking and thinking the financial world is going to come to an end.  He says stocks are attractively priced.  He could be wrong.

Another thing is that Buffet doesn't have a habit of saying things just to try to drive the market.  Buffett holds stocks for decades, so getting the market to go up a few points here and there doesn't make any difference to him.  He has a history of making honest comments and providing sensible advice that ordinary investors can profit from.  In my opinion, investors would be wise to listen to Buffet. 

Buy some of the stocks he is buying and hold them for 5-10 years, and you'll come out ahead.

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#6) On October 21, 2008 at 8:53 AM, alstry (35.02) wrote:

I doubt there are many CAPS players that appreciate or understand Buffett better than I do....that said....Buffett also won the ovarian lottery when he became an investor.  His termpermant and style was perfect for the years he invested.

If you invested in the "Market" in the first half of last century between 1900 and 1950...your returns sucked.  If you invested in the "Market" in the second half of the century between 1950 and 2000....your returns were incredible.

Guess which half of the century we are living in now.  Go though ALL of Buffett's public holdings for the past ten years....average out the returns INCLUDING dividends and you might be shocked.

Nobody admires Buffett more than I do...nobody was more disappointed in this piece more than me as well.

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#7) On October 21, 2008 at 11:17 AM, awallejr (82.99) wrote:

Because guess what, apples to oranges.  One day you will understand this point.

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#8) On October 22, 2008 at 3:36 PM, LonnieLewison (< 20) wrote:

Alstry, seems that this Buffet article was a big attention grabber. I read another article interpreting it, where the point taken away from Warren’s writing was  the following  “ Mr. Buffet won’t be shaken out of the market at the wrong time he is 100% confident in his analysis, and that he purchased a stock for much less than it’s really worth. That’s why he isn’t like your typical individual investor who let’s market volatility dictate his moves.”  What do you think? The following is the link to the article:  http://tycoonreport.tycoonresearch.com/articles/427471412/who-s-beating-buffett

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#9) On June 30, 2009 at 6:48 PM, mts4243369 (< 20) wrote:

"Buffett also won the ovarian lottery"

Your quoting him?

 Well Alstry I think you have a good point, but you also engage in fallacy here. You have said many times before that the past does not dictate the future.....all you have is your best guess based on an indepth analysis to try and find the market's general direction. I am a big fan of Buffett myself, but its his strategy that made him king, not just when he was born. Many many many investors lost PLENTY of money during that expansive growth period. But using a logical method saw that over a period of years, equities would perform. He also isnt below shorting, he has something like a $21B short on the US Dollar - All it comes down to is he makes a long term predicition, and sticks to it! He avoids the volatitly of momentum investors (which is MOST investors, or traders rather, these days) - he knows how to hold his position, and his is very often correct. You make a number of good points, but in the worst most cliche saying possible "you miss 100% of the shots you don't take." Granted no one should be diving in face first, but with diligence and temperment, oportunities will arise and wealth expand.

*pardon any spelling errors - I am typing this from a mobile phone

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