Here are some excerpts (All highlights mine)…
``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.
My interpretation of Mr. Buffett’s message:
1) too much fear have dominated the marketplace, this could be indicative of a near bottom or the near end of the bear market cycle,
2) valuations have turned inexpensive hence have become attractive for value investors like Mr. Buffett
3) market always operate in cycles. After a recession comes a recovery; it is time to look forward.
4) it’s difficult to second guess the market’s short term moves, so it is best to position today as the windows opportunities are widely open. Mr. Buffett offers a great analogy “So if you wait for the robins, spring will be over.”
Turning to Mr. Buffett again,
``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.”
My interpretation:
1. Holding into Cash is likely a losing proposition as government actions today will prove inflationary in the future or our currency’s purchasing power will certainly dissipate or buy less of goods or services.
2. Bonds will be the next shoe to fall.
3. Stock market investments will outperform bonds and cash.
My additional comment..
For some of the “doomsayers” this seemingly “patriotic” call from Mr. Buffett would possibly be interpreted with political color, since it goes against their depression outlook, in the same way they have earlier fervently rebuked Mr. Buffett for his Goldman Sachs bailout.
For his JP Morgan-like act, they have denigrated him as a “political or celebrity endorser” and benefiting from assurances of Mr. Bernanke or Mr. Paulson, which some claim makes his flagship Berkshire’s investment in Goldman Sachs deal as “riskless” and guaranteed by US taxpayers.
We find such criticism similar to those whom earlier accused Mr. Buffett of having lost touch when he deliberately missed out the technology boom. In the same way, Mr. Buffett rode over the heydays of 2003-2007 in apparent anticipation of a bust in the derivatives market which he direly warned of as the Financial Weapons of Mass Destruction in 2003. Even former Fed Chair Alan Greenspan debated Mr. Buffett’s censure of derivatives. Apparently, all of them including Mr. Greenspan proved to be wrong.
Yes, past performance may not imply the same results, and Mr. Buffett could be wrong but our money is on him.
Nonetheless here are some other points to consider:
First of all it is true that at Age 77, Mr. Buffett doesn’t need the money. But this doesn’t mean he would squander all the years of extraordinary gains by unduly taking on risky positions today.
Since 1967 Berkshire Hathaway’s annual return has been at a magnificent 24.73% in 2008 (allfinancialmatters.com). At the end of 2007 Berkshire had amassed an astounding cash reserve of US $44.3 billion and this has been reduced to $31.2 billion by midyear 2008 on latest buying binge (Business Standard- Bloomberg)
Two, Mr. Buffett’s “Be fearful when everybody is greedy and greedy when everybody is fearful” has been a longstanding guiding principle in practice. It doesn’t take much to realize that Mr. Buffett’s secret has not been “Greek” sounding quant models or algorithms but plain emotional intelligence, understanding of market cycles and practical valuation assessment.
To quote Dr. John Hussman, ``At present, the most probable source of long-term returns is the willingness to provide liquidity (holding out willing bids at depressed prices in a panicked market), risk-bearing (taking on the market risk being liquidated by fearful or distressed sellers), and information (through the proper assessment of value). In my view, Buffett's willingness (and our own) to accept market risk here does all three.” (highlight mine)
Three, it would be wrong to assume that Mr. Buffett’s bet comes with nothing but himself at stake. Aside from money, he has his reputation at stake. His Berkshire Hathaway’s annual stockholder’s meeting is the “Woodstock of Capitalism” which draws about 20,000 shareholders and followers. I may not be an Omaha attendee but have surely followed his actions. Count me in as one of his fans when it comes to investment principles (but not in the realm of politics)
Fourth, Mr. Buffett’s investments has network externality effects which means the companies he acquire as part of his flagship’s portfolio tend to get impacted by his decisions. This means any decisions with negative effect will harm, aside from shareholders, the other stakeholders as management of every companies and corresponding subsidiaries and their respective employees, customers, suppliers, US and other governments for taxes reasons etc.... Hence his wide reach of people involved within his organization signifies as a personal responsibility.
Recalling a quote of Peter Parker in the movie series Spiderman, “With great power comes great responsibility.” Mr. Buffett commands great power (financial, even political clout), thus has great responsibility.
Remember, Berkshire now owns a diverse range of businesses including candy production; retail, home furnishings, encyclopedias, vacuum cleaners, jewelry sales; newspaper publishing; manufacture and distribution of uniforms; manufacture, import and distribution of footwear; as well as several regional electric and gas utilities. (wikipedia.org)
Fifth, to strike bargain deals in an environment of fear isn't inherently wrong. He appears to use his political clout to seize such once in a lifetime economic opportunities. Ultimately the markets will determine whether he is right or wrong; not you or not me.
Lastly, Mr. Buffett isn’t just talking. He has long been putting his money where his mouth is even before the New York Times Op-Ed letter.
The latest buys of Mr. Buffett (deal.com)
-NRG NV, a reinsurance unit from ING Groep NV, for about €300 million ($440 million) on Dec. 28, 2007
-3% stake in Swiss Re AG for about Sfr840 million ($1.2 billion) on Jan. 23, 2008
-132.4 million shares of Northfield, Ill.-based Kraft Foods Inc., representing an 8.6% stake of the company
-$4.5 billion purchase of Marmon Holdings Inc., the Pritzker family's collection of 125 companies, in March 2008
-$6.5 billion to help Mars Inc. buy Wm. Wrigley Jr. Co., giving him a stake in the combined confectionery business, in April 2008
-$3 billion to Dow Chemical Co.'s $15.4 billion takeover of Rohm and Haas Co. in July 2008
-$4.7 billion bid for Constellation Energy Group Inc., the largest U.S. power seller, Sept. 18
-An estimated $1 billion for 71.2% of Japanese toolmaker Tungaloy Corp. Sept. 22
-$5 billion investment in Goldman Sachs Group Inc. Sept. 23
To add a 10% stake in Hong Kong listed Chinese battery maker BYD recently acquired for $230 million by Berkshire subsidiary energy company MidAmerican Energy (Reuters).
We think with Mr. Buffett along the bullish camp, the bottom looks likely very close.
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