-
RSS Subscribe
-
Be fearful when others are greedy, and be greedy when others are fearful
I am going to say little here and let the most successful stock investor in American History say it for me. This is an Op-Ed in today’s New York Times by Warren E. Buffett one of the two richest Americans. He made his fortune by investing in the stock market. He comes to the conclusion to buy American stocks now after many years of not buying any American stocks. I really recognize the truth in his statement replicated as this posts title. I’ll leave this post up as long that the New York Times does not object to my printing it in its entirety. I’ll provide the link HERE
CAVEATS: This bullish scenario may be well tempered by the unknow tax horizon. The value of equities are based on investors best “after tax model” calculations. Even those securities held by tax deferred accounts such as Pensions, IRA’s and 401-K’s are subject to this ultimate valuation model since the wall street traders trade even these stocks based on this valuation model. Many extremely qualified market analysts already feel the anticipated increase in the cost of investment (increase in tax on Dividends and Capital Gains) and related impact on capital formation is taking its toll on the stock market. Also, Buffett is a buy and hold (long-term) kind of guy and to him long-term can be an exceptionally long-term, but his view cannot be overestimated. caveat emptor
Buy American. I Am.
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.
comments
One Response to “Be fearful when others are greedy, and be greedy when others are fearful”
Leave a Reply
i understand the fundamentals of this article. what i dont though is:
why most investors would buy now outside of an established 401 tax deferred investment. this is one party i dont mind being late to with descretionary funds.
Hi Matt……..Not sure why you draw this distinction. My best guess would be on two fronts. The inherent nature of holding retirement funds over the long term and the capacity to avoid income tax makes the return on return a better deal until withdrawal then subject to tax (other than the ROTH IRA). To me these particular advantages are not necessarily relevant to the conundrum that the market has presented. You can make long-term investments outside of the “qualified” accounts and the price valuation of underlying equities whether within or outside a “qualified” account operate by the same mathematical principals. By that I mean that various peoples models of “after tax rate of return” establishes the trading value of the equity and such prices are marked to the holdings within the qualified accounts and thus establish fund value.
also, what warren does nto say is that by virtue of him buying, the security he buys will rise. when he purchases, it take 2 weeks to acquire the allocated asset. he swings with bigger assets as well as broader research efforts into how to acquire shares that have not only a high float, but a large 50day volume moving average so to best hide his giant tracks. stated another way, you can typically buy 1000 or even 5000 shares of 85% of the compaines traded without being noticed for 15 or 20 seconds. trying filling an order of 1 or 2 million shares (sometimes daily in his case) and go undetected…
In the current move of Buffett into American Stocks (marked by his purchase of GE and Warrants of the same, and Goldman, etc.) he completed the deals outside of the market whereas they issued Preferred stock (new issue) which didn’t impact the market at all in a Supply Demand sense. The only market impact of this transaction would be the Market Suasion of his sentiment.
people follow buffett and his sec filing like a watchdog. the beffett effect is substantial. any small investors, well negligable for even those 5 seconds the trade takes to activate.
and finally, when is bernanke and the fed going to stop treating the market like a petulent child who wants candy at the grocery store lines? seems like a new day bring a new stimulus package. can we let the big arm of the government get out of the way and see the market react to the info at hand?
If you are talking about the second round of stimulus I am in agreement with you. This sentiment is being spearheaded by the Democrats and it is another example of pandering to their base at the expense of the country. The results are in and the first stimulus package had no such effect. It seems that they could help the country by directing that money towards capital formation rather than increasing demand without a commensurate increase in supply thus not helping the GDP deflated economy and only increasing the potential for inflation. But to dampen this pursuit your criticism would be better directed at the Democrats than the fed. Bernake doesn’t have the power to accomplish it either way and he has refused to suggest a number………..steve
know this is a lot, but i cant help but ask it