http://www.nytimes.com/2008/10/17/op...in&oref=slogin

By WARREN E. BUFFETT

Omaha

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.”

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I like reading Buffet and Ron Paul whenever I feel depressed about the state of the govt and/or economy. Nice post DC.

Yay, time to sink more money into the market! :-)

Well ...

A little history here: During the Depression the Dow went from a high of 377 to 228, a drop of 60% in the latter 2 months of 1929. Had you bought on this precipitous drop as Mr. Buffett is advocating before waiting for things to turn around, you would not have seen a return to the 228 level until 1952. A spectacular ROI of 0%(not counting dividends) for 21 years.

His argument is faulty and it seems like he is being a cheerleader instead of rationally thinking.

He's advocating buying solid companies with strong balance sheets and good cash flow. The market as a WHOLE may still go down a lot and it probably will but companies like KO and JNJ will not likely collapse, yet they are on sale too. If you bought into the market in 1930 but focused on fundamentals I strongly doubt your performance would have mirrored the index as a whole.

And of course, he's also suggesting this isn't a repeat of 1930, which is up to you to decide if the most successful market analyst of all time is correct on that or not.

Right, but in a bear market you should short bad companies not buy good companies. And even if his good companies outperform the index dropping dramatically it is still likely a loss.

Whether he is suggesting it is a repeat of 1930 or not is irrelevant, because he used it in his example just as I used it in mine.

I respect his historical market analysis results. But he is getting old and may not be thinking as clearly as he used to.

investors have been fearful for over a year now since the credit crunch hit the headlines. it would be great if someone could find a statistic for whether the average investor is net selling or net buying now. i expect most people in stocks have been drummed into them not to sell, especially when you have frequent news reports telling them all the stats about reasons to buy.

plus i need enough bullets left, who's to say the fear trend won't continue and this time next year people will then start selling their holdings having given up all hope? or maybe in 2 years?

the article seems to take an overly basic approach. i much prefer rogers and schiff who give you precise reasons for what has happened and what to expect based, and what to invest in should the US govt keep trying to prop up the economy.

also, why doesn't he consider who is managing the economy? Given the economy is heavily controlled but a number of key individuals, surely that should be a crucial determinant of how we expect the future to pan out, and given the horrors we have seen unfold, why would i now trust those who have given so many investors such a raw deal over the past decade now to bring future gains?

all very interesting.

He may be getting old but what makes you think he's not thinking so clearly. He waited and waited for several years on a pile of cash, and his own shareholders criticized him for it and now look, he's snapping up huge chunks of GE and GS at firesale prices with sweetheart deals, and he's purchased energy companies for 20 cents on the dollar. He may be getting in on the ground stages of another great depression but something makes me think not.

Also, shorting is for traders, not investors, and I don't think Buffett's comments are for traders.

TrimTabs has good analysis of that kind of thing. September was a record month for mutual fund withdrawals.

Umm... WTF?

The fact that you don't count dividends destroys your argument. I believe dividend yields reached a peak around 7% during that period and probably averaged close to 5% during it. Someone who reinvested dividends during that period had even higher returns, essentially do to a double dollar cost averaging effect.

And you are comparing a period where the market declined 60% from a point where it was hugely overvalued, to now, where its declined 45% from where it was probably only mildly overvalued. My guess is 228 in 1929 was still overvalued.

The difference is Buffett would not be buying stocks or writing this op-ed if he didn't think the market was extremely cheap. He's wary of leading lemmings off cliffs. This is probably the only clear buy signal he's given since his "I feel like an oversexed man in a whorehouse" comment in 1973.

To be fair, I'm biased in that I agree with Buffett. I've been buying a lot of stock the last few weeks, and my biggest positions are now GS, HAS, JNJ and CVX.

Basically, I think Buffett is right and for long term investors, you can't get burned by purchasing stocks of solid companies today.

Of course, I've been bullish on the long-term all during the past year ... all these dropping stocks just makes me more bullish. If we get Depression II I guess I'll have to wait until 2040 after WWIV to see my stocks break even...

I'm not... fundamentals are still completely horrible for US equities.

US consumers are strapped with massive debt, we have a negative savings rate, the two guys in charge think printing money is the solution for everything, unemployment is on the rise, foreclosure rates are rising even with the massive propping, we have no infrastructure, foreign competition is becoming more fierce by the day and the policies of both prospective candidates will only make things worse.

Enough reasons for you folks?

No. You're argument doesn't make sense to me. You're saying fundamentals are horrible for US equities? Are you saying that the fundamentals of companies are horrible? Do you really think this drop is due to the companies being terrible investments? The only thing that has changed is that the economy as a whole is bad, but that doesn't make companies bad. In my opinion, not much has changed. Most of the drop of the market has been based on a fear of uncertainty and a general mass of the crowd. Everyone is panicking because they see the market tanking, so they too sell, which compounds the effect. They aren't selling because all of a sudden one day the company decided it was going to be a bad investment and change it's fundamental foundation. I think this is a great opportunity to buy too. You'll never time the market correctly.

Stock price is based on the profitability of the company. Where are the increased profits going to come from given the massive list of reasons I gave you about why they will fall? What is your reasoning for why profits will rise?

The main thing that has changed is that investors are finally realizing that US equities are massively over valued.

If investors think that US equities are massively over valued they wouldn't be fleeing to cash dollars like they are. They would be buying foreign currency and the dollar would be weakening rather than strengthening.

I think the one thing Buffett has going for him is experience in bear markets, where his record is very good. In 73-74 he was up 10.5% while the market was down 37.5%, relative out performance of 48%. When he still had a reasonably sized portfolio in 1965-81 the market had six down years. His average gains in those down years were over 15% a year. His gains the year after each down year averaged over 20%. So there is more than one way to skin a cat in a recession.

And shorting stocks requires an decision on each individual stock. A bad stock that is beaten down in a bear market is not necessarily a short target. Buffett once considered shorting a famous pump and dump stock in the late 60s but it had already been deflated a bunch and his comment was "shorting it would have been like jumping off a pancake".

If you disagree with his opinion, he is "cheerleading". If he disagrees with your opinion, he is senile. I think you see how fallacious that is.

Buffett has been investing for almost 60 years through recessions and booms, is hyper aware of all these macro economic phenomena, and yet he just recommended U.S. equities. So maybe your factors are overstated.

1) US consumers are strapped with massive debt - this has been said for decades, and how economists measure debt is debatable at best. And massive deleveraging is in effect.
2) We have a negative savings rate - Again been said for decades and how the savings rate is measured is questionable at best.
3) the two guys in charge think printing money is the solution for everything - True of every president since Roosevelt.
4) Unemployment is on the rise - And so far well below other historically severe recessions. ,
5) Foreclosure rates are rising even with the massive propping - there is no propping going on at all. The Treasury plan just started and it's not going to change foreclosure rates, it only affects new loans so it might lend some stability to housing prices but will take time. And foreclosures are part of fixing the economy, without foreclosures assets stay in limbo, market prices are false, etc.
6) We have no infrastructure - we have a massively overbuilt and overused infrastructure created by federal central planning without funding maintenance. We build highways be used for free, mass transit to be used for almost free, and so they are greatly over-used. Most of these projects don't need public funding, they get it because it's cheap and available. A return to toll roads and private mass transit systems would be cheaper, would improve user experiences and significantly reduce government spending. McCain might help make this decision if elected, but of course that's slim chances.
7) foreign competition is becoming more fierce by the day - foreign competition makes us wealthier, if you don't understand this you don't understand the principles of free trade and the law of comparative advantage.
8) and the policies of both prospective candidates will only make things worse - in the short run, if they can get congress to agree to new spending programs, and even then it will make guarantee we'll get a reform candidate next election fix things.

http://pages.stern.nyu.edu/~adamodar...ile/spearn.htm

In the last 48 years the S&P, which is a subset of the greater market, has only seen earnings decline by a max of 20% in a recession. Right now the S&P is being priced as if it will make only about $55 per share a year, which would be a 37% decline, and this is an index that averaged about $48 per share in earnings from 1999-2003, well before the housing bubble and more than equivalent to $55 today with inflation.

And if you think the money supply is being inflated, then you believe we will have inflation in the future. This isn't good for the value of the dollar, but any increased inflation makes it extremely unlikely that earnings will decline dramatically. If we go back to 10% inflation during the Obama reign, at the end earnings will be at least $180 for the S&P, and more likely $300+. The index is selling for 900 right now and paid $27 in dividends last year. What else is gonna keep up with inflation?

Buffett understands all this, and he recommends U.S. equities. My only criticism of his op-ed is that he is likely underplaying the risk of further declines in the dollar out of patriotism. But with my investment horizons limited to U.S. only right now I'm very happy in equities.

Yea, but DesertCat don't you think that some of this public announcement might be an attempt to help restore public confidence in the stock market and an attempt to help convince people to keep their money in the stock market and/or put more in?

I'm sure Buffett realizes his stature that he holds in terms of investors in America and the effect that he can have on people.

I think the timing of this statement shouldn't be overlooked. He might very well believe and it might be accurate, but I feel that you should also look at it for the potential impact that he can have on people.

Any reason buffet is buying for his "personal account" in which he has been holding "treasuries" VS buying under berkshire hathaway?

It's ironic that buffet is HEAVILY SHORT the US dollar. This clearly seems like an attempt to get some sheep to help hold up the market... Buffet's a smart guy, but I don't doubt he could have ulterior motives behind each of his public statements.

I just truly believe a lot of companies will suffer massively decreased earnings for multiple years in a row.

Everywhere I go I see tons of employed and especially UNDEREMPLOYED people, and the problem is only getting worse. Obviously we've read about massive food shortages recently in at least 20 different countries. There's LOTS of inflation going on- everything is going up in price. Right now before the election the prices are being manipulated lower and they don't seem so bad. Look at historical commodity prices 2 months before the election vs 2 months after the election!!! Look at all these trillions we're printing up. Look at all the bank runs we've seen very recently.

THERE IS A HIGH CORRELATION BETWEEN BANK RUNS + BANK FAILURES, AND THE STOCK MARKET LOSING SIGNIFICANT VALUE.

In my opinion if you don't have at least 3 years worth of food in your possession for each family member, you're absolutely insane to be in the market AT ALL right now. Cover with tin foil hats to preserve freshness.

I know many people with no savings / got their savings practically wiped out already in the market... I have talked to people who have to choose between food and gas. Heating bill, or pay the rent on time? This is going to be an ugly winter.

When the government nationalizes every single US bank, and we have just one bank left... the stock market will lose have lost another 40% from where it is right now.

If anyone is willing to give me 4 to 1 odds, I will bet the dow ends under 5,000 in the next 18 months. ( Would prefer to bet in metal or some other commodity, definitely not US TP) If you're unwilling to take this bet, you should at least give some weight to the possibility of total collapse.


Also LOLOLOLOL at the bailout possibly ever "breaking even"

if you spend 1 trillion buying back mortgages, and we resell the mortgages for
1.2 trillion 5 years from now, we will have made a "profit" in the eyes of the bankers.

However, if gas is 12$ / gallon and bread is 8$ / loaf by the time we get that 1.2 trillion back... did we really "make money" ? as long as the govt inflation numbers run at 2% for the next 5 years, we will have made a "profit"...

In reality, we will see at least 20 trillion if not much much more printed out of thin air by central banks in the next nine months.

I agree with an earlier post - buffet is amazing at selecting companies with great management teams in place. But in terms of timing the market... I think he is trying to give people an illusion of a bottom that is far from being reached. Obviously his past results have been great, and I wouldn't bet against him necessarily. Although I am short the market, so I suppose I am... I wouldn't bet specifically against him though- I believe he will outperform the indexes. I just think it's a very bad time to go long the market. Just don't put any money in the market that you hope to see again one day. And if you do, make it a very small % allocation, and make sure it's a solid company. AND PROJECT OUT YOUR EXPECTATIONS vs your expectations for another asset class. I would highly highly recommend hedging your stock market risk with a diversified basket of commodities such as silver, gold, oil, alcohol, guns, ammo, - anything that will last for a long time, doesn't expire, and you can hold in your hand. Do not be the last person holding the bag here, whether you're holding real estate, stocks, US toilet paper. Anything you can liquidate should get turned into commodities here, especially while they're being manipulated to ridiculously dirt cheap levels before the election. If the market ever goes to zero, at least you'll have something that you can hold in your hand, that is worth more than all the stocks in the world.

ALSO I just wanted to add that I would highly highly recommend that if you insist upon holding equities right now, you get the actual stock certificates in your hand. This is important because your brokerage is likely lending your shares out to a shortseller, and there are many scenarios in which they could default and be unable / unwilling to return your shares. There's very very little downside to holding onto the shares yourself. As long as you register them w the company, they will even replace if they are lost or stolen etc.

Since we're comparing to the depression ITT, my guess is we're somewhere past that second circle but before the bottom.

For someone who claims Market Timing can't be done and its a fool's game, Buffett's record in terms of buying stocks is quite good. He purchased a vast majority of his stakes in companies before the great bull market in the 1980's. Lucky, sample size? Maybe, but very doubtful. Long term bottoms (multi-decade) tend to happen with P/E's in the 6-10 range.

He also acknowledges he is probably going to be early buying when he sees value, and I wouldn't be surprised at all if he is a little early here too. Still, it's a great sign that he is buying stocks. Again, I'd say you don't need to buy the bottom to make big money in the stock market. I would much rather buy a rising market than one that is still declining.

This is all true, but he wouldn't say it if it wasn't true.

This is all true, but he also wouldn't say it if he didn't believe it was true.

Because he has had an ironclad policy not to reveal what he is buying for his clients since 1957, not even to those clients. So you have no idea whether Berkshire is buying stocks or even still holding treasuries.

Again no one knows if he's still short the dollar. But if you think he's trying to pump and dump gullible investors you don't know anything about Buffett or even rational incentives. He's a multibillionaire who is giving most of that money to charity. He has no incentive to pump stock prices because the lower they go the better prices he gets to buy at. And he's not throwing away a reputation built over 50 years for some silly op ed.

This is how he feels. You, for a bunch of mostly anecdotal reasons feel differently. People can hold opposing opinions to you without being corrupt. That's pretty sloppy thinking.