Advice from Warren Buffett

[Rajiv]

Re: Advice from Warren Buffett

Here is Chris Martenson's take on it - Money stampeding out of the market

While the myth is that the stock market is a discounting machine, the reality is that it is mostly a liquidity measuring device.

What I mean by this is that the gigantic machinery of Wall Street, which includes all the people working at brokerages, as well as all of the buildings and infrastructure involved in operating a market, are not cheap, and the money to operate all of that has to come from somewhere.

It is safe to say that just keeping the machinery well-oiled requires several billions of new money each month to keep it fed at a subsistence level (for the pin-stripe crowd, I mean).

Yes, we could look at stock's p/e ratios and scrutinize annual reports, but the sad truth is that if more money is leaving the market than entering it, prices will fall.

It's very simple:

• More sellers than buyers = prices fall
• More buyers than sellers = prices rise

So for all the fancy analysis of stocks and earning and such, the most important measure is how much money is entering vs. leaving the market. It is in that sense that the stock market is, first and foremost, a liquidity measuring device.

First, I have been watching the mutual fund money flows pretty carefully, because the constant flow of "retail" money from ordinary citizens (much of this via automatic 401k contributions) is the lifeblood of the industry.

Up through August it has been, well, disappointing, with up months and down months, but adding up to a net outflow for the year of more than $67 billion. This outflow is the primary reason there are so many articles in the mainstream media cajoling and sometimes berating people into "investing for the long haul" and "not making the unfortunate mistake of selling at the lows."



The reason, for such articles, I believe, has little to do with helping people make wise investment decisions and everything to do with helping out Wall Street by keeping retail money in the markets to provide essential nutrition to the money machine. Otherwise we would expect to see the counterpoint to these articles advising people to sell when new highs are reached, but I can't recall ever reading any such article in a mainstream media source.

At any rate, as bad as the August data was, the early read on the September data is even worse.

Funds saw $104.4 bln outflows in September
BOSTON, Oct. 17, 2008 (Reuters) — Investors pulled out a record $104.4 billion from U.S. mutual funds in September as they were friended by the credit crisis and turmoil in financial markets, research firm Lipper Inc said on Friday.

"We have never seen (monthly) outflow figures like this," said Jeff Tjornehoj, senior research analyst at Lipper. The data did not include flows of exchange-traded funds.

No wonder they trotted out Warren Buffet to calm the crowds - this is a disaster for the investment community. Now, I have to point out that my two data points are a bit of "apples to oranges," because the first data applies to stock mutual funds only and the second to ALL mutual funds, of which stocks are only a part. But the trend is worth noting.
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[flintlock]

Re: Advice from Warren Buffett

I think maybe Buffett's letter is just another form of his well known philanthropy.Trying to help his country's stock market before he kicks the bucket. The way he put it, 100% in US equities, means he's making a statement more than just an investment.

[Jim Nickerson]

Re: Advice from Warren Buffett

http://online.barrons.com/article/SB...weekend&page=2 FREE on Barron's and entire column by Alan Abelson is food for thought.

And last but not least what helped fire up investor optimism (briefly, anyway) was an op-ed piece on Friday in the New York Times by Warren Buffett, in which he announced he has been busily buying stocks and the good old American kind, to boot, plans to keep doing so long as the price stays right and exhorted investors to follow his lead.

As always, Buffett was folksy in his explanation of what prompts his bullishness ("Be fearful when others are greedy and be greedy when others are fearful.") He sprinkled his advice with some obvious caveats and cautioned that he hasn't any idea what the market will do in the short term -- a month or even a year from now -- but he's confident that it will turn up before sentiment or the economy does. In any case, most major companies "will be setting new profit records five, 10 and 20 years from now."

And he's quite emphatic that the investor who has been sitting with cash and calmly watching the carnage should lose no time in piling into stocks. "If you wait for the robins," he warns "spring will be over."

We needn't go through the obligatory obeisance to Buffett's investment prowess and peerless common sense. We think he's great. And sure, we believe the country will survive and prosper in the future. No argument most stock prices are down sharply. But we don't agree this is the time to dive headlong into the market.

For one thing, Buffett can afford to be patient as long as he chooses. Most investors don't have that luxury. For another, the economy is in the early stage of unraveling and we don't think the market decline has discounted the havoc this unraveling may wreak by a long shot.

As to the shining prospects he summons up for the long term, they're not apt to help us all that much if tomorrow's troubles prove as harsh as we suspect they will. Then, too, as another wise man, John Maynard Keynes, famously observed, in the long run we're all dead.

Most of all, Buffett despite his long experience and savvy hasn't run into a crisis quite like this one because, pure and simple, it has no true precedent. That alone anyone should give anyone with fewer resources than Buffett, intellectually and otherwise, pause. Contrary to what he's saying, we can't remember anything that deserves to be called a bull market that had to be caught early and it certainly wasn't true of the last two we've enjoyed.

As to his allusion to robins in the spring -- a nice play on it's the early bird that catches the worm -- as someone has noted, it's the second mouse that gets the cheese.

[touchring]

Re: Advice from Warren Buffett

Warren isn't a liar. This premise of his has been pretty much his thesis his entire investing career.

He made this call in the late 70's and those who followed, did extremely well. He's making the call again.

Sure, the market might dip another 20% .. I wouldn't be surprised. But we are at historical lows for P/E

http://bigpicture.typepad.com/commen...sp_500_50.html

If the median is 17, and we're at 11? Most certainly we're at historical lows.

The fact is, everyone is bearish on the market. That's the best buy signal I've heard in a long time.

Also, like the man said, government action will be inflationary. Cash is trash.

Ha, what if the US government defaults.

[mickeyc21]

Re: Advice from Warren Buffett

I find it fascinating that Buffett is 100% in cash personally. I have had people yelling at me for a year and a half about Buffett's purported "buy and hold" only approach.
If you've ever read the Bekshire report you'd know his grandfatherly advise is not remotely followed by what he actually does.
It is interesting that during the same time as Buffett was out of the market everyone was trying to get me back in citing his "philosophy".
Have a look at www.slycapital.com if you're interested in the Buffett myth as I'm in a myth busting mood right now!

[Thailandnotes]

Re: Advice from Warren Buffett

http://www.npr.org/templates/story/s...oryId=95862842

Daniel Schorr...all 5:18 are worth it.

[c1ue]

Re: Advice from Warren Buffett

You should also note: Sir Warren hasn't been buying into the FIRE companies - he's been buying into the FIRE company's income streams as a senior debt holder.

If he had bought GE or Goldman or GM or whatever, that might mean something.

But just being a loan shark doesn't match actions to his words.

[phirang]

Re: Advice from Warren Buffett

You should also note: Sir Warren hasn't been buying into the FIRE companies - he's been buying into the FIRE company's income streams as a senior debt holder.

If he had bought GE or Goldman or GM or whatever, that might mean something.

But just being a loan shark doesn't match actions to his words.

He also may be buying puts to cover his new long positions, like he did with his RR stocks...

WB grew up very well connected: he isn't a rags-to-riches story. That doesn't discredit him in the least, but to think he's not part of the establishment is woefully naive.

[sn1p3r]

Re: Advice from Warren Buffett

Totally agree. I had posted a article on WB's views on stocks performance during periods of high inflation. I am posting it again below:

http://www.valueinvesting.de/en/infl...en-buffett.htm

Here's the best part of that link:

7 percent after taxes


How large a bite might taxes take out of the 12 percent? For individual investors, it seems reasonable to assume that federal, state, and local income taxes will average perhaps 50 percent on dividends and 30 percent on capital gains. A majority of investors may have marginal rates somewhat below these, but many with larger holdings will experience substantially higher rates. Under the new tax law, as FORTUNE observed last month, a high-income investor in a heavily taxed city could have a marginal rate on capital gains as high as 56 percent. (See
"The Tax Practitioners Act of 1976.")

So let's use 50 percent and 30 percent as representative for individual investors. Let's also assume, in line with recent experience, that corporations earning 12 percent on equity pay out 5 percent in cash dividends (2.5 percent after tax) and retain 7 percent, with those retained earnings producing a corresponding market-value growth (4.9 percent after the 30 percent tax). The after-tax return, then, would be 7.4 percent. Probably this should be rounded down to about 7 percent to allow for frictional costs. To push our stocks-asdisguised-bonds thesis one notch further, then, stocks might be regarded as the equivalent, for individuals, of 7 percent tax-exempt perpetual bonds.

The number nobody knows

Which brings us to the crucial question - the inflation rate. No one knows the answer on this one - including the politicians, economists, and Establishment pundits, who felt, a few years back, that with slight nudges here and there unemployment and inflation rates would respond like trained seals.

But many signs seem negative for stable prices: the fact that inflation is now worldwide; the propensity of major groups in our society to utilize their electoral muscle to shift, rather than solve, economic problems ; the demonstrated unwillingness to tackle even the most vital problems (e.g., energy and nuclear proliferation) if they can be postponed; and a political system that rewards legislators with reelection if their actions appear to produce short-term benefits even though their ultimate imprint will be to compound long-term pain.

Most of those in political office, quite understandably, are firmly against inflation and firmly in favor of policies producing it. (This schizophrenia hasn't caused them to lose touch with reality, however; Congressmen have made sure that their pensions - unlike practically all granted in the private sector - are indexed to cost-of-living changes after retirement.)

Discussions regarding future inflation rates usually probe the subtleties of monetary and fiscal policies. These are important variables in determining the outcome of any specific inflationary equation. But, at the source, peacetime inflation is a political problem, not an economic problem. Human behavior, not monetary behavior, is the key. And when very human politicians choose between the next election and the next generation, it's clear what usually happens.

Such broad generalizations do not produce precise numbers. However, it seems quite possible to me that inflation rates will average 7 percent in future years. I hope this forecast proves to be wrong. And it may well be. Forecasts usually tell us more of the forecaster than of the future. You are free to factor your own inflation rate into the investor's equation. But if you foresee a rate averaging 2 percent or 3 percent, you are wearing different glasses than I am.

So there we are: 12 percent before taxes and inflation; 7 percent after taxes and before inflation; and maybe zero percent after taxes and inflation. It hardly sounds like a formula that will keep all those cattle stampeding on TV.

As a common stockholder you will have more dollars, but you may have no more purchasing power. Out with Ben Franklin ("a penny saved is a penny earned") and in with Milton Friedman ("a man might as well consume his capital as invest it").

[touchring]

Re: Advice from Warren Buffett

You should also note: Sir Warren hasn't been buying into the FIRE companies - he's been buying into the FIRE company's income streams as a senior debt holder.

If he had bought GE or Goldman or GM or whatever, that might mean something.

But just being a loan shark doesn't match actions to his words.

ha, basically sums it up. just trying to talk up the market. good luck to whoever follows the advice!