- The New York Times – Warren E. Buffett: Buy American. I Am.
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. - The New York Times – Often Asked Q: Is It Time to Buy?
Often Asked Q:
Is It Time to Buy?
How much should you pay to buy a factory? All things being equal, about as much as it cost to build it. For a company? A stock market? Roughly speaking, about as much as they cost to create. That, at least, is the insight behind a measure called Tobin’s Q, used by some analysts to gauge stock market value. This theory, devised by the economist James Tobin, measures the relationship of the market price of an asset to the cost of replacing it. When the market price is higher than the replacement cost, Tobin’s Q runs above 1. Usually, only rabid bears think stocks should trade with a Q as low as 1. But after recent declines, the companies composing the S.& P. 500-stock index now cost about the same to buy as they would to build.
Comment We first wrote the following comments on September 18, 2008. We still believe they are correct and broadly agree with Buffet’s comments. That said, if you buy now (DJIA 9000) and if the DJIA is at 7500 at year-end, will that bother you? If so, we would recommend holding off until clearer signs that the credit situation is stabilizing. If you can buy and hold for years regardless of the up and down moves in the middle, then Buffett’s advice makes sense.
Everyone loves analogies … An asteroid hit in early July and all the dinosaurs are dying. After the asteroid hit, the only food left are those financial institutions that are light on mortgage holdings and get their funding from a retail deposit base. Either get with a food source or die.
We believe this is the final capitulation process. It is “the beginning of the end.” Within the next three months the low price and high spread should be in place. However, between now and then it will not be pleasant. See the charts below. Both the High Yield and Investment Grade option-adjusted spreads (OAS) have widened by a similar amount, over 100 basis points in the last week!
The objective is to stay in business over the next 90 days, and as the list of those that have not survived over the last two weeks attests, it’s not as easy as it sounds. If you are still standing when this capitulation process is over, that will be the time to make money.
Then comes the ice age. This will constitute a period of low returns, higher inflation and where risk-taking is regulated from the marketplace.