Warren Buffett: Buy American. I Am.

[Warrior-Mentor]

October 17, 2008
Buy American. I Am.
By WARREN E. BUFFETT

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.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

[gagners]

Amen.

"Be fearful when others are greedy, and be greedy when others are fearful" - That's some sound advice.

[nmap]

It's great advice...the challenge, though, is gauging the degree of fear or greed.

Right now, fear is strong. I suspect we're forming a base. On the other hand, the averages are still high if one is looking for those rare periods when stocks are truly cheap. One measure is earnings related to price, or price earnings ratio.

The chart HERE is interesting. Take a look at the lower chart, the one that tracks P/E ratios.

As of the 10th of October, Friday, it was 18.31 according to Barron's. That still looks expensive, unless one expects very rapid growth in earnings.

Hard to say.

[Guy]

nmap:

Are you buying or just commenting on the subject of the economy?

The reason I'm asking is...I work with a Senior Economics Advisor and he comments ALL the time on the economy/stock market yet; I'm the person buying and jumping into it.

Kinda reminds me of when...I'm sweating like SOB with all this gear on, in the back of MRAP that the A/C does not work in; and some person in the rear is telling me..."The stuff was delivered!" While I'm standing right there, where the stuff was supposed too be delivered at yelling..."IT AIN'T F@*KING HERE!"

Stay safe.

I think Warren Buffet knows a thingertwo about the economy, now is the time to buy.Anheuser - Busch is always good when the rest of the stock is low.

[nmap]

Originally Posted by Guy

nmap:

Are you buying or just commenting on the subject of the economy?

The reason I'm asking is...I work with a Senior Economics Advisor and he comments ALL the time on the economy/stock market yet; I'm the person buying and jumping into it.

Kinda reminds me of when...I'm sweating like SOB with all this gear on, in the back of MRAP that the A/C does not work in; and some person in the rear is telling me..."The stuff was delivered!" While I'm standing right there, where the stuff was supposed too be delivered at yelling..."IT AIN'T F@*KING HERE!"

Stay safe.

Sir, I am NOT buying here. We may be approaching a bottom, and the level of fear is beginning to be noticeable - but the market and the general economy have some problems.

First, Lowry's statistics. I get these indirectly through a newsletter; the selling pressure is increasing, and has increased to record highs. This despite repeated 90% down days. (These are defined as days where downside volume equaled 90.% or more of the sum of Upside plus Downside volume). This simply means that selling has not been exhausted. Rallies are likely to be crushed under a wave of selling.

Second, Barron's confidence index. It can be found in the market lab, under bond statistics. Here's the latest:

Confidence Index
(High-grade index divided by intermediate-grade index; decline in latter vs. former generally indicates rising confidence, pointing to higher stocks.)
last week = 58.1
previous week = 53.7
one year ago = 81.8

Levels like this suggest that bond buyers - who tend to be more sophisticated than stock buyers - are willing to sacrifice yield for safety. The numbers suggest a recession. And, the numbers at this level are bearish. There is one tiny little glimmer of light in that last week is better than the previous week.

Next, global trade as measured by the cost of shipping dry goods has fallen through the floor. The index is the Baltic Dry Index - I've attached a chart. The fall in global trade is suggestive of poor economic fundamentals.

The failure of Iceland and the risk of further failures among the East European block is problematic. Likewise the possibility that the U.S. bailout will extend to insurance companies.

Fear is present - but not the wild-eyed, gibbering, quaking in the boots panic I'm looking for. People are holding onto their stocks, assuring each other that every ting will come back and life will be good. Panic is where people look at their depreciated assets, swear never to invest again, and sell no matter what the price. Back in 1974, I saw ads in the Wall Street Journal that suggested the Dow would fall to 300 or lower. I don't see those yet.

Anecdotal evidence. This is of dubious (at best) quality, but it sounds as if a lot of businesses are getting hammered. On the other hand, such reports can be deceptive.

Finally, stocks are not yet great values according to historic measures. We have high PE ratios and low dividends - and that is using current earnings. The problem is, we have yet to see earnings reports that include the rapid slowdown in various sectors of the economy. If those reports show sharp declines, then stocks remain expensive according to historic valuation measures.

So, I'm not ready to buy. I wish those who choose to do so the very best of luck, and perhaps I will miss a great opportunity, but I think we have more discomfort coming. It appears you are buying - perhaps you have some information I've overlooked?

And if you come across any data or observations you care to mention, I would very much appreciate the chance to see them!

[nmap]

Well....today looks as if it was a 90% up day.

GE looks like it could have a bounce from a technical perspective, and it pays a dividend of about 6.5%. PE ratio is 8.45, so even if earnings are awful, it should maintain a reasonable PE.

So, I put in an order to nibble off a few shares on opening in the morning.

Please wish me luck.

[SF_BHT]

Originally Posted by nmap

Well....today looks as if it was a 90% up day.

GE looks like it could have a bounce from a technical perspective, and it pays a dividend of about 6.5%. PE ratio is 8.45, so even if earnings are awful, it should maintain a reasonable PE.

So, I put in an order to nibble off a few shares on opening in the morning.

Please wish me luck.

So Where are we at Now after the One has mounted his horse?

[Team Sergeant]

Originally Posted by SF_BHT

So Where are we at Now after the One has mounted his horse?

IMO, Chaos in the markets.

The one has already declared all out class warfare. After he realizes he must raise all taxes in order to fund all his social welfare projects he will realize that he cannot raise the needed monies, he will then "gut" the US military, intell agencies, homeland security, etc etc etc.

All those companies that make money working for Uncle Sam, watch out. I will be amused when blackwater goes out of business......

A lot more people are going to be out of work in the next six months beause of his politics, just watch.....

[SF_BHT]

Originally Posted by Team Sergeant

IMO, Chaos in the markets.

The one has already declared all out class warfare. After he realizes he must raise all taxes in order to fund all his social welfare projects he will realize that he cannot raise the needed monies, he will then "gut" the US military, intell agencies, homeland security, etc etc etc.

All those companies that make money working for Uncle Sam, watch out. I will be amused when blackwater goes out of business......

A lot more people are going to be out of work in the next six months beause of his politics, just watch.....

I used to think I had job security since there will always be Idiots that do Drugs..... Well I guess since we have a future Commander in Chief that was a Hop Head I may not have a guaranteed job. Hell he may legalize and attempt to tax it......

[nmap]

Originally Posted by SF_BHT

So Where are we at Now after the One has mounted his horse?

I bought at 19.58, but the charts just weren't looking right. Then, on the 5th, the market was down badly - GE had enjoyed a brief pop up...so I decided to write a Jan 21 call at $1.67. In essence, I promised to sell the stock at $21 anytime before the third Friday in 2009, and someone paid me $1.67 per share to do so. So...breakeven is about $18.03 (after all fees and commissions), with a current price of $18.45. In essence, not pretty.

As for the market....it's just plain nasty. There is talk of 5,000 on the Dow - although, all things being equal, we're holding our own. There is chatter about unemployment going to 8%, and perhaps a lot higher, soon. And there is still a lot of selling pressure - we were up today, then declined as investors dumped stocks.

However, if one wants a vision of horror, one need only click on the LINK There, you will see that Ireland's external debt is $7.58 per $1 of GDP. Now if Ireland were to have a meltdown, as Iceland did, the blow to the global economy could be severe.

Somehow, I don't think this will be a get-rich-quick market. We may not see a positive market until 2010 - and even at that, it may be anemic at best for years. BTW....that's with B0 not making things worse. Which I expect him to do.

I discussed a little of this with the professor in this evening's class. She indicated she would have a shot of tequila later. I seem to have that effect on people.

[nmap]

Originally Posted by Team Sergeant

IMO, Chaos in the markets.

...

A lot more people are going to be out of work in the next six months because of his politics, just watch.....

Originally Posted by SF_BHT

I used to think I had job security since there will always be Idiots that do Drugs..... Well I guess since we have a future Commander in Chief that was a Hop Head I may not have a guaranteed job. Hell he may legalize and attempt to tax it......

Chaos not only in the markets but, perhaps, in the society itself. High unemployment, coupled with declining markets will place considerable stress on individuals. Few people alive today remember the lessons of the 1929 depression - and even though I doubt matters will get that bad, people (in my opinion) lack the knowledge and skills required to cope.

There is an additional card; I don't know if it will appear or not. Right now, the dollar is strong. We can print dollars, and people give us things in exchange for our pieces of paper. However, we're printing a lot. What happens if other nations decide they have all the paper they want? Or, what happens if the value of those pieces of paper decline?

One of our few exports are grains. If those go up a lot...and unemployment is high...can social unrest be far behind?

And that spells job security for law enforcement officers....

[nmap]

Something pleasant for a change!

It looks as if the markets have transitioned to an intermediate term uptrend - although the long term trend is still down. So the next several weeks (maybe even months?) look better.

Even my GE is showing signs of life just before the options expire in 2 weeks.

I've also attached a copy of the Dow Theory Letter - it has some thoughts I found of interest.

[6.8SPC_DUMP]

After failed career attempts in human resources and sales, I got interested in investing for a living, based on how bad my parent's two brokers had been. What has worked for me is not to diversify my portfolio of stocks - but diversify my methods of investment - based on were I felt there was growth (i.e. stocks, real estate, currency, metals ect.) Money doesn't flow out of one area and not end somewhere else. I think most investors are so specialized they go into extraordinary detail in one method of investment, and lose sight of other options, that are directly related and a lot less complicated.

One example that I can talk about now that it is not used by my company (thank you nmap) is having "puts" on a stock. SIRI was fluxing between 2 and 3 dollars for a LONG time. That's a 50% swing multiple times a year and most brokers would sit on the roller coaster. Why not buy it low 2's sell it high 2's, have a "put" on it high 2's ( a put is a "bet" that a stock would go down in a certain time frame ) and once the "put" ended buy it again if you like the price?

It's metals and currency for my short term and agricultural commodity's and whatever comes up long term.

[nmap]

Originally Posted by 6.8SPC_DUMP

One example that I can talk about now that it is illegal is having "puts" on a stock. SIRI was fluxing between 2 and 3 dollars for a LONG time. That's a 50% swing multiple times a year and most brokers would sit on the roller coaster. Why not buy it low 2's sell it high 2's, have a "put" on it high 2's ( a put is a "bet" that a stock would go down in a certain time frame ) and once the "put" ended buy it again if you like the price?

It's metals and currency for my short term and agricultural commodity's and whatever comes up long term.

I'm highly confident that puts are not illegal. The problem with the strategy is the change in the part of the premium attributable to price change (delta) coupled with the decaying time premium (theta). A speculator would almost certainly be better off simply shorting the stock, and perhaps purchasing a distant out-of-the-money call for protection. Conversely, writing a put when the stock is in the low 2's might be profitable.

In essence, you're describing "swing trading". Nothing wrong with that - but the commission structure of full service brokerage firms make it unworkable. An online brokerage has a cost structure that fits the strategy.

Metals are nice; and I like the DBA etf for the long term, since it focuses on some of the agricultural commodities. As for currencies, you are FAR braver than I am.