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.