Saturday, October 18, 2008

Buffett " The Financial World is a Mess"

In today's world, wealth is considered a measure of a person’s intelligence. Thus, when Warren Buffett speaks everyone listens. Here is a condensed version of his October 16th investment advice from the NY Times. Click on this Link for the full report.

The financial world is a mess . . . . 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 . . . . .

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. . . . . But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. . . . . 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. .. . What is likely, however, is that the market will move higher . . .

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.

I like the guy, but I think he’s off in left field. After the crash of 1929 and the fall to July 1932 the market didn’t come back for 25 years. That’s not much comfort if you are 60 years old already. Your retirement vacation plans could become just dreams. What happens to your portfolio of investments presently, will determine your lifestyle for the rest of your life. Retirement is not a time to invest in the future.

Warren mentioned the fact that the Dow advanced 30 percent by the time FDR took office, that’s about 12 points (a real barn burner). The market dropped from 381.17 September 3, 1929 to 41 on July 8, 1932. The Dow dropped 90 percent never to get back to that 1929 high until 1954.----25 years to break even, gee whiz I'll be 87 hoping that I don't need day care!

What's everyone is saying? “Don’t panic!” I emphasize, there has been no panic--- YET! People have figured out that things will get worse and are willing to settle for far less that the full amount. The panic starts after the first 20% in line get their money (80-50% less than anticipated). At that point you have 80% of the remaining investors fighting over the 20% that is left; now that's a panic.

The government angle, if everyone stays in the game, the game can continue. But the question arises “Who lost all of this money?” If you can take your funds out and put it in a shoe box, you can answer “Not me.” Step one, get a shoe box.

John D. Rockefeller, after the market crash in 1929, announced that stocks were undervalued and he was buying more. It was joked that, he was the only one that had any money left to buy stocks.

Buffett is suggesting that we invest in America. It sounds nice. But when a government starts "investing" in banks, it's time to realize that the game is almost over. To get to where we are today, took a lot of "common sense" and the desire to get rich. The normal reward for stupidity, greed and incompetence in business is bankruptcy. Paulson and Bernanke are trying to keep that from becoming a financial reality.

Warren's right, the market will recover (after it tanks)--just not in my lifetime.

Copyright 2008 All rights reserved


Anonymous said...

Since Buffett owns large stakes in Moody's and Wells Fargo, the architects and enablers of this mess; it probably would not be wise to take any of his self serving advice.
If Buffett is so smart why wasn't he shorting CDS's last year? I could have told you they would all fail and I am a nurse. It was apparent to everyone without an IVY league conformist education that this was unsustainable.

dearieme said...

There must come a point when, rather than let your paper wealth all evaporate, it becomes wiser to buy some real estate of one sort or another. Which sort and when?

Shankar said...

Buffett is completely off the mark here. And you are absolutely right.

Here's some history.

After a tremendous 20-year bull run, Japanese stock index Nikkei peaked at 38,915 in 1989 only to drop down to 7,607 14 years later. Seventeen years later, it is still 56% below the high it reached in 1989. And although Japanese central bank has been running a super-expansionary monetary policy, the stock market has gone sideways during this period generating meager returns for the investors. Closer to home, in the United States, an investor who might have invested in NASDAQ at its peak in 2000 would have seen his net worth plummet to almost one-third 3 years later. Even after 7 years, the index is about 50% lower.

The performance of Dow Jones is not very different. An investment in the market (DOW) in 1929 would have had to wait 25 years (until 1954) just to break even. In real terms (using CPI to measure inflation) that investor would not have broken even till 1958 - almost 30 years later. Another bear market in equities that started in 1968, the DOW was highly volatile but ended at a level of 985 in 1982 - almost the same level it had reached in 1968! Since 1970s, the US economy was beleaguered with high inflation, it would have taken an investor till 1995 to break even if we measure CPI-adjusted (adjusting for inflation) DOW performance. Thus, an investor aged 40 starting on his retirement savings plan in 1970 would be 77 years of age in 1995 to break even. More critically, he/she would have missed one of the greatest commodity booms ever experienced since during 1971-1980 time period during which the gold rose by 2,300%, silver by 2,400%, platinum by 900% and oil by 900%.

And if you want Mr. Rockefeller's performance, check this out:

Oracle of Omaha? He will more probably be called a 'Numbnut from Nebraska' in the next few yeas as Mr. Bear says.

Jim in San Marcos said...

Hi Anon 3:04

Buffetts Company Berkshire Hathaway took a billion dollar hit in first quarter playing with derivatives contracts. Hard to say what he does investment wise. He does make mistakes. That's a pretty big one.

Anonymous said...


If you take his words at face value they seem to be contrary to gut instincts. But his simple buying strategy of "Be fearful when others are greedy, and be greedy when others are fearful." is sound advice and if you look at the last two bubbles (all of them in fact) it is telling what the statement really means.

In euphoric high times why would you buy into anything that is about to peak? I think everyone would agree that business cycles all exhibit ups and downs. Since no one can predict the top or bottom, it sounds like good advice to be the one buying in a down market... not an up one.

One last point. Who would buy long term stocks that do not pay dividends? If you take into account dividend reinvestment and stock splits of invested companies, the stock market's percentage drops or gains have nothing to do with your profitability.


Tyrone said...

“Who lost all of this money?”

I'm good. Got out while the the getting was good. I put 20% in precious metals in case the worst happens.

There must come a point when, rather than let your paper wealth all evaporate, it becomes wiser to buy some real estate of one sort or another.

I thought this exact same thing, and then loaned (0%) someone in my family $60K to buy a nice house on 2 acres, paid in full. I figured I should ensure that some good use come from these dollars. If the dollar survives and it's paid back,... great; if the dollar becomes worthless,... oh, well, at least somebody got something tangible from the fiat while it was still around.

Jim in San Marcos said...

Hi Dearieme

That would be the final play to save yourself from inflation. The trouble is, the banks can't stay stupid forever (I hope). I would look for future loans linked to the price of gold or inflation. Borrowing hard earned dollars now for cheap ones later is how the government does it. Banks cannot survive using that model.

Real estate is a very visible taxable item but it has been a very successful business investment and store of value. Rentals could turn bad if unemployment gets worse. Plus the government might pass rent controls which could mess you up.

I think we still have 5 years or more before inflation becomes a problem. I could be wrong, I never imagined a 700 billion dollar bail out.

We are in uncharted territory. I do have one recommendation. If the government offers you a tax incentive for doing something that's reason enough not to do it. they keep changing the rules.

Sorry I could be more help.

Anonymous said...

Mr. Buffet is right on the money except for one small detail: possible bankruptcy. There are lots of cheap stocks out there that I want to buy (like Ford and GM), but they could easily go bankrupt. And I wouldn't touch a financial stock with a ten-foot-pole because they seem to vanish without notice.

I wish stocks all came with a "Defcon Level" that showed how close they were to detonation.

John in Texas

Jim in San Marcos said...

Hi Shankar

Thanks for the link I hadn't caught the item that Buffett was into Goldman Sacks for 5 billion. It's funny GS was the only trust to survive the Great Depression and do it again in spades to a new generation.

You're right on with the Nikki market in Japan. It went from a high close to 39,000 and is currently at 8,693. "Down" is "up" over there.

I've always used "Numbnuts" as a plural. Warren might feel insulted being referred to in the singular;>)

Thank you for your comments

Jim in San Marcos said...

Hi Tom

I agree there is some truth to his remarks in the right situation. IMHO stocks are still in the stratosphere far from any reality.

If you go back to the battle of Waterloo in 1815. Nathan Rothchild a wealthy stock trader on the English exchange was able to learn that Napoleon had been defeated several hours before the rest of the nation. He went into the market and told his associates that the British had lost. The market went nuts and everything that was English tanked. Rothchild sold his worthless French holdings for a profit and then bought everything English at pennies on the pound.

The time to buy is when no one wants it. I think we are quite aways away from that point. People keep repeating "No one can pick a low." In the last 20 years anyone could make money in the market with any stock, it always went up. A drop in price was a "buying opportunity."

Warren's perspective assumes that things will return to more of the same. Things are different now. If stocks were to drop 75%, that might be pretty close to a low. The question then becomes will that company survive. As with all bottom fishing, there is no one ahead of you in line.

I do agree that dividends play a key roll in the price of a stock. It's the pits when the board cuts the dividend. A lot of retirees purchase stock for their dividend payout. Rough times ahead will cut into dividend yields.

Thank you for your comments

Jim in San Marcos said...

Hi John in Texas

I know what you mean, Ford and General Motors are tempting me also. I am still looking for frames for my Florsheim and Bethlehem Steel Stock Certificates.

Jim in San Marcos said...

Hi Tyrone

I agree. Your home is great protection against inflation and a store of value. A lot of the homes in the San Marcos area will be worth a million dollars in 20 years. If you bought last year, you have a bit of a wait for RE to get back to your purchase price. If you paid a Million last year, you will pay off the note with hard earned dollars today for inflated dollars years ahead.

I picked up gold and silver back in 1985 so I got it pretty cheap. Silver is still a good buy for the money.

I have learned, that you never loan money to relatives, you give it to them. Once you understand that you don't get upset when they don't pay it back. If they are your kids, you did the right thing-- help them out while you're alive.

Thank you for your comments

Shankar said...


Thanks. I'll still refer to Mr. Buffett as Numbnut or a Nutcase, no matter what he feels. ;-)

People like to throw out snippets like the one Buffett uses - "Be greedy when others are fearful" or the blood on the street one without asking themselves whether that has occurred.

As Taku Yamamoto, who helps oversee about $107 billion at the Pension Fund Association in Tokyo, said recently - "The correction hasn't finished and will continue until the all the optimists are wiped out."

By that standard, we'll find the bottom when the last optimist stops buying and starts selling.

Tyrone said...

If you bought last year, you have a bit of a wait for RE to get back to your purchase price.

Jim, just to clarify. I didn't buy anything for myself. I just loaned (gave) some money to someone in my family. And it wasn't in CA. I live by the following philosophy: I only pay what I think something is worth. Can't get my price, I walk. And I agree with your statement on loaning to family. I was initially pained with the request, but I thought about it and then decided to go forward and accept any outcome; then it was easy. (FYI: previous price on the house was $180K vs $60K paid today)

Jim in San Marcos said...

Hi Shankar

I like that quote you referred to.
'As Taku Yamamoto said "The correction hasn't finished and will continue until the all the optimists are wiped out."'

I'm a firm believer that a Pessimist is an optimist with experience.

The quote does suggest that things are about to get a lot worse.

Pardon me while I go stick my head in the sand.

Sackerson said...

I think you're right, Jim. I had a go at showing the Dow long-term, adjusted for inflation, back in April:

And as for Buffett, surely he's well aware that he's big enough to affect the market. When you're part of the process, your comment is less than objective. I'd like to see an analysis of the difference between what he says and what he does (preference shares yielding 10%, with warrants that represent an immediate capital gain, aren't what the ordinary investor gets).

I'm now trying to see the big picture, rather than be a MSM blow--by-blow commentator. Would appreciate it if you could swing by and take a look at today's rant.

Pingvin said...

If you had invested the same amount of capital every year from 1929 to 1954 in Dow Jones, with reinvested dividends, your return would have been +529%, or +7.3% per year... Link with the story:

Jim in San Marcos said...

Hi Pingvin

No disagreement from me on that.

Look at it from a different perspective. Its 1933 you have lost everything and you're 65 years old. You will probably freeze to death while sleeping next to your shopping cart.

Your savings give you freedom. Poverty robs you of your freedom if you are too old to work.

The individual and his\her present age is the real kicker here. I laughed when Buffett suggested to invest in the future. I was mentally imagining him trying to decide on risking the purchase of green bananas. Would he be around to eat them when they ripen?

Thank you for the link and your comments.

Jim in San Marcos said...

Hi Tyrone

60K for a house--not bad. Buy when no one wants it. You might want to pick up one as a rental.

Buster said...


What do you think about the TED spread coming in substantially. I doubt we are going to have a collapse, but I do think we are going to have a severe recession.

Jim in San Marcos said...

Hi Buster

I think that the TED spread pretty much shows how out of sync the two banking systems are.

I don't think that anyone is sure of what it means when the spread goes above 1%.

The Euro system is functioning. The US system could or couldn't be functioning properly no one knows. The Feds are pumping money into everything. The trouble is, it's "play money."

As for recession or depression, 1932 sounds better than what we are looking at now.

I think that we are witnessing the debauchery of our monetary system.

Let's hope I'm wrong. Thank you for your comments

Shankar said...

"A Pessimist is an optimist with experience..........."

Just another one of your classic statements. I am going to make a note of it.

Great blog.

I'm Not POTUS said...

Buffett could spend a billion a week on bottom fishing without flinching. How many years does that work out to????????????

He really should qualify his time horizon. The rest of us can't spend that much time at the bottom of the pond picking up bargains.

Numbers are just too big. If you spent a billion dollars A DAY since the birth of Jesus of Nazareth you still would be well short the alleged value of the CDS market.

Anonymous said...

Speaking of CDS's, isn't tomorrow some big CDS redemption day? I hear it could be a doozy.

Jim in San Marcos said...

Hi Shankar

I can't take credit for that one. It has some unspoken reality to it.

Glad you liked it, it is one of my favorites.

Jim in San Marcos said...

Hi Im not Potus

Maybe Buffett is broke and no one knows it yet.

Wouldn't that start a panic if it was true?

I wouldn't dare suggest it in the blog, but as for remarks section, I have my suspicions, you can't bat 1000 forever.

thank you for your comments

Jim in San Marcos said...

Hi Anon 7:05

I haven't been able to follow the CDS's in the WSJ to a sale price.

You can see that they will trade at secret auction, but I haven't seen an after sale price list of what they sold for. I have the sneaking suspicion that there were no bids in previous auctions for the securities

Anonymous said...

Liquidate everything, even if you have to pay penalties and taxes on your deferred tax vehicles. Buy rental properties at foreclosure for 30 cents on the dollar. Live on those rents for the rest of your life (just hope that the rental income has value and isn't destryoed by hyper inflation). Could live in Mexico... earning USD but paying living expenses with pesos.