"I am buying American companies"
I read this article written by Mr. Buffett himself this morning and couldn't help but comment on it. It is reassuring that the world's greatest investor has faith in the American economy, and at his age, is still able to see beyond the noise of today's financial markets.
What I have decided to do was go through his article and highlight some of the main points that teaches us about his investment philosophy. The bolded items are his ideas and my comments are the underlined statements that proceed. I hope it is as instructional for you as it was for me. ENJOY!!
[Source: The New York Times | October 16th, 2008 ]
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. [It does not get any clearer than this.] 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.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. [ This is one of my favorite quotes. It allows me to stay focused in a time like this. It allows me to ignore the crowd and stick to the fundamentals of what he has taught.] 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. [He is advising to stay away from companies with debt, since these companies will be somewhat dependent on the capital markets. It is wise to focus on companies that are able to run their operations with cash they have generated internally. He also speaks of competitive advantages. It is also prudent to stick to the companies with wide moats as it is certain they will be able to survive this serious downturn.] But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. [Have faith in the American economy. There are very strong businesses here.] 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. [ Do not try to read or time the market. All that matters is that the market tends to perform well over a long period of time. I love this quote. It will be my quote of the day "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. [This statement reminds me of another of his quotes; "In the short-term, the market is a voting machine, but in the long-term it is a weighing machine.]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. [Cash is good to have, but it must be put to good use in times like this. If not, it will be losing value with each day that passes. Especially with so many opportunities and bargains out there right now. Cash is king, but only if it is earning a royal return]. 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. [Ultimately, stocks outperform any other security over the long-term. With so much fear in the market today, this is a once-in-a-lifetime opportunity. We all know that the economy will return to normal, so look into the future and just be an observer and active participant now. My sole advice, with Buffett as my guide, is to Buy American now, Ignore the crowd and Think Long Term]
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
What do you think of his article? Do you have the temperament to follow? Or is it really different this time?