Buffett's Opinion Piece here
As an investor, I've never seen stocks so cheap. Not during the Asian Crisis, not during SARS. I've been investing my money in stocks since my NS days....that is a few decades of watching numbers such as price to book, price earnings ratios and price to cash. Stocks are the cheapest since I started investing by all measures of value. There is nothing like what we have seen in recent weeks - nothing comes close. It is like having successive bouts of 9/11 in the financial markets week after week.
There are a number of reasons why they are so cheap:
1. The coming recession is expect to be deep and serious.
2. The credit crunch might cause some companies to go bust especially those dependent on short term financing.
3. Large large doses of fear ...immense fear...
Buying stocks because they are cheap may is no guarantee of success because things can get worse and worse ....earnings can fall, assets can fall in value, cash can dry up and companies can go bust. There is no doubt that a recession is on the way and the economy will get worse before it gets better.
It is really really hard to pick the bottom. The bottom may be far far away. There is nothing like this market and even for someone as old as Buffett, it is probably the first time he has seen what happened in the market in the past 3 weeks.
Here are some of my thoughts on the market:
1. Buffett is applying an old adage to "buy when others are fearful". The VIX index is a measure of fear in the market hit a historic high yesterday. There was fear. The highest level of fear ever in the history of the VIX.
2. Perhaps the market will go lower and do a "Japan". The Japanese stock market hit a high of 33,000 20 years ago and never recovered. Maybe the market will drop by 70% from the peak. It is now only 50% from the peak. There are things we will never know and this is one of them.
3. Investors ask : Shouldn't we wait for a bottom to form before we invest? Actually, you can't tell if a bottom has been formed. You can wait for the market to rally 5% or 10% from a "bottom" before going in but the 5% or 10% might be the tail end of a market move.
4. Don't buy stocks when we just entered a recession? Actually the bottom or opportunities to buy relative to the timing of a recession is not clear. Markets can bottom before a recession or during a recession. If my memory serves me right, stocks have their heaviest drops before recessions and slide down slower or go sideways during recessions.
5. To wait or not to wait? The million dollar question.
Timing the market is tricky business. One also should be wary of catching falling knives. Some people would buy because Buffett bought and he has not been too far off any bottom in the past.
Also, is there a bottom in this crisis in the first place? The economy may be so damaged, we go into an L-shaped decline ...we go down and stay down for the next 5 years. It is indeed hard to be optimistic. I've been through numerous recessions. There has never been one that I didn't think we will get out of in decent time. .....that is until this crisis....there a real possibility that the global economy stay down after the knockout punch. I don't know for sure.
I'm buying stocks in batches because there is no way to time the market. All I know is stocks are trading at historic low valuations - the only reason for Warren Buffett to buy. There is of course the possibility of things getting much worse....that is a risk that cannot be eliminated....a risk that value investors have to take because once it is clear that things are getting better, the bargains will disappear fast.
Warren Buffett Says Now Is the Right Time to Buy U.S. Equities
By Alan Purkiss
Oct. 17 (Bloomberg) -- Warren Buffett said he's buying U.S. stocks and, if prices stay attractive, his personal investments, as distinct from his stake in Berkshire Hathaway Inc., will soon be wholly in American equities.
Writing in the New York Times, he said he's following the principle: be fearful when others are greedy, and greedy when others are fearful.
Exaggerated concern about the long-term prosperity of the many sound U.S. companies is foolish, and most will probably be setting profit records in years to come, Buffett said.
While short-term stock-market movements can't be foretold, the likelihood is that the market will recover before the economy or general investor sentiment do so, and ``if you wait for the robins, spring will be over,'' he said.
Referring to the 1930s depression, Buffett pointed out that the Dow reached its nadir on July 8, 1932; economic conditions continued to deteriorate until Franklin Roosevelt became president in March, 1933, but by that time the market had climbed 30 percent.
Bad news, Buffett concluded, is an investor's best friend, for it enables you to buy ``a slice of America's future at a marked-down price.'' Last Updated: October 17, 2008 05:21 EDT