Friday, October 17, 2008

BREAKING NEWS : Buffett - Now is the time to buy!

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


redbean said...

i agree that the market is now very cheap with some stocks having single digit PEs. read my post in, 'daily discussion' on stocks with very low PEs.

i also posted several articles on the flaws in our stock market and these must be addressed or else the market can be sold down to the very bottom. short selling is one of the biggest culprit. if one has 10 million shares, that is all he can sell. a short seller may not have a single share but can sell 100m or 200m shares in our market at practically zero cost. very marginal to be a deterrent.


Anonymous said...

Greed got better of me and I turned long last 1-2 weeks. to my regret.

Scums are running the US economy and until they are fired (preferably arrested) I fear it will be a long global recession.

Buffet get better deals. He is hardly an angel.
He even managed to extort $$$ from Goldman ... which makes him my hero.
These days he makes his money from options.
And he is buying US stocks.

Most of the companies listed in Singapore are junk.
Having said that, I like Noble but they are getting a real beating.


Anonymous said...

There's reason to be optimistic, really, this is a time of change (to overuse that phrase but it is true), the biggest shift since the great depression. We are going to see another period wage compression, a shift back to social welfare even with greater hindsight.

The current generation of financial and economic students is being taught the greatest hands on lesson ever, more reason to believe in the stability of future financial system.

This ties together with Buffett's insight and strategy, as he is known to to stick to his purchase, through thick and thin.

The recovery in the stock market is likely to be slow but steady, if you're in it right now, go long, make this your retirement fund, aim for at least 10, 15 years.

If you don't have the cash now, not to worry, simply average out the purchase, which might serve you better in volatile times.

This might just turn out to be the longest period of continuous growth without cyclical boom and bust.

When you choose a company, I hope you reward the ones that strive on innovation, not greed. The books of Tech companies are usually flush with cash, namely because a well run business anticipate cyclical demand, which is very apparent in Technology, however long this recession maybe, a company with better cash flow in times like this will fair better.

I agree with Lucky, fortune says you can't foretell the bottom, best take the plunge when condition tells you it is near a bottom.

Mr Market's car is in dire need of servicing, just be glad that it is in the workshop right now ;)

Good Luck! Don't let greed eat you up!

Anonymous said...

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.

I don't think there is enough fear yet. Waiting for 2009.

Anonymous said...

Anon @ 11:53PM

Why do you think there's not enough fear in the market?

Anonymous said...

I think the NK225 went up to as high as 39000 in the period Dec 1989 and Jan 1990.
And since the down turn in 1991, it had went back up above 23000 only once in 1996.

Anonymous said...

I get a feeling why Warren Buffett is publicly announcing he is going into the share market now is that he is also playing his role in restoring confidence to the market. He is already in his 70s and has accumulated more than enough wealth that any people has dreamt of. He is into philanthropy and will act to the best interests of US and the people. It is really apparent that it will get worst in the future. But fear and panic is worst than monetary losses.

LuckySingaporean said...


The single digit PEs can become double digit if the E falls. Shipping companies have trailing PE of 3, but the shipping rates have collapsed over 3 months so they will be making losses.
Shortsellers? I think it is great if they can drive down prices to zero so I can buy stocks for free.

1-2 weeks is hardly investing. Maybe in 1-2 years those stocks you bought will be double in price.

Anon 11:24:

Nothing is guaranteed. There may be no recovery just slow death of the markets in our lifetime. Buffett is only 70+ years, he has not seen everything and does not know everything. Even Buffett has to make assumptions...assumptions that can be wrong.

anon 11:53,

Not enough fear? You may just be right we don't really know but Buffett has been in the market for 50 years. In the past his calls can be off by 3 months to 6 months but they proved right in the long run.

anon 1:46am:

You're right about the N225. Which holds an important lesson...whatever you do never invest when there is a bubble, you may never get your money back ever.

anon 6:49am:

Not even Buffett can restore confidence. Only time can heal...and this time may be a long time.


These are risky times and Buffett may be wrong. Invest with money you won't need...and remember we have a nasty recession ahead some listed companies are not going to make it through. You might want to take my suggest to spread your investments over time. That will help if we eventually have a recovery....otherwise nothing you do investing in the stock market will make money.