tinyurl.com/5nhbdg -> caps.fool.com/Blogs/ViewPost.aspx?bpid=99524&t=02007718965682909770
I think this piece deserves some closer attention because Warren Buffet is so influential in the world of money. 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. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. Moving to 100% equities without any international diversification is a puzzling move even under the best of times. I would not recommend that anybody in or near retirement attempt this without first being a billionaire. While it could pay off, it could also fail spectacularly. I think it is irresponsible for him to suggest, however indirectly, that others should consider doing the same. Perhaps he's lost touch with the fact that his circumstances are very different from everybody else's? 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. Japan's experience with deflation is instructive as a case example for how this investing creed can go horribly wrong. The Japanese stock market hit its peak in December 1989. This compares to a 40% loss for the US markets one year after our peak. Today, nearly 19 years after its peak, the Japanese stock market is a full 80% below its former peak. If the US markets follow the same trajectory, an investor today can expect to lose two-thirds of their money over the next 18 years, not including the potential impact of inflation. Japan has been fighting a deflationary battle for 19 years and despite the extremely aggressive actions of their central bank and Treasury (I'm talking about their equivalent organizations), deflation is still winning. While I happen to also believe that we'll face an inflationary burst in the future, I would never dream of hinting that everybody should go 100% long, right now in anticipation of that outcome. I don't yet know which way this battle between inflation and deflation will go and because of this uncertainty I continue to advise people to hedge their bets. Further, the structural differences between Warren's historical examples and now deserve at least some discussion. The US is now a net debtor nation, a net energy importer, and about to run the largest federal deficit in history by more than a factor of two. Peak oil is coming soon enough and the US has failed to adequately invest in its infrastructure. We've got a demographic situation that has never before been faced, but certainly the retiring of the baby boomers is going to have some impact on the net-investment position of our country. How does he see companies "setting new profit records" against this backdrop? I love optimism at sporting matches but I think it makes a terrible investment strategy. 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. It lets you buy a slice of America's future at a marked-down price. From the stock market peak in 1929 it wasn't until 1954 that the stock market regained that lofty peak, 25 years later. Since our own peak was just a year ago I wonder how many people would be okay if we repeated that experience. I realize that anybody can pull any particular periods from history to make whatever point they want. I just wanted to illustrate what I perceived to be a misuse of historical example by a revered investment guru. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. 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 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. My Comment: Here Warren is again displaying a strong bias, a belief if you will, that we'll soon return to an inflationary world. But the Japan experience shows us that a different outcome is possible. In Japan cash has been a better investment than either stocks or real estate for the last 19 years (and counting). By going "100% all-in" to US stocks Warren has eschewed the most basic of all investing tenets - diversification. Gold, stocks, bond, all of them are signaling that deflation is winning. I am confused as to why Warren has not offered up the concept of hedging against the possibility (no matter how slight in his mind) that deflation might win. I suppose, for whatever reason, that is an unthinkable outcome for him. More importantly, I see him chiding small-time investors for panicking out of the market. This may be true, but he's done himself a disservice by painting it so narrowly. Certainly anybody who is in retirement or will be soon should absolutely consider selling out whatever assets they need to assure their monetary needs are met. 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." My Comment: Again, his unshakable faith in inflation is on display. 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." Final Comment: On the one hand I appreciate that Warren is using his considerable clout to try and inject some hope and optimism back into the markets. On the other hand I worry that our markets need more than a good pep talk from Grandpa and that his advice here could be quite destructive if it is followed by people of lesser means and it turns out that we still face many years of stock market losses. Certainly nobody who is at or near retirement should consider doing anything quite as reckless as Warren has done. For them, his advice would be actionably bad if offered by an investment advisor. As always, my advice is to carefully consider what information you "let in". A powerful Op-Ed piece in the NYT stands a very good chance of persuading a lot of people. Be sure that you really are in agreement with Warren's risky reasoning before allowing his beliefs to inform your actions. I have found his Crash Course to be immensely helpful in understanding our current predicament. He (along with a handful of others) predicted much of what has already happened and his warnings about the next 20 years are even more dire. Whether one agrees with his conclusions or not, I strongl...
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