Warren Buffett Bets On America... Finally

(Illustration by Brad Holland for The New York Times)

It took a while but Warren Buffett finally considers American equities attractive. Warren Buffett wrote an opinion piece for The New York Times today and he is buying American equities for his private account. This is a big shift from Warren Buffett, who says he has been holding US Treasuries in his private account. There isn't anything insightful in his essay for any value investor or a contrarian but I recommend reading it. In fact, the most important thing to me is not his comments but the fact that this is a powerful signal. It's one thing for some guy off the street to be saying stocks are cheap; and it's another when someone great like Buffett says so.

I hate to insert my views into an opinion piece but here are some brief thoughts...

(source: Buy American. I Am., By Warren E. Buffett. October 16, 2008. The New York Times)

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.

That's a pretty powerful endorsement for US stocks. Admittedly Buffett is not comfortable with foreign stocks so he always had some bias for US stocks. But nevertheless, it signals to me that a hardcore value investor like Buffett, who always looks for cheap prices, feels that valuations are finally attractive.

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.

I share the same view as Buffett. However, if I may play Devil's Advocate, it should be noted that Buffett will be wrong if we enter a deflationary depression like Japan did in the 90's. Even the very best companies in Japan have suffered in the last decade. I have been in the disinflation/deflation camp for a few years now but even I think the Japan scenario is unlikely. As John Hussman has remarked, notice that many of those expecting a depression were the ones who were superbullish a few years ago. For example, you'll notice that many who were calling for $150 to $200 oil due to a boom are now superbearish and think the world is going to end.

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.

This is probably the greatest mistake you can make right now. The time to unload stocks was 6 months to an year ago. For instance, I have been bearish on oil for almost two years now and never would have considered oil&gas stocks worth owning. However, I would be the first one to say that it is not worth selling such stocks right now. The valuations are so low that even it is hard to be a bear on that sector anymore. If I had to make one decision, I would rather buy oil&gas right now than sell.

(Do note that I am not making a bullish case on oil&gas here. I don't have a strong opinion right now, except for some really beaten down E&P junior or maybe Russian oil&gas stocks, some of which are supposedly trading below cash i.e. net-nets (but I'm not sure how reliable accounting is). I'm just saying that selling is not a good decision anymore, unless you were certain your company was severely overvalued.)

Today people who hold cash equivalents feel comfortable. They shouldn’t. 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.

Buffett is talking about short-term securities but even worse are US long-term bonds. That's probably the biggest bubble right now. As Marc Faber has alluded to, anyone buying a 30 year bond with a 4% yield is just asking for financial suffering. It's hard to think of too many greater mistakes than locking in their money for 30 years at 4%. At least those "investing" in short-term T-bills with 0.5% yield are only doing it for the short-term.

I share similar views as Buffett. However, it should be noted that his views will be wrong if we enter a deflationary collapse of some sort. Clearly the consensus, hence market view, is that we are going to enter such a scenario. Otherwise, you wouldn't get anyone giving away their hard earned money at 0.5% for the next 3 months.