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moneysense.ca, 15/09/09
No Green Shoots says Warren Buffett
In a chat with Fortune magazine’s Poppy Harlow (available here), Warren Buffett noted that he is not seeing any green shoots in the seventy-odd businesses that Berkshire Hathaway is involved in. But he isn’t seeing any deterioration either. Still, Buffett says he is buying stocks: “We are buying stocks this morning, I can tell you that… I’m not buying based on whether we are coming out of the recession in three months or six months or a year. I’m buying them because I think we are getting good value over time. And I think it’s a mistake for investors to focus on business forecasts instead of looking at the intrinsic value of a business.”
Asked if even the Oracle of Omaha has learned an investment lesson in all this, Buffett replied: “Well, it’s always a terribly interesting thing obviously to watch… but, the dangers of leverage, the dangers of everybody getting a belief of some huge asset class that can do nothing but go up… you know… the dangers of joining the crowd just because the crowd made money yesterday and the week before… all of those things they just recur throughout history. So, you’ve seen an extreme version in certain aspects of the economy but there is really nothing new”.
moneysense.ca, 15/09/09
Thanks for the pointer to the Buffett interview. My main takeaway is that Buffett finds valuations low enough to buy based on intrinsic value. Hopefully that means that I’m doing the right thing being over 95% invested in stocks right now.
Glad Buffett is still around to talk to us all about what he thinks. But yes, quite interesting that even he doesn’t see green shoots in over 70 businesses. Wow. And you know what he owns, too….. yikes.
Of course, I wonder if that includes the debt he owns as well… and currencies. He might be talking mainly about U.S. companies.
Do you know what I think? The average Joe is realizing that the market CAN go up again, as it has since March 09, and is getting back in. Institutionals are also getting back in, too afraid of NOT being in. The Canadians and American money leaders are saying the recession is over.
Look at the P/E ratios, US consumer spending, left-over job and housing numbers, and it doesn’t look good. Many ‘Guestimators” are saying this is a dangerous time. We are in Sept.and October, traditional shakeout months. I agree, there could be a huge sudden drop, so I have stops in place.
Buffet is right, this has happened time and time again in financial markets, tulip bulb craze in holland, the south sea bubble in engliand, the buble before the great depression with market manipulators, nifty fifty, and dotcom bubble. Valuations get completely out of hand and noone can even recall any of the lessons learned from the previous crash.
In the broader market, irrational exuberance is taking hold. The rally is well ahead of the fundamentals. In some cases, like the share price for AIG, it’s absolutely insane.
For long-term investing, I’m buying based on intrinsic value and dividend income.
Hey wait a minute now, folks! Slow down!!! When Warren Buffett buys stocks, it has been well publicized that he has been buying preferred shares with dividend yields in excess of 10% per annum with buy-back prices which are 40% to 50% above his original cost!!! He’s not buying the same crappy common shares that the rest of us schmucks have access to… These preferred shares that he’s buying are private placements which are ONLY issued to Berkshire Hathaway and are NOT exchange listed securities! If you offered anybody else the same deal, well duh, everybody would jump at them. In reality, we’re the sheep who get led to the slaughter based upon this advice if we dive into those crappy common shares because the common shares will lose their dividend and take a nosedive in price in order to support the dividend payments to Warren Buffett’s preferred shares!!! It’s in Buffett’s best interest to talk up the shares because that is the equity that will be used to buy back the shares that he owns at a 50% capital gain to him!!!
What?
First of all, preferred shares are not inherently better than common stock, in fact, common stock has some advantages (you can get a piece when earnings grow via bigger dividends).
Second, maybe the blog needs a “no un-medicated commenting” rule.
Rob, could you elaborate on your statement:
(you can get a piece when earnings grow via bigger dividends).
@Rob. Preferred shares are inherently better than common shares at downside protection, but it’s not quite as good as bonds. If the underlying company starts to lose money, they will cut the dividends to common shareholders but they must continue to maintain dividends to preferred shareholders. And the buyback “strike” price for preferred shares is as much of a guaranteed price as the underlying company’s credit quality will allow.
So, if times are good and money grows on trees and all you have to do is rake it in, then maybe common shares will outperform. If things aren’t quite so happy, then common shareholders are usually completely wiped out (see Air Canada) while preferred shareholders and bondholders at least get something back. Because a lot of times, someone like Buffett will make a private placement when the companies are in distress, they often give away the farm to get the cash – but when things turn around, they will often dilute the common shares in an effort to buy out the private placements because they were often raw deals for the companies. Great for the likes of Warren Buffett et al, though!