Buy American. I Am.
By WARREN E. BUFFETT
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.
So . I've been buying American stocks. 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.
Why? 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.
Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
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.
In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
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.
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. 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."
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." Today my money and my mouth both say equities.
The information contained herein is obtained from sources we believe to be reliable but its accuracy and completeness and that of the opinions based herein are not guaranteed. It is not to be construed as an offer, invitation or solicitation to buy or sell any of the securities mentioned. It is not intended for private clients. NOTE: This document is issued by ODL Securities Ltd., for information purposes only. Past performance is no guide to future results. No representation is being made that any investment Fund/s described within this document will or is likely to achieve any profits or losses similar to those shown. Changes in foreign exchange rates may have an adverse effect on the value or price of the investment. The track record/s and performance data shown is based on the actual audited results published by the Underlying Investment Advisor/s within the fund, which were in existence at the time of creation. All trading strategies are denominated in US$ and all management and performance fees as described in the Information Memorandum have been deducted from their historic track records. Investment allocation scenarios shown are for example only and are subject to change and will also vary from time to time. Any comparisons between different funds have been made on a Net Asset Value basis, whereas any comparisons with an index have been made on an offer to offer basis. The directors of the Prestige Fund/s believe that this approach is fair and not misleading. The directors believe that such comparative data has been obtained from reliable sources. Any comments, views and opinions expressed in the Advisors Summary within this document reflect those of the Underlying Investment Advisor to which Prestige Global Growth & Income Fund Ltd., currently invests and may not be the comments, views and opinions ODL Securities Ltd., and or its affiliates. This document does not constitute an offer to sell or a solicitation of an offer to buy shares in any Prestige Fund/s. Subscription for shares in any Prestige Fund can only be made by completing the relevant application form that accompanies the Fund's Information Memorandum. Neither ODL Securities Ltd., Prestige Global Growth & Income Fund Ltd., or the Fund Administrator accept any liability from investors who rely upon any other information with regard to any Prestige Fund/s. Trading of Prestige Global Growth and Income Fund Ltd., began in December 2007. NOTE: All trademarks are recognised. The Investment Fund/s described within this document are not subject to FSA authorisation and regulation under the Financial Services and Markets Act 2000 (the 'Act') and consequently no investor protection is provided by the UK regulatory system. Similarly, benefits available under the UK Financial Services Compensation Scheme do not apply. This document is only intended for distribution to persons permitted to receive it by Section 238 of the Act. Prestige Global Growth & Income Fund Ltd., is registered with the Cayman Islands Monetary Authority (CIMA). The Investment Fund/s and services offered or described within this document are marketed through ODL Securities Ltd., a company incorporated in England and Wales and is authorised and regulated in the United Kingdom by the Financial Services Authority (FSA). (C) 2008
Recent Market Volatility
Dear Investment Professional,
The last few months has seen extreme market volatility particularly in global stock markets. On Monday 29th September saw a fall of 777 points / -6.9% in the Dow Jones Industrial Average to 10,365. The NASDAQ Composite Index, dropped -199 points / 10.06% to 1,983. The S&P 500 Index dropped -106 points / -9.6% to 1,106
Monday 15th September also saw a fall of 504 points / -4.4% in the Dow Jones Industrial Average to 10,917. The NASDAQ Composite Index, dropped -81 points / -3.6% to 2,179. The S&P 500 Index dropped -59 points / -4.7% to 1,192.
Historic US Stock market Performance
| Index |
2008 |
1998 |
1988 |
1978 |
| S&P 500 |
-40% |
-29% |
+215% |
+811% |
| Dow Jones |
-37% |
-9% |
+284% |
+934% |
| Nasdaq |
-40% |
-27% |
+319% |
+1254% |
| FTSE |
-37% |
-31% |
+128% |
|
Putting it all into context
October's market falls have seen the largest daily points decline on the Dow Jones Industrial Average in over 20 years, but it is completely dwarfed by the percentage decline in that Index on October 19th, 1987 when the market fell -22.6% in one trading day!
This reflects the strong advances that the markets have made in recent years, with the Dow Jones Index still 296% higher than it was 20 years ago, and 966% higher than it was 30 years ago!
What caused the markets to fall?
Short Selling is not the reason why equity markets have fallen so much recently.
After 9/11 the US Treasury and the US Federal Reserve slashed interest rates to avoid recession and stimulate growth. Real rates remained below inflation for to long, causing massive asset bubbles around the world - particularly in real estate. Many countries around the world are pegged to the US Dollar.
Banks operating with too much leverage!
Banks lending too much money (and to a single asset class - such as real estate) without secure funding from savers (relying on money markets) to continue issuing loans based upon inflated property booms.
Banks buying and selling "high yield" bundled / packaged loan products containing mortgage backed securities which combined had higher credit ratings than if individually unbundled - and then leveraging them!
Banks lending too much money, with lax lending rules to borrowers who have poor credit records and little or no equity in the underlying assets.
Entire sections of the US Financial System remain largely unregulated!
Financial Groups like Fannie Mae and Freddie Mac are largely unregulated with little real oversight and no audited accounts for many years. Combined these groups have US +$5 trillion worth of assets!
The entire US +$60 trillion dollar market for CDO (Collatoralised Debt Obligations) / CDS (Credit Default Swaps) is largely unregulated with little real oversight, and operates "over the counter" (off exchange) without any form of clearing house for defaults. For over 30 years all major Futures Exchanges have operated with strict regulation and with a major clearing house in place for all trades.
The United States has multiple financial regulators, some of which are not suitable to cope with modern investment / trading techniques. The United Kingdom has essentially 1 financial regulator the FSA, though the Bank of England has recently been given new powers to act to help stabilise markets and has oversight over various market related matters.
Most Hedge Fund Managers in the United States are unregulated. ALL Hedge Fund Managers in the UK are regulated!
Market Timing
In view of recent declines, investors might be tempted to sell their investments in order to realise profits or cut their losses. In this type of environment, it is always tempting to try to avoid periods of volatility by selling out of the market, and buying back at a later, more settled stage. However, our many years of experience in managing portfolios indicate that this may not be the best approach to take - in the past it has often proved unhelpful to an investor to follow such a strategy and not infrequently can do more harm to long-term investment returns.
Research into market timing indicates that equity market returns tend to be concentrated in a relatively small number of strong trading days. Moreover, some of the strongest rises tend to come immediately after sharp market declines, a time when many 'market timers' may still be out of the market. As a result, it is very easy to miss some of the strongest rises in the market. In the example below, missing the 40 best days in 12 years (just three to four days per year) has dramatically reduced returns.
| Market Index |
Fully Invested |
Missed best 10 |
Missed best 20 |
Missed best 30 |
Missed best 40 |
| USA S&P 500 |
19.1% |
15.4% |
12.7% |
10.4% |
8.3% |
| UK FTSE 100 |
16.2% |
12.8% |
10.5% |
8.5% |
6 .7% |
| Germany DAX 30 |
17.5% |
11.9% |
8.2% |
5.3% |
2.7% |
| France CAC40 |
19.4% |
14.8% |
11.4% |
8.5% |
6.1% |
All figures show annualised, total returns, from 31 December 1987 to 31 December 2007, in local currency terms. Source: Fidelity Investments
This is demonstrated most recently when the Dow Jones Industrial Average rose by a massive +936.42 / +11% on Monday 13th October 2008. Clearly, being out of the market on a very small number of key days dramatically reduces returns - we believe that the risk of missing these days should be a significant factor in the determination a long-term investor takes into consideration when making investment decisions. Each investor in making their investment decisions would probably find it helpful to make these in the context of what best suits their risk profile and their long term investment goals.
2009