By WARREN E. BUFFETT
Omaha
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.
Source: http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&pagewanted=print&oref=slogin
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And that's what I am doing!!! I have been purchasing leaps (call options longer then a year)on companies that are down 80% but still have strong cashflows and balance sheets.
I just purchased some Jan 2011 call options on VMWare. I have also bought call options on some beat down financials.
If you want to be a long term investor, why not listen to greatest long term investor and a disciple of Graham?
As Buffet says, in the short term, no one knows where the market is going to go. It could drop another 1000 or go up another 5000.
But don't be foolish!!! "Be fearful when others are greedy, and be greedy when others are fearful."
Buy American. I Am.
October 17th, 2008 at 04:29 pm
October 17th, 2008 at 06:42 pm 1224268977
Can you explain leaps a little bit more?
October 17th, 2008 at 07:35 pm 1224272133
October 17th, 2008 at 07:46 pm 1224272801
I haven't jumped into options yet, as I am still learning the ropes. However, that may (or may not) be in my future. I'm also out at this current time, BUT I do plan on jumping back in at the next sign of opportunity, and yes, I AM PROUD TO BUY AMERICAN!
October 18th, 2008 at 02:37 am 1224297426
I also bought some dec 2010 options on SPY.
For all these calls, I bought my first lot, which is 25% of my final position. I believe the bottom came in and am waiting for a retest where I will double down on the positions.
I also am 75% invested in my etfs on Financial services and brokers.
My lot buys are 25%, 50%, and then 25%. So for the etfs I have one more lot to buy.
always use stops and build up a position. Good luck BA.
And for Thrift, I am still watching NCC. I don't like what the bond market is saying about NCC (the yields are around 35%).
And yes I realize the VIX is extremely high but I like how 8500 is holding and the chart is starting to flag out. (See it BA?)
October 18th, 2008 at 08:12 pm 1224360774
On the contrary, I've heard that even if this housing crisis is finally starting to "bottom out", there's still the matter of a slowing economy, which from what I've heard, is a separate issue from said housing crisis.
If so, the general economy could actually get worse before it gets better....
One thing is for sure though. This week has been nothing but breath-taking. We're all going to look back at this some day and ruminate on the insanity of it all.