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Friday, October 17, 2008

Warren Buffett is buying American stocks

I'm not the only one feeling more bullish lately--so is Warren Buffett (yeh, I'm flattering myself).

Warren Buffett is the richest man in the world and probably the best investor alive today. To top it off, he seems like a grounded, happy guy. He still lives in the house he bought in his 30's, still drives himself around town, and has good relationships with his kids. Pretty amazing for a multi-billionaire.

Buffett wrote a letter to the editor of the New York Times that was published today titled "Buy American. I Am." You can access it here to read the whole thing.

Buffett's basic argument is that because the financial world is a mess, this is a historic time to buy American stocks.

He cautions that unemployment will rise, business activity will slow and headlines will be scary. Despite these issues, he's buying stocks in his personal account (not just for Berkshire Hathaway, the holding company he runs). Up until recently, his personal money was all is U.S. government bonds. But soon, he will be 100% invested in U.S. equities.

As Buffett has said many times before, "Be fearful when others are greedy, and be greedy when others are fearful." In other words, buy when everyone is scared and sell when everyone is euphoric. This is very difficult to do, but it is also very profitable.

He cautions against investing in highly leveraged companies and businesses with weak competitive advantages. He also cautions that he can't predict short term movements in the stock market. Let me let you in on a secret--no one can!!! It may keep going down over the next year or two, but in 5 years, it's the best place to invest (especially at today's low prices).

Buffett is seldom if ever outright bullish. But, when he says, "What is likely...is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," I stand up and listen. What he's saying is you can't wait until things look good to invest, because by then you'll have missed significant gains. I've rarely, if ever, heard Buffett say something so bullish. The last time he seemed to be this optimistic was 1982, and that was an outstanding time to invest.

He goes on to give examples of why waiting doesn't work. During the Great Depression, the stock market bottomed in the summer of 1932, long before the economic picture improved. During World War II, the market bottomed in the spring of 1942, long before it was clear the Allies would defeat Axis powers. In the early 1980's, when inflation was double-digit and the economy was in a deep, double-dip recession, the time to buy was in 1982, long before the economy's recovery was clear in 1983 and 1984.

The lesson from a guy who has generated 20%+ returns for over 50 years is: you buy when everyone is pessimistic, and that time is NOW!

He warns that buying stocks only when you feel comfortable leads to poor results, so does selling because you feel scared.

He also warns against sitting in cash. Holding cash now feels comfortable, but it's an unwise investment decision. Cash doesn't pay much of a return, especially now, and it will depreciate in value. As he warns, government policies directed at alleviating the current crisis will probably prove inflationary and make cash an even worse investment.

He believes that "[e]quities will almost certainly outperform cash over the next decade, probably by a substantial degree." You should invest for where things are going, not for where they are today.

At a time when people are looking for something to hang their hopes on, Warren Buffett is a voice of clarity in the maelstrom. I'm listening, and so should you.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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