Time to Buy

If not in India, at least in America, its the time to buy equities, opines the Oracle of Omaha. Probably the fear has not really percolated as much in India. The real “real estate” meltdown on the streets is yet to take place. Property prices are yet to correct by a lot. Slowdown is yet to hit the economy in terms of numbers. Probably the slowdown is already there. Nevertheless, there might soon be a time when the following might hold true for India too. Only that one needs to believe in the people of this country. India afterall is no America.

Op-Ed Contributor
Buy American. I Am.
By WARREN E. BUFFETT

Published: October 16, 2008

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.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Good Ones

It just so happened that I came across the following and considered it worth a share.

First: (an excerpt from WSJ’s news on Buffett’s USD 5 bn injection in Goldman)

Mr. Buffett received a call at 4:30 p.m. that Saturday from a private investment firm trying to assemble a group to buy the embattled financial giant. “I’m calling about Bear Stearns,'” the private investor began, according to Mr. Buffett. “Should I go on?'”

Mr. Buffett recalls thinking: “It’s like a woman taking off half her clothes and asking, ‘Should I continue?’ Even if you’re a 90-year-old eunuch, you let ’em finish.” Mr. Buffett says he passed on the proposed deal. Bear Stearns was bought by J.P. Morgan Chase & Co. the following day.

Second: (an excerpt from Bloomberg’s report on Buffett’s interview on CNBC)

“It’s nice to have a lot of money, but you know, you don’t want to keep it around forever,” Buffett said. “I prefer buying things. Otherwise, it’s a little like saving sex for your old age.”

Third: (Typical Sardarji joke)

“Hitler says, There is no word like IMPOSSIBLE in my dictionary” Sardar says:Ab bolne se kiya fayidah? “Jub kharidi thi tab hi check karna tha na”

The Dhando Investor

Finished reading the simple yet excellent book by Mohnish Pabrai. I believe its a good read even for those who are not a bit interested in stock picking. He talks about Patels, Mittal, Branson and himself highlighting the common gene of value picking in businesses they have done.

Not too thick also, a one day read.

Real estate in bad state

When your job has nothing to do with buying, selling, renting, leasing property and someone comes to you with an opportunity to invest in a lucrative (obviously on papers and spreadsheets) real estate deal, definitely all is not right. And if the number of such deals offered to you rise on a weekly basis, you may assume something is not right with the industry.

Yes, the realty stocks have already been beaten down by the market. Some of them are trading at 70-90% off their peaks. Oversupply, stupendous increase in the prices over the past few years, credit crunch and increasing interest rates have taken a toll on the property market. Banks are not lending, PEs are shying away. The man on the street is the next target.

What should someone do when the builder is promising a fantastic assured return year on year? This he says is exclusive of the appreciation in property prices. Too good to be true.

The flawed assumption is that property prices always appreciate. They don’t. In some cases, it may take years for the sale value to be equal to the cost and you lose on the time value of money. The next big question is on the credibility of the builder. What if he fails to provide you the promised cash flow? You drag him to the court and wait for the hearing to happen when your kids are as old as you are now. By the time, who knows some goons will end up at your door asking you to simply forget that you owned anything.

But, but, but its not that bad always. In fact, the last few years have been great for those who have invested in property. Will that continue is difficult to answer but on a probabilistic basis I have my doubts. Having said that, it may still be worthwhile to look into such opportunities on a case to case basis and use the Dhandho approach of low risk and high returns. Heads I win, tails I don’t lose much. Now thats the tricky part:)

Volatile Nifty

You just need one day like today to make money on options. I converted the peanuts purchased yesterday into cashwenuts today. Thanks to some short covering, resulting in a mercurial rise in Nifty (up more than 4.5% from previous close), the price of the OTM call options I had purchased yesterday jumped from Rs 7 to Rs 14. This was obviously very very unexpected! But it happens in the kind of unpredictable markets we have nowadays.

There is nothing to party though. I also squared off my previous purchase (my first trade) where I have made a substantial loss. Net net, loss making two deals; the latter just minimized my overall loss.

However, in the current economic environment, the following may make sense:

(a) long term value investing: accumulate in a step wise fashion (like a Systematic Investment Plan) extremely defensive businesses at bargain values. A SIP because of the unpredictability of the market and one’s inability to time the bottom. One can find some value for sure now.

(b) trade using options: allocate a risk capital and bet on the market using options to keep control on the loss. Obviously, one can make a huge loss here too by piling up such individual loss making bets. Unpredictability guarantees volatility. It need not mean bearishness only.