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“Be fearful when others are greedy, and be greedy when others are fearful.”

October 16, 2008, The New York Times

Warren 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.

Pay It ForwardSo … 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. [Aside: Warren has donated over $30Billion… yes billion… to the Bill and Melinda Gates Foundation… “Pay It Forward” Warren!!) 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.

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Jay’s Comments:

Note the date of the above article by Mr. Buffett, the greatest value investor who ever lived,… last Friday the 16th, right in the middle of all the turmoil in the world markets.  I added the emphasis in Warren Buffett’s article above to highlight key points he makes.  Warren says it all… I can add little to it.  He is a long term value investor, not a short term trader… which is exactly what I have been advocating over the years.  Short term now the markets are gyrating all over the place.  Negative news continues to flow as shown by the following article:

U.S. Stocks Drop as Housing, Consumer Data Offset Buffett Buys (Bloomberg, 17Oct08) — U.S. stocks fell, capping a day that sent the Standard & Poor’s 500 Index swinging between gains and losses at least 28 times, as worsening consumer confidence and housing data overshadowed Warren Buffett’s advice to buy shares… The expiration of options added to trading swings today, sending the Chicago Board Options Exchange Volatility Index, or VIX, to a record.

Volatility in the market is at its highest ever which means prices are swinging, mostly in the down direction of late.  In spite of all this, Warren Buffett is “Buying American”… cool!  He’s picking up great American companies at bargain basement prices.

To learn more about how I handle this situation were are in now, please join Michellew Breuer and me on our weekly Dream Team calls at 8pm Eastern every Tuesday evening.  To join the Dream Team to receive the call info and Become Part of Something BIG sign up at: http://dreamlifestylefound.com/ 

 

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