Warren Buffet’s Investing Strategy
Warren Buffett made news the other day in a New York Times opinion piece where he stated that he is moving 100% of his assets from U.S. government bonds into U.S. equities (stocks). When the richest guy in the world, a man who made his fortune through wise value investing, says that it’s time to buy, people tend to listen. Let’s take a look at what Buffett says.
Warren Buffet’s Reasons for Moving 100% of his Assets into U.S. Stocks:
1. Buffett invests by the motto “be fearful when others are greedy, and greedy when others are fearful”.
If you believe in Buffett’s motto, then now is a great time to buy. We haven’t seen this much fear and volatility in the market since the Great Depression. Could people get more fearful than this? To succeed in investing, you need to get over the fear of investing.
2. Buffett believes that a rebound will happen prior to economic conditions improving.
He believes this because during the Great Depression, the Dow hit it’s low in July of 1932 even though economic conditions worsened until FDR took office in March of 1933. Despite the economic decline, the Dow advanced 30%. Those who waited for the economic recovery missed out on the gains.
3. We’ve been through so many tumultuous periods of time and equity value has increased.
Buffett calmly states that the 20th Century provided “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.”
4. Cash is a terrible long-term asset that is certain to depreciate in value.
On this point, Buffett is correct. If you stay in cash, you’re bound to get dominated by inflation over time. Buffett then goes on to state that “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.” I couldn’t agree more with this statement.
My Thoughts on Buffett’s Mottos:
I agree with just about everything Buffett stated. He was very careful not to say that he doesn’t know where the market will be tomorrow, in a month, or even in a year, but does think that in 5, 10, or 20 years, stocks will go up.
I do think he could have further clarified what type of stocks to look for in this type of a market versus giving a blanket statement that he’s getting 100% into them. Many companies will not survive this credit crisis because they don’t have enough cash on hand and won’t be able to meet stricter lending standards.
I am also a little surprised that Buffett was 100% into U.S. Government bonds prior to making this statement. This implies that he is a market ‘timer’. Was his decision to do so smart? In hindsight, absolutely. If only I had listened to my senses when the Dow was overvalued at 14,000 a year ago, I wouldn’t mind dumping more money into the market right now either (I probably will anyways).
What if Buffett is Wrong?
There is always a possibility that the economy won’t recover and is headed lower 5, 10, and 20 years from where it is now. If this is the case, my guess is that we’ll have catastrophic conditions worldwide and 401K statements will be the least of our concerns.
One thing seems almost certain – we’re going to encounter higher inflation levels than we’ve enjoyed over the last 15-20 years. Cash is not the way to go. Gold, silver, tangibles, TIPS, and undervalued market leading equities seem like a solid bet.
If you are going to go the stock route, which would not be a bad choice, you must choose the right type of stocks. More to come on this shortly.
- Do you agree with Buffett?
- Where is your money right now?
- Does Buffett’s piece inspire you to get back into stocks if you had moved to cash?
I agree with you and Buffet that this is the time to invest if done wisely. But what areas are wisely? Take risks or not? Of course he won’t get into more detailed as it probably wouldn’t be appropriate, but he has made a lot of solid decisions over his lifetime that his advice is to take more than a grain of salt. Are there specific companies/sectors you plan on taking risk and buying in?
Craig, I don’t think Buffett would be an advocate of taking risks in this market. I wish I knew what the guy was buying (outside of Berkshire). I’m going to discuss some areas in an upcoming post that might make sense to invest in.
I am looking for some idea and stumble upon your posting :) decide to wish you Thanks. Eugene
I think the second point is particularly interesting – that the market will recover prior to economic conditions improving. I recall that in 2003 my 401k went up 27% – but the economy will still considered to be pretty poor that year.
Any thoughts on when you think we will “hit bottom”? I’m thinking that it will recover the rest of the year and then decline and bottom 1Q 09. (But that’s pure speculation on my part).
We’ve been through so many tumultuous periods of time and equity value has increased? i definitely agree with Warren Buffett,i dont think the economy will still can recover
I bet he wished he held off just another month now….