Warren Buffett Investing

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Warren Buffett Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”

by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Friday, May 30, 2008: Issue #801

Warren Buffett opined that the United States is already in recession, even if it’s not in the sense that economists would define it: two consecutive quarters of negative growth, in an interview with the German magazine Der Spiegel on Saturday. Furthermore, Buffett argues the recession “will be deep and last longer than many think.”

Sounds pretty ominous. After all, Buffett is now the world’s richest man – he recently surpassed Microsoft chairman Bill Gates – and is easily one of the planet’s most successful investors. If Buffett himself thinks the economic outlook is lousy, the average punter thinks, maybe I should get out of the market.

If you have money in the stock market that you will need in the next few months ahead, you should. (Not because the market is about to go down – although it may – but because money earmarked for short-term expenditures shouldn’t be in the market in the first place.)

However, if you own stocks to meet your long-term financial objectives, stay put. And look for fresh opportunities, too. After all, that’s what Buffett himself is doing…

Warren Buffett’s Global Investment Opportunities

One of the reasons Warren Buffett was in Germany is that he shares our view that you should search worldwide for the best investment opportunities. Right now Buffett would like to put Berkshire Hathaway’s cash war chest to work in a few well-managed German family-owned businesses.

But why would Buffett buy companies if the economic downturn is likely to be deeper and last longer than generally expected?

Because he knows that nobody can accurately or consistently predict something as big, diverse, and dynamic as the global economy. (Work like this is better left to the experts: you know, palm readers and Ouija boarders.)

Warren Buffett knows that even if you somehow knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market. Stocks fall during good times. They often rally during bad times. Money manager Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing.

Buffett knows that the stock market is a discounting mechanism. It takes the news and reflects it into stock prices immediately. Who in their right mind would sell their stocks today because he realizes the economy is slowing down. We’ve known that for months already.

And, finally, Buffett knows that nothing beats the long-term returns available in equities. Where else can you put your money to work today? In real estate that is in a death spiral? In bonds that pay less than 5%? In money markets yielding 2%?

Warren Buffett’s Investment Strategy

In the same interview with Der Spiegel, talking about his investment strategy, Warren Buffett said “If the world were falling apart I’d still invest in companies.” In other words, he gets it. There is no superior alternative to common stocks. The long-term returns of every other asset class pale by comparison.

In an interview in the April 28, 2008 issue of Fortune, Buffett said “I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don’t want capital markets that function perfectly if you’re in my business. People continue to do foolish things… and they always will.”

Realize that when other investors sell too cheap or buy too dear, it creates opportunities for those of us on the other side of their trades.

Buffett ends his Fortune interview by saying, “Stocks are a better buy today then they were a year ago. Or three years ago… The American economy is going to do fine. But it won’t do fine every year and every week and every month… The only way an investor can get killed is by high fees or by trying to outsmart the market.”

Amen. They don’t call him the Oracle of Omaha for nothing.

Good investing,

Alex

Alexander Green’s recommendations have beaten the Wilshire 5000 Total Market Index by more than 3 to 1 over the past five years. To get access to a steady stream of the companies he expects to outperform this year, consider joining The Oxford Club, our premium service. You’ll have access to all of Alex’s growth-stock recommendations in a matter of minutes. Learn more.

Today’s Investment U Crib Sheet

Some define recession as two successive quarters of negative real economic growth. Others use a more general framework of a decline in economic activity lasting for more than a few months with visible declines in GDP, employment, production and income.

The average length of recessions for the past 50 years has been 11 months. So as an investor, you can’t confirm if we’re in a recession until we’re almost halfway through it. For those deciding whether they should hold on or sell their holdings… take a look at the performance of the S&P from past recessions.

By looking at the numbers for the last nine recessions, we see some surprising and encouraging figures. The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst.

For the last 50 years, the average return for the S&P 500 has been around 12.5%. Investors focused on the long term, who didn’t panic and who stayed fully invested in the market, found themselves with an average return of 42.4%. With those returns, it’s understandable why a great investor like Warren Buffett likes to see the market shake out from time to time. Here’s a look at one of Buffett’s most recent buys… and how to profit by following in his tracks.