Buffett

Buffett

On Friday, October 17, in the New York Times, opposite a column by Paul Krugman describing just how terrible a condition we are in, economically, there was a guest op-ed column by Warren E. Buffett, entitled: "Buy American. I Am."

He urged people to do what he is doing, buy American stocks. He admits that no one, not even, Warren Buffett, probably the most successful investor in American history, can predict "the short run movements of the stock market." Nevertheless, he argues you should buy now, arguing the following: you should "be fearful when others are greedy, and be greedy when others are fearful."

Translation: buy cheap and sell when prices are bubbled. Don’t wait until you feel secure about buying–after the recession is over–because by then the prices will already have risen and you will be buying too late. Explanation: stocks are a leading indicator–they go down before the "real" economy (or GDP) goes down and they go up before the "real" economy goes up. His example of the latter is that the Dow hit its low in early July of 1932, while the economy kept deteriorating until March 1933.

Finally, at one point (nearer the beginning of the article than the end), he talks how the nation’s "many sound companies"–naming none!–will suffer earnings hiccups (his word), "but most major companies will be setting new profit records 5, 10 and 20 years from now."

Now it happens, I check on how stocks are doing through Yahoo (finance.yahoo.com/indices?u). And often there are a few comments below the stats. On that Friday, there was a comment from someone named David Weidner (who I later Googled and he seemed to be a perfectly reasonable and informed economic commentator). He criticized Buffett by arguing that Buffett is getting preferred stock with high dividends–if I recall, he said 10%–and that he had warrants that might be of no value if stocks go down.

In effect, he was implying that Buffett, whom I respect enormously, was manipulating us, for his own gain. This I don’t believe. Not at all. Not from someone who has argued that people like him should pay higher taxes. Instead, I think his comment was a reflection of the fact that he thinks and states the following: "Over the long term, the stock market news will be good." When I went back to check on Weidner’s comment, it was no longer there (but fortunately I had written down the author’s name).

Buffett also says that "(E)quities will almost certainly outperform cash over the next decade, probably by a substantial degree." But will they outperform bonds? Will they outperform TIPS, Treasury Inflation-Protected Securities? Will they outperform longer term and higher interest CD’s? And there are other possibilities. It seems to me Buffett is not presenting one’s choices fairly.

But more important, given that he says "I have no idea what the market will do in the short term," it means that his 1932-33 example is badly flawed. What if we are in 1930? What if stocks drop 25% from their current level? Why doesn’t he mention that the Nikkei 225 (Japan’s "Dow Jones) is today approximately 1/5 (yes 20%!) of its late 1989 high? Or that here in America, the Dow essentially stood in place for 17 years, from 1965 to 1982. And unhappily another example comes to mind–the 1929 peak was not reached again until about 1955, over 25 years later.

Yes stocks have generally been a reliable leading indicator–they go up before the economy goes up and down before the economy goes down. But those who put their money into stocks in 1930 lost their shirts. I’m not saying we’re in for another Great Depression, though reading the distinguished conservative economist, Gregory Mankiw, in today’s Times (Sunday) is not reassuring. What I am saying is that Buffett is irresponsibly suggesting we do something very risky and that is buy stocks now.