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Investment Strategy
Thursday, January 1, 2009
Ignore the common trend

Warren Buffett needs no introduction these days; but his investment philosophy seems as ignored as ever. ‘Buy and hold’, has for instance been an abiding strategy of his. And, despite the global turmoil he shows no sign of letting up. Are there any investors in South Africa bold enough to take his advice to heart?

  An article written by Mr Buffett was published in the New York Times, where he remarked: “Buy American. I Am.”
  I don’t have any money to invest but perhaps those that do should be echoing his sentiment: ‘Buy South African, I am.’
  Here’s why.
  Warren Buffett says he’s 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.”
A simple rule dictates his buying strategy: 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.”
  He reiterates another observation in the New York Times: “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,” observes Buffett. 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.”
And for his part Mr Buffett says he is following 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. Extract of article published in the New York Times
Meanwhile, add The New York Times to your list of sites to visit. At the very least it is worth a weekly read. It’s mostly free. Go to: www.nytimes.com

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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