Buffett 2013: The World’s Most Successful Investor on Today’s Markets

353426d5fad15be7cfc4_dgd__2012_photo.jpg
David Dietze, JD, CFA, CFP
353426d5fad15be7cfc4_dgd__2012_photo.jpg

Warren Buffett is indisputably the most successful investor alive today and one of the wealthiest on the planet.  His investment vehicle, Berkshire Hathaway, has advanced from $150 a share in the 1960s to over $165,000 today.  Using Berkshire’s book value as the best measure of its worth, it has outperformed the S&P by factor of 7 times;  since 1964 it’s grown over 586,000 percent versus the S&P’s near 8,000 percent advance.

We can gain insight into his market outlook by piecing together a flurry of news from him this year, including his company’s Annual Report, its annual meeting in Omaha, plus his TV appearances immediately following the meeting.

Bonds are a “Terrible Investment”

Sign Up for E-News

Mr. Buffett minced no words when it came to the topic of bonds, labeling them “terrible investments” and singling out long term government bonds as especially toxic.  Even casual market observers acknowledge that interest rates are close to their lowest in 50 years.  What many don’t realize is the loss of principal that will result if rates rise.  Expect a 6% principal decline for every 1% rise in rates on the 10 year Treasury.  That bond yields 1.9% today, but it was nearly 16% in the early 1980s.  You do the math.

Interestingly, many believe they have skirted this risk by investing in high yielding fixed income substitutes.  But, Mr. Buffett made clear that such investor favorites as junk bonds and real estate investment trusts (REITS) could also deal investors a harsh blow in a rising rate environment.

There’s no question that yields on REITS have plummeted, now below 4% compared to 11% in February of 2009, thus offering far less value today.  Meanwhile, high yield bonds are, well, no longer high yielding, with their rates below 5% for the first time ever.

Bottom line: Mr. Buffett is warning on bonds, and does not believe that the popular yield substitutes investors are flocking to today will escape the ultimate fate of longer dated government bonds.

Stocks Are “Reasonably Priced”

Despite being in the fifth year of a bull market, with the Dow and the S&P at all-time highs, Mr. Buffett still thinks stocks are “reasonably priced.”  Of course, he admits that they aren’t the bargains they were several years ago.  Nevertheless, in comparison to other investment vehicles, like debt, real estate and farmland, he believes stocks are the best home for your money.

That money should have a long term focus; Mr. Buffett says he has no idea where stocks are going in the next day, week, month or even year.  His level of confidence only seems to rise when holding periods are a decade or longer.

Bottom line, Mr. Buffett likes equities’ present valuations, but recognizes that’s no guarantee against a bear market or worse in the near term. 

Returning Money to Shareholders

Mr. Buffett continues to extol the virtues of companies’ returning money to stockholders, either via stock buybacks or dividends.  He responded to questions on Apple by relating discussions he had with the late Steve Jobs, counseling Jobs that if he felt Apple’s stock was cheap and it had surplus cash, a stock buyback made sense.

Continuing his recurring theme that price is paramount when investing, he warns that companies that buy back stock at too high a price are simply destroying capital.  That applies to even great companies; indeed, he made clear that if his own company were to buy back stock at the wrong price that would be a horrendous mistake.

Mr. Buffett explained in detail why he preferred stock buybacks to dividends.  With a stock buyback the holder retains control over when and how much he might want to draw down on his investment by selling shares.  This permits tax deferral that’s not possible with a dividend. 

Bottom line, Mr. Buffett would counsel that after your research has uncovered a cheap stock, the company’s plan to buy back stock would increase the attractiveness.  Further, despite the current mania for dividends, they are a less efficient way than stock buybacks to build wealth.

Consider Carefully the Counter Arguments

Mr. Buffett’s latest annual meeting made news because he invited a noted short seller and Berkshire bear, Doug Kass of Seabreeze Partners, to take the podium and make the negative case. 

While Mr. Buffett didn’t concede (“nothing Kass has said makes me want to sell my shares”), the exercise was instructive.  There’s always another side to any investment thesis; you’re not going to be able to buy an investment unless someone else sells it to you.  Serious investors examine carefully the flip side to any investment thesis.

Hold Some Cash

Despite Mr. Buffett’s long term optimism (Heinz, a recent buy, will be a great brand for the “next 100 years”), a careful parsing of his comments makes a case for keeping some cash in your portfolio.

First, he extolled the advantages of Berkshire’s size in the event of a financial crisis, boasting that Berkshire will be the “800 number” because of its cash horde for those caught in the next financial storm.  Mr. Buffett suggests there will plenty of financial panics in the years ahead, and those that have liquidity at those times will profit.  Indeed, he cited what a great opportunity his own stock had been during the four times it had dropped 50% “if you had cash then.”

Second, while eschewing macroeconomic forecasts, there are clearly long term economic problems he worries about.  He praises Ben Bernanke and the Federal Reserve for rescuing the global economy in the latest crisis.  However, he has no idea how the Federal Reserve will reverse its historic bond buying, and what that may do to the economy.

Further, he raises real questions on our nation’s debt quagmire:  The amount of deficit spending in the last four years … has been quite appropriate in relation to the threat …..The question is, how do you get off that.”

Bottom line, while Mr. Buffett disdains big picture forecasting, the next crisis is simply a when, not an if, and the prescient investor will have some cash handy to scoop up the inevitable bargains!

Financials Still Attractive

Mr. Buffett loves brands; one of his biggest holdings is Coca Cola.  He thinks Wells Fargo offers better opportunity today than does Coca Cola.  Mr. Buffett underscored the value of its retail depositor basis, a source of long term cheap funding.  Wells’ earnings were understated, as it reduced them to reflect the amortization of the value of those deposits; under general accounting rules deposits have a relatively short finite life.  But, Mr. Buffett thought those rules understated their life; those deposits are unlikely to leave Wells anytime soon.

Similarly, Mr. Buffett waxed enthusiastic on Bank of America, for many of the same reasons.  Investors failed to give due credit to its massive deposit base, on which they were paying little and had little risk of losing.  As Buffett saw “some recovery” in housing, Bank of America is “making progress” with legacy problems in its mortgage portfolio inherited from  Countrywide.  As is his wont, he would not provide a timeline, but thinks Bank of America would ultimately be “significantly” higher.

Bottom line, Mr. Buffett remains very positive on both Wells Fargo and Bank of America.  Financials remain cheap relative to pre-downturn levels.  As Mr. Buffett believes that by the time of the next annual meeting the economy “will have moved forward,” bank investments have his clear endorsement.

 

 The Guest Column is our readers' opportunity to write about a given issue or topic in an in-depth and educational manner.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

TAP Into Another Town's News:

You May Also Be Interested In

Sign Up for E-News

Berkeley Heights

Have Your Voice Heard Tonight on Vote for $4 Million Extra for Municipal Complex

July 10, 2018

The Berkeley Heights Municipal Complex project is the largest and most expensive local public project we will likely witness as Berkeley Heights residents. It is a vast responsibility. Therefore, it was concerning to learn that the Township Council and Mayor placed an ordinance on the agenda June 26 for an additional $4 million for the municipal complex without much regard to time.

Avoiding 10% Tax Penalty

Do you want access to money from your retirement accounts but aren't sure of the real costs involved?

Most retirement accounts have a set age requirement you must reach before making penalty-free income distributions, which is usually 59.5 but can sometimes be as early as age 50. If you decide to access your accounts earlier, you could face penalties ranging from 10%-25%, which is not ...

Beneficiary Forms - As Important as Your Will

As you plan for the future, don’t leave out one of the most overlooked must-do’s: naming the beneficiaries of your retirement assets. Updating your beneficiary forms ensures that the legacy you worked so hard to build will be distributed correctly. Don’t delay -- the designations on your beneficiary forms supersede those stated in your Will. 

Try answering the ...

17 Years Running and the Pizza is still Hot!! The Downtown Westfield 5K & Pizza Extravaganza is July 25, 2018

July 16, 2018

The 17th Annual Downtown Westfield 5K & Pizza Extravaganza, now more often referred to as the ‘Pizza Run’ will be here in no time! Don’t forget to sign up for a night of running, pizza, prizes, and entertainment! The event will be held on July 25, 2018 with a start time of 7 pm. Register online at PracticeHard.com before our Monday July 23, 2018, at 11:59 pm deadline will be ...

Union County’s Free Summer Arts Festival Continues July 18 at Echo Lake Park Featuring 5 Against 1

The Union County Summer Arts Festival concert series continues on Wednesday July 18, with the band 5 Against 1, a Pearl Jam  tribute band, taking the stage at Echo Lake Park in Mountainside.

The free series, presented by the Union County Board of Chosen Freeholders,is held at Echo Lake Park during July and moves to Oak Ridge Park in Clark during August.

5 Against 1, which ...

Award-Winning Senior Art Exhibited at Freeholders Gallery

A new exhibit of award winning artworks by local artists age 60 and up is now on display at the Freeholders Gallery through August 29. Each of the 13 works received first place honors in the countywide Senior Art Exhibit held earlier this summer in the Atrium at Liberty Hall in Union Township.

“Each in their own unique way, these artists have contributed to an enriching, creative ...

Union County Students Invited to Experience a Unique Silent Party

Students ages 12 to 16 are invited to “Youth Chella,” a silent party scheduled for Friday, Aug.16 from 1:00 to 4:00 p.m. in Union County’s Watchung Reservation at the Trailside Nature and Science Center, 452 New Providence Road in Mountainside.

Admission and refreshments are free with the donation of a snack item. The donations will be provided to students in the ...

Geoffrey the Giraffe Moves In To New Brunswick Children's Hospital

July 12, 2018

NEW BRUNSWICK, NJ - Over a stretch of nearly 70 years, Geoffrey the Giraffe at Toys R Us stores was the symbol of happy times for generations of children, and now he may provide those same feelings for children coming to a hospital.

"From this day forward, Geoffrey stands tall in our lobby to encourage our smallest patients to smile when they enter our facilities," said John ...

Severe Thunderstorm, Flash Flood Warnings in Effect for Berkeley Heights Tuesday Afternoon

July 3, 2018

BERKELEY HEIGHTS, NJ — The National Weather Service has issued a severe thunderstorm warning for Union County until 2:30 p.m. and a flash flood warning until 5 p.m.

“Torrential rainfall is occurring with this storm, and may lead to flash flooding,” the service warned. “Do not drive your vehicle through flooded roadways.”

Sign up for our free enews and get ...

Upcoming Events

Tue, July 17, 10:00 AM

Healing the Children, new providence

Summit Old Guard

Giving Back

Wed, July 18, 10:30 AM

Berkeley Heights Public Library, Berkeley Heights

Story Time & Craft with DIVA DELORES AND THE ...

Other

Carousel_image_b91f21bd7ac6c164e408_wednesday_matinees_at_trailside

Wed, July 18, 1:30 PM

Trailside Nature & Science Center, MountainsidE

Trailside’s Annual Summer Wednesday Matinee ...

Arts & Entertainment Education

Carousel_image_f315283ead6566b0f0d0_24b31797abd0cb2d199e_senior_bbq

Wed, July 18, 6:00 PM

Summit YMCA, Summit

Senior Summer BBQ at the Summit YMCA

Food & Drink

Wed, July 18, 7:30 PM

Chatham United Methodist Church, Chatham

Masterwork’s Summer Sing Four to Feature Brahms

Arts & Entertainment

Special June Episode of 'Berkeley Heights Here & Now' Features 6th Annual Street Fair

BERKELEY HEIGHTS, NJ – The Berkeley Heights Communications Committee (BHCC) today announced a special edition of Berkeley Heights Here & Now is available on the Township website, www.berkeleyheightstwpnj.gov.

 

The special episode features the 6th Annual Berkeley Heights Street Fair held on June 24 and includes onsite interviews with attending residents/visitors, event ...

Women Have Special Financial Needs That Advisors Overlook

Women have special financial needs that advisors overlook in two ways: 1) advisors don’t always acknowledge the different planning needs women have and 2) advisors don’t always communicate well with female clients – especially if the client comes to a meeting with her husband. It’s very common for a male advisor to spend much or most of the face time in meetings talking to ...

5 Simple Ways to Save Water this Summer

According to the L.A. Times, the average American uses an estimated 98 gallons of water EACH day.  

Here are five simple ways you can save water, to help you conserve water this summer and take some pressure off of your drains.

1. Unless you are using it, turn the faucet off. How many of us still leave the water running while we shave or brush our teeth?According to ...