Friday, October 17, 2008

A Richard Whitney Moment

Most of my friends (and people I didn't know where my friends) all emailed me the NY Times op-ed piece by Warren Buffett today. I figure I should at least comment on it. This reminds me of Julius Pierport (JP) Morgan in the panic of 1907 and Vice President of the New York Stock Exchange Richard Whitney who during the middle of the 1929 crash strolled onto the exchange and very publicly placed a bid for U.S. Steel. One of the major problems right now is trust. Trust has been broken by the bankers, regulators, treasury, FED etc. and so for reinsurance who do you turn to? This is the modern version of Warren Buffett strolling on the floor of the NY Stock Exchange and buying stock in General Electric. I watched very little CNBC this morning but what I did watch had all the talking heads talking about how much Buffett made sense and we should be buying stocks. It is a soothing mechanism that the America's grandpa and greatest investor is buying. His actions with Goldman also stopped the run on Goldman. It is big when he speaks because people still trust him.

Of course whether it actually marks a bottom depends on fundamentals. Morgan stopped the crash of 1907. 6 months later after the crash of 1929 the markets about regained everything before rolling over setting knew lows in 1932.

Buffett is right. Stocks are cheap. Not stupid cheap, but cheap. Debt is cheaper and my guess is stocks will get cheaper yet but who knows. I spoke with confidence that the market had not reached an absolute bottom when it was at 1150 in July. Down here I don't think it has reached the absolute bottom but am much less confident of that declaration and hence do not own any puts or have major short exposure. I also still think we are at a probable multi week to multi month interim bottom where the markets could easily go up another 10% or more.

Buffett is not buying the S&P 500. He is buying individual stocks and taking advantage of individual opportunities. I am not sitting on 100% cash anymore. There are cheap cheap things out there but that is very different than buying the S&P 500 and putting it in your 401k. In the editorial he talks about the bottoms of 1932, 1942, and 1982. Stocks were much cheaper at all three of those bottoms than they are now.

I sent this in an email this morning:

10 to 15 years from now stocks will be higher and in 5 it will be close. In the interim could we be 30 to 50% lower? Fairly easily I would say. I don't think any investor (including Buffett) has a model for what is going on. He is much later than the Leon and Whitman's of the world but I still think he is early. In a way he also has an annuity stream with his insurance and and free cash flow business giving him more money which is also why he has a better model and one that I want someday. If your Buffett I think you absolutely start buying now.

There is one other aspect of all this. If we get inflation you absolutely want to be in stocks and not government bonds which if you read the oped piece is what Buffett is selling to buy stocks.

Everything Buffett says in his piece is right on. How it applies to everyone individually is something different. I am also curious if he was asked to white this editorial by anyone in government?

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks

1 comment:

Anonymous said...

This recession will be different in time and depth compared to the last ones. First, the leverage is still too high and it will take years to heal the banking system. Moreover, thanks to the globalization you cant export different products as before just by decreasing ones´s currency and reallocating resources. This will bring more protectionism closing markets. I dont foresee a rapid recovery but a stagnant economy. Last point, it is hard to envisiage which companies will emerge after this cycle, there will be many that will not be longer viable and many will dilute their sharehoders