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By now, I'm sure folks have read Warren Buffett's recent op-ed piece in The New York Times, in which he discussed why he was buying stocks right now.
Before I comment on his views, let me be clear about one thing: He is Warren Buffett, and I am not. His investment record is vastly superior to mine and probably better than anyone else's will ever be.
When an op-ed is not an all-clear
Having said that, I find some of his arguments to be less than persuasive. More importantly, I'm afraid too many people will seize upon his column and use it as an excuse to be more optimistic or perhaps take more risk than they ought to. That is my major complaint with the timing of his article. (Of course, that assumes my expectation of a very weak economy is correct.)Buffett makes the point that "equities will almost certainly outperform cash over the next decade." He says: "The policies that government will follow in its effort to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. . . . Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset."
Although that is true and is a reason one needs to have some insurance against the government printing presses, it doesn't mean that anyone now holding cash plans to stay in cash for the next 10 years! I, for one, have no intention of holding cash for the next decade, but I have even less interest in parting with it now to buy stocks (even though we might see a ferocious rally anytime).
Many people might be surprised to know that over the past 10 years, the S&P 500 Index ($INX) has declined by about 10%, even accounting for dividends. Unless you happened to catch a rare low, it's hard to find a significant period in that decade when you would have done better owning stocks rather than holding cash and collecting interest.
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Continuing, Buffett writes that one has to buy before "either sentiment or the economy turns up." A little history here: During the Depression, the Dow Jones industrials ($INDU) hit their low, 41, on July 8, 1932, at a time when gross domestic product had contracted 30% to 40%. Economic conditions kept deteriorating until Franklin D. Roosevelt took office in March 1933. But by then, the market had already advanced 30%.
This is my big concern. We are enduring a credit crisis, but we haven't seen a tremendous amount of economic damage yet. Folks who buy now or drop their guard because Buffett says he's buying stocks may not have a cushion with which to handle the upcoming economic problems. (However, as I noted at the outset, if I am wrong about the severity of our economic problems, then perhaps his advice to buy stocks now will prove to have been prescient and wildly profitable.)
Meanwhile, I note that the list of bulls continues to grow. People whom I respect and who seem to be constructive include Jim Stack of InvesTech Research and Ned Davis. Even longtime bear Jeremy Grantham of GMO, who in his recent monthly letter was sort of neutral, indicated that at right around current prices the S&P represents fair value, although he expects it to overshoot on the downside.
Continued: 2 companies to consider