“You should assume you are NOT going to be right when you critique the world’s most successful investor.”

The above comment reflects the type of feedback I received for my November 18th, 2008 article, “Has Warren Buffett Lost His Touch?”

As most of the investment community, I respect Warren Buffett for his financial acumen. Nevertheless, there exists the responsibility to warn investors of adverse financial conditions, like the most recent market meltdown, even if it contradicts Warren Buffett’s point of view.

My November article said the following about Mr. Buffett: “Through his career Buffett survived and thrived through three declines of 40% to 50% (1973-1974, 1987, 2000-2002). Naturally to him a 40% decline may be the benchmark for a buying opportunity.”

Mistake No. 1 – “Buy American. I am”

When Warren Buffett uttered his now famous words: “Buy American. I am” on October 16th, 2007, he merely acted on his accumulated past investment experience which DOES NOT include the Great Depression.

Now even Warren Buffett admits, that the economy has “fallen off a cliff”. This kind of insight would have helped investors a few months ago. Did we really need Warren Buffett to state the obvious? Since Buffett admonished fellow Americans to “Buy American”, the Dow Jones (AMEX: DIA), S&P 500 (AMEX: SPY) and Nasdaq (Nasdaq: QQQQ) have lost another 30% of their value.

Mr. Buffett said he doesn't regret writing the above mentioned commentary, encouraging people to buy U.S. stocks, but in hindsight he wishes he'd waited a few months to publish the piece. On behalf of those who followed his advice, I wish he never had said anything at all about buying. Unlike him, most investors can’t afford a 30% loss.

Mistake No. 2 – “Cash is trash”

According to Warren Buffett, cash is the worst investment option, here’s what he said: “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

If you’d gone against Buffett’s advice on October 16th, you would have 30% more money compared to buying American. But rather than taking a short-term snapshot, how about a long-term big picture?

$10,000 invested in the S&P 500 10 years ago would be worth $5,700 today. $10,000 invested in the safest cash equivalent, T-bills, would be worth over $13,000 today. ETFs tracking short term government bonds include the iShares Barclays 1-3 Year Treasury Bond (NYSEArca: SHY) and SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSEArca: BIL).

Contrary to Mr. Buffett, we recommended to stay away from U.S. equities. In fact, our ETF Profit Strategy Newsletter recommended short ETFs from September to November 2008 and since January 2nd 2009. The recommended short ETFs are up between 75% and 150%.
 

Mistake No. 3 – “America’s best days (and inflation) are ahead”

Mr. Buffett remains confident that America’s best days are ahead. "Everything will be all right. We do have the greatest economic machine that man has ever created." Knowing that Mr. Buffett is a long-term investor, I assume his confidence is predicated on a long-term outlook.

Once again, contrary to his view, our long-term analysis shows that the worst is yet to come. We have analyzed dividend yields, P/E ratio’s, investors sentiment and the Dow measured in the only real currency, gold (NYSEArca: GLD), to determine a long-term outlook.

A look at historical data shows, that the stock market does not bottom until dividend yields, P/E ratios and investor sentiment reach a certain level. The Dow measured in gold is a forward looking indicator. The stock market should soon match the performance of the Dow measured in gold.

Indicative of the implications, we have named the above indicators the “Four Horsemen”. A detailed analysis of the Four Horsemen was published in the March issue of the ETF Profit Strategy Newsletter.

While most investors are concerned about inflation, we were one of the first to point towards deflation, a deflationary depression to be accurate. In a deflationary environment, all asset classes go on sale.

If you look around, that’s exactly what has happened. Since the respective all-time highs, you are able to buy oil (NYSEArca: USO) at a 70% discount. The iShares Dow Jones Real Estate ETF (NYSEArca: IYR) can be snatched up at a 75% discount. Agricultural commodities as represented by the PowerShares DB Agriculture ETF (NYSEArca: DBA) are selling at a 45% discount.

Broad U.S. benchmarks as represented by the iShares Russell 1000 ETF (NYSEArca: IWB) and Vanguard Total Stock Market ETF (NYSEArca: VTI) have melted by over 55%. International indexes have fared even worse. The iShares MSCI EAFE Index ETF (NYSEArca: EFA) has lost nearly 65% of its value.

Over the past two years, the plummeting real estate and stock market have erased some estimated $22 trillion of American wealth. Even though the Fed’s balance sheet has increased by a few trillion dollars, investors’ wealth is evaporating faster than the government can print money. As long as this trend continues, deflation will trump inflation.

On a positive note

As even the Wall Street Journal is making a case for Dow 5,000, I would like to conclude this article on a positive note. The stock market has shifted gears and is now in a bottoming process. Once the bottom is reached, investors will get some much needed relief via a powerful counter trend rally.

When will the market bottom? Where will the market’s ultimate low be? How much higher will the counter trend rally lift stocks? What are the best strategies to benefit? All these questions were answered by a recent special alert sent to subscribers of the ETF Profit Strategy Newsletter.

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