Do you remember the Seinfeld episode where Kramer (accidentally) punched his idol, Mickey Mantle?
I don’t mean to knock on Warren Buffett but it seems he’s lost his touch as of recent. “As of recent” is the key as his long term record makes him the (or one of the) most successful and common sense driven investors ever to set foot on Wall Street.
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.
Buffett’s First Mistake
On Tuesday, September 23rd, Warren Buffett decided to invest $5 billion in Goldman Sachs (NYSE: GS). The markets viewed this as a vote of confidence for the entire financial sector and staged a two-day rally. On Thursday, the Wall Street Journal applauded Buffett’s “hard bargain” as he also negotiated a warrant to buy another $5 billion at $115/share.
$115 per share of Goldman Sachs was considered cheap at the time as GS traded at over $130 with a book value of at least $100. Already on September 15th, over a week before Buffett’s bet, we wrote in our ETF Profit Strategy Newsletter that the financial sector finds itself in a “downward spiral with no stop-loss provision”.
Base your investment decisions on reliable advice - Sign up for the ETF Profit Strategy Newsletter
Our report continued: “One morsel of truth every investor should have picked up over the past few months is that Wall Street’s estimates, assessments and predictions cannot be trusted” (read full article here). If Goldman Sachs has a book value of $100, how come GS now trades at $64/share? So far, Buffett has lost over $2 billion on the Goldman deal.
Buffett’s Second Mistake
In a telephone interview Wednesday morning, Mr. Buffett said he believes the proposed federal bailout will get approved and succeed. He further states that if congress fails to approve the bailout, all bets are off and his investment in Goldman Sachs along with all other investments will get killed.
As we know, congress did approve the $700 billion bill. The S&P 500 (AMEX: SPY) is down over 25% since Buffett’s $5 billion injection into Goldman and over 21% since the bailout bill was approved. Buffett was right and wrong at the same time. The bailout bill was approved AND his investments are getting killed.
Buffett’s Berkshire Hathaway (NYSE: BRK-A) has dropped from $151,650/share to $97,850/share erasing over 30% or $88 billion in shareholder’s wealth. While even the Oracle Of Omaha is trusting in the bailout to fix his stakes in the economy, the ETF Profit Strategy Newsletter already explained on the very same day the bailout was approved by congress, why it will fail (read article here).
Buffett’s Third Mistake
“Buy stocks, cash is trash” Warren Buffett said in an op-ed piece in the New York Times on October 17th. He wanted to make clear that this was advice geared for the long-run, so we don’t want to misconstrue his statement by looking at the performance since his statement.
How did his “cash is trash” philosophy fare over the past 10 years? $10,000 invested in the S&P 500 exactly 10 years ago would be worth $7,500 today. The safest cash equivalent, T-Bills (SPRD Lehman 1-3 Month T-Bill, NYSEarca: BIL) would have returned about 30%, putting you at $13,000.
We don’t encourage investing by looking in the rear view mirror but a look at the numbers shows that the only bull market right now is in cash, short ETFs (and bailouts). If your money would have been sitting in cash for the past year, you’d be able to buy most everything on massive discounts.
The Vanguard Total Stock Market ETF (NYSEarca: VTI) is now available at a 42% discount, the Nasdaq (Nasdaq: QQQQ) could be scooped up at a 45% discount, the iShares Dow Jones US Real Estate ETF (NYSEarca: IYR) is on sale for 39 cents on the dollar. Even the SPDR Gold Trust (NYSEarca: GLD) and iShares Silver Trust (AMEX: SLV) can be snatched up at 22% and 54% lower prices.
Did we mention oil? The United States Oil ETF (AMEX: USO) trades at a 60% discount. The bull market in rice, wheat and corn seems to be over as well. The PowerShares DB Agriculture ETF (AMEX: DBA) has lost 42% of its value.
As outlined in the ETF Profit Strategy Newsletter, the only “condition” that supports a decline of all asset classes is a deflationary depression. This condition is so rare that it is often misdiagnosed and misinterpreted. The last occurrence of a deflationary depression was during the Great Depression.
Is the Dow overvalued? What is the Dow's real value? - Sign up for the ETF Profit Strategy Newsletter
Mr. Buffett, as most investors, did not live during the Great Depression. As mentioned in the outset of this article, his personal experience with bear market benchmarks did not start until 1973.
The ETF Profit Strategy Newsletter points to other, more reliable benchmarks and historic references. An analysis of historic dividend yields compared with current dividend yields and the Dow’s value in real money (gold) provides more trustworthy insight than any one person’s experience.
When Warren Buffett buys, he looks decades ahead. “I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term”, he says. If Mr. Buffett loses half his money, he can still afford to live like a billionaire, we can't.
How long is long term?
It took the stock market 25 years to climb past the pre-Great Depression levels. It wasn’t until July of 1954 that the Dow Jones (AMEX: DIA) was able to reach new highs. Do you have 25 years just to get even?
Most of us will have to take a hands-on approach to squeeze every last basis point out of our portfolio. The ETF Profit Strategy Newsletter is designed to zero in on easy to follow ETF profit opportunities for the pro-active investor. >> Sign up now |
