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I listen to Warren Buffett’s words carefully. Not because I’m a hero worshipper, but because the Oracle of Omaha knows the investment world inside and out. His conglomerate, Berkshire Hathaway, has returned a compound annual gain of 27.1% over the last 42 years (through the end of 2007). And individually, he is the richest man in the world.
So, what has Buffett been saying lately? Here are some of his comments made last week …
“In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are now.”
“The recession is going to get worse. I don’t want to hold out false hopes that — by some magic bullet — that things will turn around in a couple months.”
“This really is an economic Pearl Harbor. That sounds melodramatic, but I’ve never used that phrase before. And this really is one.”
Discouraging stuff, to say the least. And unfortunately, I agree with all of it.
People are panicking more than I have ever seen. The minute I got back from my trip to Asia, I felt it. The country’s mood had changed. What were once distant possibilities had become immediate dangers.
Everyday Americans, not necessarily even investors, were angry and worried about the pending bailout. My mother asked whether she should move her retirement account to another institution. And this past weekend, while visiting my wife’s family and friends, I was questioned on the markets by nearly everyone I encountered.
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| Warren Buffett is worried about the current environment, but he’s also buying despite his fear. |
There is no question that the worry is well founded. Like Buffett, I have been saying for quite some time that even if our country is not in an official recession, it sure feels like one. Falling investment values, rising prices for daily necessities, money markets freezing out investors … these are serious threats to our nation’s wealth and security.
And I am now certain that we will ultimately see two consecutive quarters of GDP growth before all is said and done, too. That will make it official for the economists, and likely means more downside for stocks in the short term.
However, There Is Also Wisdom in Another Buffett Saying:
That We Should Be Greedy When Others Are Fearful …
This is easier said than done, of course. But some investors — even as they openly worry about our country’s future — are making bullish bets on the U.S.
Buffett is a prime example. While he is talking about the sad state of affairs, he is ACTING on the belief that things will improve.
I have pointed out some of his earlier moves in 2008, but here’s a quick refresher:
His investment firm, Berkshire Hathaway, bought a 60% stake in Marmon Holdings, an industrial group that makes everything from railroad tank cars to wires and cables. The firm plans on acquiring the rest of Marmon over the next several years.
Berkshire bought 751,400 shares of U.S. railroad company Burlington Northern, boosting its overall stake to 17.6%.
Buffett launched a new business unit that will insure bonds.
And he is helping finance two mergers involving companies I recommended to Dividend Superstars subscribers — Wrigley and Rohm & Haas.
Now, just last week, as he made the negative comments I cited above, Buffett committed $3 billion to General Electric and $5 billion to Goldman Sachs in exchange for preferred shares in the two companies.
Yes, he negotiated far better deals for Berkshire than you or I would get. But Buffett’s moves are bullish nonetheless.
And never forget that Buffett has also made billions of bullish bets using options on not just the S&P 500, but also three other unnamed foreign stock market indexes.
While the details are scant, Buffett has said all of these bets expire between 2019 and 2027 and were struck at the market. In other words, he believes stocks — both in the U.S. and in other foreign markets — will be higher 10 years from now than they are today.
Again, I agree with him. History is certainly on our side.
Consider What Has Happened in
Past Bear and Bull Markets …
This latest bear market officially began on July 9, when the S&P 500 index closed 20.5% lower than its high made on October 9, 2007.
How low can stocks go based on history?
The average bear market in the S&P 500 has seen an average loss of 34.1% over 20 months. That would take us to 1031.49, approximately where the index sits today.
It’s worth noting that, technically speaking, the “500” does have a lot of support in the low 1000-range, too. However, the 20-month average would take us out to the summer of 2009.
The last bear market — which lasted from March 2000 to October 2002 — took the entire “500” down 49.1% over about 30 months. If we apply that loss to this cycle’s current high point, we arrive at an S&P 500 bottom of 796.66 somewhere around March, 2010. Yikes!
Worst case, historically speaking? The fiercest bear occurred back in 1937-1942, with the index losing 60% of its value over 62 months. Today, that would mean an S&P 500 of 626.1 in the beginning of 2013.
This table breaks out each historical bear market for you …
|
Bear Markets
|
|||
| START | END |
MONTHS
|
CHANGE
|
| 03/05/33 | 04/28/38 |
62
|
-60.0%
|
| 05/28/42 | 06/13/45 |
37
|
-29.6%
|
| 08/01/52 | 10/21/53 |
15
|
-21.5%
|
| 12/11/57 | 06/26/58 |
6
|
-28.0%
|
| 02/08/62 | 10/06/62 |
8
|
-22.2%
|
| 11/28/64 | 05/25/66 |
18
|
-36.1%
|
| 01/10/69 | 10/02/70 |
21
|
-48.2%
|
| 11/27/76 | 08/11/78 |
20
|
-27.1%
|
| 08/24/83 | 12/03/83 |
3
|
-33.5%
|
| 07/15/86 | 10/10/86 |
3
|
-19.9%
|
| 03/23/96 | 10/08/98 |
31
|
-49.1%
|
| AVERAGE |
20
|
-34.1%
|
|
| Source: S&P Index Services | |||
As you can see by these numbers, there could be plenty more pain ahead. But I want to come back to the greed part … the reason to buy when everyone else is fearful.
I’m talking about what has happened during the average bull market: A whopping 164% return over 57 months!
Take a look at this table for a complete breakdown of past bull markets. As you can see, even the last bull market was good for a 101% gain over five years …
|
S&P Bull Markets
|
|||
| START | END |
MONTHS
|
CHANGE
|
| 05/31/28 | 03/05/33 |
57
|
325%
|
| 04/28/38 | 05/28/42 |
49
|
158%
|
| 06/13/45 | 08/01/52 |
86
|
266%
|
| 10/21/53 | 12/11/57 |
50
|
86%
|
| 06/26/58 | 02/08/62 |
43
|
80%
|
| 10/06/62 | 11/28/64 |
26
|
48%
|
| 05/25/66 | 01/10/69 |
32
|
74%
|
| 10/02/70 | 11/27/76 |
74
|
126%
|
| 08/11/78 | 08/24/83 |
60
|
229%
|
| 12/03/83 | 07/15/86 |
31
|
65%
|
| 10/10/86 | 03/23/96 |
113
|
417%
|
| 10/08/98 | 10/08/03 |
60
|
101%
|
|
57
|
164%
|
||
| Source: S&P Index Services | |||
The historical lesson is clear: Bears can be absolutely brutal, but the ensuing bull runs have always paid off handsomely for patient investors.
Am I saying that right now is the absolute bottom or the time to buy with both hands? No.
But I do think we should all keep the market’s history in mind as we watch the daily ticker tape …
We should pay close attention to what legendary investors like Warren Buffett are not only saying, but DOING ...
And by using strategies like dollar-cost averaging, dividend reinvestment, and hedging with inverse ETFs, we should be setting ourselves up for long-term gains with a strong element of short-term protection.
Best wishes,
Nilus
P.S. I should also note that dividend stocks continue to hold up significantly better than shares that don’t pay dividends. Payers in the S&P 500 outperformed non-dividend stocks in September … year-to-date … and over the last 12 months!
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