Monday, July 27, 2009

Warren Buffet Wrong On Stock Market Prediction

The Oracle of Omaha may have made a rare incorrect prediction when he encouraged investors to buy stocks 9 months ago when the Dow was at 9,000. Today, the Dow is still at about 9,000 so Buffett went on record to reiterate his faith in US stocks. See the following post by Tim Iacono for more.

Don't get me wrong, Warren Buffet is admired around here quite a bit - more so than just about any other billionaire investor - but, going on CNBC this morning and being portrayed as a raging bull probably didn't do him any good in the eyes of those who are a bit more skeptical of the current market rally than is the CNBC staff.

His appearance today comes nine months after his memorable op-ed piece in the NY Times urging investors to buy shares. Coincidentally, the Dow was at about 9,000 back then too.



It's kind of hard to reconcile the "buy when there's blood in the streets" mantra that sounded so good last fall (even though the results weren't so hot) with a similar recommendation today, given the bubbly nature of stock markets around the world where, after the early-July bounce, investors appear to be loaded with optimism once again.

From CNBC this morning:

Warren Buffett tells CNBC that the economy still isn't showing any signs of life but that doesn't mean investors should stay away from stocks for the long-term.

In a live interview on Squawk Box this morning, Buffett says "business is still flat." But he stresses that doesn't mean he's negative on stocks, predicting the market will revive before the economy does.

"The market is very, very likely to turn up before business. But I don't try and time stocks. I try to price stocks."

He repeats his advice from his "Buy American" op-ed in The New York Times last fall: don't wait to buy stocks until the economy improves. By then, he says, you will have missed the biggest stock gains.

Even with the Dow hitting highs for the year around 9000, Buffett repeats his belief that stocks will outperform cash investments, such as Treasury notes, over the long-term. "I would much rather own equities at 9000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money."
From last year's editorial:
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. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

At least he's done a heck of a lot better with his Goldman Sachs shares than most retail investors have done with their mutual funds since last fall.

This post was republished from Tim Iacono's blog, The Mess That Greenspan Made.

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7 comments:

July 27, 2009 at 6:41 AM Anonymous said...

Your headline is misleading, and you omitted the Buffet Op-Ed paragraph most pertinent (and contradictory) to your thesis:


"Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."

September 6, 2009 at 6:42 AM Anonymous said...

Good Post. Thannx

September 6, 2009 at 6:43 AM ersin said...

Your headline is misleading, and you omitted the Buffet Op-Ed paragraph most pertinent (and contradictory) to your thesis:


"Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."

October 1, 2009 at 6:03 PM Anonymous said...

You just compared it with DJIA index, let's not forget the importance of stock picking..if you followed his advice and bought sound companies that were trading way below their fair value the time he wrote his piece, you probably would have made a lot..

And look at the recent rally, 50-60% gain from March lows, the markets indeed rallied before clear signs of economic recovery..

The market discounts future performance not current performance..the market will always move ahead of the economy..

November 11, 2009 at 5:11 PM Market Timing said...

Mr. Buffet tends to buy early and quietly accumulate through the lows. If your pockets are deep enough, that strategy can work. But for most investors, his timing was painful if followed.

I was trading the QID and DXD most of the way down. Those of course move inverse to the markets and were going up while indices were falling. Since March, I've been playing the DDM and QLD which move up twice as fast as the indices.

A simple 50 to 100 day moving average will keep you on the right side of most of these moves ...though as a lagging indicator, you'll end up just a little late to the dance, but you won't miss the whole thing.

November 11, 2009 at 5:17 PM Market Timer said...

Warren is almost always early in buying, but just keeps buying all the way through deeper bottoms.

It's a great strategy if you have his deep pockets, but extremely painful for most investors who try to follow his advice.

November 29, 2009 at 8:07 PM Anonymous said...

What was so "painful" to investors following buffett's advise to buy the dow at 9,000 when it's 10,500 today? That's a 17% return in a year.

People will inevitably respond by saying "but you could have bought it much cheaper if you'd waited several months".

That misses the point and is exactly why buffett is so wealthy and most investors aren't.

Buffett has said investment success has a lot to do with how realisitically you define what it is that you don't know. buffett has the wisdom to be able to do this when most investors can't.

Not being able to reliably predict which way the market will go and when is a very important limitation for investors to acknolwedge if they are to succeed.

Buffett knows that investing is about probabilities not certainties, and the probability of making money goes up when stocks get cheaper. At a certain levelf of extreme "cheapness", risks reduce to close zero and the probability of large gains rises substantailly to an investor prepared to hold stocks until normalicy returns.

An investor who invests under these circumstances will make a lot of money in the long term.

That is the real game and buffett is smart enough to know that. Trying to predict which way the markets will go is a mugs game.

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