Warren Buffett may be souring on stocks; The Oracle of Omaha still likes the market — but he’s hardly pounding the table

Warren Buffett may be souring on stocks

By Stephen Gandel, senior editor March 1, 2013: 4:03 PM ET

The Oracle of Omaha still likes the market — but he’s hardly pounding the table.

chart-stocks-gdp2

FORTUNE — In his annual letter to Berkshire Hathaway (BRKA) shareholders, released Friday afternoon, Buffett says he still believes U.S. stocks will “do well.” He notes that he made his first stock purchase during the bleakest part of World War II, so even if things look not so great right now, you should end up doing fine as well. But compare that to last year’s letter. Buffett devoted three and a half pages – over 1,900 words – to a detailed explanation of why he thought stocks were a much better investment than say gold or bonds. (See Warren Buffett: Why stocks beat gold and bonds.) He also said he was bullish on U.S. housing. This time around he devotes four paragraphs to the case for stocks. And even in that small space, Buffett says that investors should expect periodic setbacks, and he includes two statistics that could signal one may be coming up sooner rather than later. Buffett points out that the Dow Jones Industrial Average rose “a staggering” 17,320% in the 20th century — despite “four costly wars, a Great Depression and numerous recessions.” Here’s the problem: During nearly the same period, Buffett says GDP per capita rose much less about 500%. Buffett has used this comparison of the economy to stock market valuations before. He featured the metric in a story he wrote for Fortune back in 2001. (See Warren Buffett on the stock market) By that time, stocks had already fallen a bit from their dot-com infused highs. But they still weren’t a buy, Buffett said at the time. Despite their fall, stocks collectively were trading at a value of 133% of the gross national product of the U.S. (Buffett used GNP because it goes back 80 years, but for recent history using GDP works just fine.)

So where are stocks trading today? You guessed it. 133% of GDP. The metric hit a high of 190% back in 1999. So we are a little ways from panic territory, but that doesn’t mean the market is a safe place to be right now. Far from it. Back in 2001, Buffett said investors who buy when the relationship of stock values to the economy falls in the 70% to 80% range should do well. That means stocks would have to plummet 43% before we are back in Buffett buy territory. Even so, Buffett doesn’t appear to be worried. In his own portfolio, Buffett in the past year has added to his stakes in Wal-Mart (WMT) and Wells Fargo (WFC), two companies that are likely to go up only if the economy and the rest of the market does as well. It’s hard to tell if that’s because Buffett believes stocks are cheap, or just because he believes the other investing options are worse. “The risks of being out of the [stock market] game are huge compared to the risks of being in it,” writes Buffett in the letter. “Every tomorrow has been uncertain.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: