<<Warren Buffett did not cite this as one of the reasons for his holding on to $36 billion in cash, up from $12 billion a year ago, maybe he felt that it was better left unsaid.>>
He did say: <<The result is that Berkshire Hathaway is now sitting on a cash pile of $36 billion, much of it in government securities. Although, as Mr Buffett puts it, these pay “pathetically low interest”, the pain of doing something stupid is potentially worse.>>
Asset preservation connection to terrorism? Come on! I don't see money flowing to places without any potential terrorism!! But the article shows Bush's tactics are working. People are buying into it.
What works against capital preservation, and destruction of wealth, are governments that are not deflating by cutting taxes and cutting their spending in tandem. Most countries can't afford the governemnts they have and they are not revolting.
Warren Buffett
Sage words
Mar 11th 2004
From The Economist print edition
Everything is too pricey, says Warren Buffett, and risk is ill rewarded
UNLIKE the oracle at the Federal Reserve, the Sage of Omaha speaks plainly. Also known as Warren Buffett, chairman of Berkshire Hathaway, he is probably the world's most revered investor and certainly its richest. And what he has to say often turns out, sooner or later, to be right.
EPA
The price is wrong, says Buffett
In his annual letter to shareholders on March 8th, Mr Buffett touched on many things: the venality of mutual-fund managers; the splendid performance of Berkshire Hathaway's insurance business; bad company management; the tax authorities; the problems with the dollar (for the first time the company is holding $12 billion in foreign currencies); and the peculiar way in which the company bought a house builder called Clayton Homes. But the most striking thing about Mr Buffett's comments is quite how many financial assets are still too expensive for his tastes.
The result is that Berkshire Hathaway is now sitting on a cash pile of $36 billion, much of it in government securities. Although, as Mr Buffett puts it, these pay “pathetically low interest”, the pain of doing something stupid is potentially worse. “Charlie [Munger, his right-hand man] and I detest taking even small risks unless we feel that we are being adequately compensated for doing so. About as far as we will go down that path is to occasionally eat cottage cheese a day after the expiration date on the carton.”
Listed shares have thus fallen from 114% of the company's net worth in the 1980s to about 50%. “In recent years we've found it hard to find significantly undervalued stocks, a difficulty greatly accentuated by the mushrooming of the funds we must deploy,” says Mr Buffett.
Just how expensive shares are depends on how you value them. Those listed on the NASDAQ market defy reason. On March 10th, the fourth anniversary of its tech-bubble peak, the market was trading on a prospective price/earnings (p/e) ratio of 32 and stood 80% above its trough in 2002. The p/e ratio for the S&P500 is a more earthbound 18, according to most estimates—a bit above its long-term average. Much depends, however, on what counts as a sustainable profit: without huge cuts in corporate taxes, for example, earnings last year would have been a third lower.
American stockmarkets
Berkshire Hathaway
James Montier of Dresdner Kleinwort Wasserstein, an investment bank, suggests that using a straightforward p/e is simplistic. In “Security Analysis”, the 1934 classic by Benjamin Graham and David Dodd, the authors suggest that investors use a ten-year moving average of profits, which smoothes out the effect of the business cycle. Nobody, they say, should buy shares with a p/e ratio of more than 16. Mr Montier puts the S&P 500's ratio at 31, about what it was in 1929.
Corporate bonds are hardly a give-away either. Mr Buffett bought $8 billion of them in 2002, when they were very cheap. “The pendulum swung quickly, though, and this sector now looks decidedly unattractive to us,” said Mr Buffett. An index of junk-debt spreads compiled by Standard & Poor's (S&P) has fallen by more than half since its high. Just how quickly the pendulum has swung can be judged by the $1.1 billion in pre-tax profits that Berkshire Hathaway made on its junk-bond portfolio last year. Now they are expensive: “Yesterday's weeds are today being priced as flowers,” says Mr Buffett.
Trouble is brewing, says Diane Vazza, a managing director at S&P. Although bond defaults are falling, this is largely because the economy is benign and interest rates ultra-low. The resulting demand for yield “allows the most speculative grade of issuers access to the capital markets”.
In January and February, 46% of new junk issues carried a rating of B- or less. Over last year as a whole, the figure was 31%, which was in turn higher than in 2002. “When the share of lower-grade issuance exceeds 30% for a sustained period of time,” says S&P, “it generally serves as a reliable indicator of imminent default pressure two or three years ahead”. Mr Buffett, who regularly dons a hair shirt for not selling more stocks in “The Great Bubble”, as he calls it, will presumably not want to make the same mistake twice.
economist.com |
