Make Money Like a Buffet!

Warren Buffet, is now “the richest man alive according to Forbes, passing Bill Gates who has held the title for the past 15 years. Although he is 77 years old, he is still eager as ever doing what he has long done best. His “buy and hold” strategy is in action – he is ready to stock up at bargain prices. Since he is regarded as one of the world’s most successful investors, every move he makes and every step he takes within the financial market is religiously watched and copied.

Currently, Mr. Buffet is buying U.S. stocks for his personal account, claiming that he is picking up “a slice of America’s future at a marked-down price”. According to an interview with CNBC, he wants the world to know that it is time to get greedy right now, as fear sends stock prices plunging across the globe. Although he acknowledges that the Credit Crunch is a total “mess” and will only get worse in the nearest future, he argues that over the long-term the stock market will be good. His anticipation of the market, will hopefully calm some of us down! The Buffet-style tips for dealing with Wall Street’s ongoing turmoil are:

1. "Cash combined with courage in a crisis is priceless"
2. "Don’t invest in things you don't understand"
3. "Don't try to catch a falling knife until you have a handle on the risk"

Last but not least, I must say that I think Buffet is a fascinating character who I truly admire. I think that the main reason for his success is that at the end of the day, business to him is like playing Monopoly. He is not afraid of taking risks and he doesn’t mind to wait! Not only is he the richest man alive, he is also probably the most humble one of us all! He still lives in the same house that he bought in 1958 for $31,500 and plans to give away his fortune to charity! Warren Buffet, is now “the richest man alive according to Forbes, passing Bill Gates who has held the title for the past 15 years. Although he is 77 years old, he is still eager as ever doing what he has long done best. His “buy and hold” strategy is in action – he is ready to stock up at bargain prices. Since he is regarded as one of the world’s most successful investors, every move he makes and every step he takes within the financial market is religiously watched and copied.

Capital Markets Outlook

Recently, I was at an event and heard a presentation from the Chief Investment Officer at RBC Asset Management. As RBC being the 4 largest bank in North America, it has been doing fairly well in this crisis. Now in sum, from what I gather from the presentation is that he is very optimistic. In his 45 min speech I was bombarded with technical analysis and forecasts.

"This crisis is big but the global economy has absorbed some huge hits over the past two decades, and the U.S. balance sheet can accommodate the crisis."

The roots of this crisis is clearly subprime mortgage. What is interesting is that prime mortgage originations have been decreasing since 2005, but in a period of less than a year, u.s. mortgage origination's from subprime rose almost 30%. Why did in one year was there such a large increase in subprime mortgages?

The housing bust is not over, but the rate in change of prices is decreasing.

Some people have a sentiment that there is stagflation however, inflation is receding as a risk.

"Collapse in the equity markets sens indices far below fair value."

"The global stock are now marked down to 1974 levels."

"Research summarizing five banking crises reveals serious declines in equity markets during the first year, then a sharp recovery."

These were some of the statements made by the CIO. In a nutshell, his sentiments is that this is a crisis, and that we are going into recession. However, recession does not mean the end of the world. The financial system will not fail but there will be less economic growth. In the end, we will have to sit this out and wait till investor confidence returns.

The economy is like a giant engine, but throw in a wrench and you can still stall it.

What about Russia?

While browsing news headlines, I came upon a very interesting article about how the crisis has taken on its toll in Russia and how they were handling it.

Currently, the Russian stock market is closed and for good reasons. When the market falls 11.3 percent in half an hour, that surely is a danger sign. That was almost double what CAC40 experienced in a time period of 3 months. You would think that this would cause grand instability and chaos in the Russian economy. However, that is not the case.

In my previous post, I was discussing the role of the media and how it has an influence on people's perceptions of the economy. It looks like the Russian government read my last blog post and are strictly controlling the media. It is forbidden to use the word "crisis" when talking about Russia. You can't say shares are plunging but must use neutral terms. Opinion polls show that Russians think that the economy is in very good shape.
Although I am a firm believe in freedom of speech, Russia shows a good example where the media is controlled in some way in desperate times to achieve stability.

Power of the Financial Media

The current situation in the markets is now being compared to the great crash of 1929. When I read that, I quickly ran towards my window to check for pandemonium. Alas, to my great relief, everything seemed fine and the sky was not falling.

One of the primary reasons for such great volatility is that people are afraid and uncertain. If I owned a substantial amount of shares, upon reading the media, I too would sell everything. That I believe, is the problem. With all the headlines with the headings such as "Market Crash Shakes World" and "World in Turmoil," we are automatically instilled with fear. Individually, as investors we can be rational, but as a population, we do things that are clearly irrational and have the organization of a herd of flamingos. Let us illustrate this with an example, yell "fire!" in a crowded shopping mall, and you could potential have a stampede. Would people stop to ask, where, why, and what? All it takes is for one moron to lose control and chaos arrives. In my opinion, it is the same principle with the financial market. You read the headline "Market Crash" and some investor starts a selling frenzy and others follow suit. Of course it is inherently much more complex than that.

The financial media plays a great role and naturally can offer solutions and hope for the markets. Of course numbers don't lie, and when a market is doing badly, you can't help but yell "sell." What I am trying to say is that the media has an effect and the power to lessen the blow of the markets.

Republican Party

Out of frustration, I would like to badmouth the Republican Party. As I watch CNN on TV, and as I watch all those debates, I get saddened. McCain looks and acts like George Bush. In fact, if we style his haircut just the right way, twins! As a European observer, I tend not to know the exact details and ideologies of each American candidate, but from first impressions I can gather a decent opinion. Thus, what I gathered is that McCain as a symbol is no different than Bush. This of course is my view, and should not be regarded as fact.

Sarah Palin. This nefarious name should make you shudder. When asked “what newspapers do you read?” She answered, “Umm, all of them.” This Alaskan governor slash ultra-conservative slash anti-abortion slash creationist soccer mom can be a potential vice president of one of the world’s most powerful countries. If McCain gets elected and gets kicked out, Palin is there to rule. In the views of Matt Damon, imagine Palin negotiating with Putin. Doesn’t look that great does it?

I guess this was rather a long digression from the financial crisis, but given the outcome, this could lead to a new political crisis. Nostradamus warned us of 3rd World War, and I am sure the name Palin can be associated to some of his quatrains.