Fat lady singing?; Paris.

With the recent market pull-back of over 10%, it’s a good time to ask if the bull market that began in March 2009 is over.

First off, I don’t know, and neither does anyone else. I, like so many others, am speculating on what may happen, not forecasting what will happen. Forecasting short term market direction is foolish. Or, as Warren Buffett put it, “The fact that people will be full of greed, fear and folly is predictable. The sequence is not predictable.”

Given those caveats, I don’t think this market pull-back is the end of this bull market. I have several reasons for this opinion.

1) The governments of the world are still flooding the system with money at zero percent interest rates. It’s unlikely markets will tank with so much easy money available.

2) The governments of the world are still back-stopping every economic problem. Market crashes rarely happen when everyone has just experienced one, or when governments are working so hard to prevent them. Eventually, governments will run out of ammunition, but they haven’t, yet.

3) Lots of economic numbers look good. Granted, commodities like copper and oil have pulled back, but manufacturing data looks strong and railroad shipments are staging a real recovery. These figures may turn down, but for now they are signaling a real recovery.

4) Retail investors were just starting to join the party. I’ve commented before that the general public tends to be a contrarian indicator–do the opposite of what they are doing. Retail investors were just starting to pull money from bond funds and put them into equity funds. I believe they will end up much more fully invested before things really roll over.

I must admit, I was prepared for the downturn. I had bought volatility for both my clients and myself and have mostly cashed out (I invested in a security that goes up when the market goes down). Now, I’m getting reinvested in the same blue chip companies I’ve been recommending for quite some time.

Markets may continue to head down for a bit, and it’s nice to have some hedges against that, but I don’t think the fat lady is singing (yet). It’s a good time to invest in quality companies at cheaper prices.

In the long run, governments will run out of ammunition. When that happens, markets will probably head down by more than 10%. In my opinion, that’s still a couple of years away, but I could be wrong and it could be starting now. Either way, I’m prepared.

On a separate note, my wife and I just got back from a week in Paris, and we had a blast. The food there was simply unbelievable. In fact, my wife and I had the best meal of our lives at a little restaurant called chez l’ Ami Jean (Rue Cler area). Outstanding!

I also found the people of Paris to be incredibly friendly and helpful. It was almost impossible to look at a map and try to figure out where you were without someone stopping to offer help. We tried our French on them, and they were happy to oblige while still being able to speak English when necessary (their English was always better than our French).

Paris is the world’s leading vacation destination, so my recommendation is hardly unique, but I’d highly recommend it to anyone thinking about world travel.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Happy New Year!

I enter 2009 as enthusiastic as I’ve ever been about future returns.

That’s not a forecast for returns this year. I don’t know what returns the market will generate over the next week, month or year, and anyone who tells you they do know is lying.

What I do know is that stock prices are as low as they’ve been relative to fundamental business values since the early to mid 1980’s.

Does that mean the stock market won’t go lower? No.

If the stock market bottoms where it did in the 1970’s, it would be 33% lower than it was at year end.

If the market bottoms where it did in the early 1950’s, it would be 40% lower than it was at year end.

If the market bottoms where it did during the early 1930’s–at its worst during the Great Depression–it would have to go down another 60% or more.

Those aren’t forecasts, that’s just a report of how bad things could get based on historical information.

But, as Mark Twain said, history doesn’t repeat, but it sure does rhyme. No one knows what precisely will happen, even if they get lucky and their prediction turns out to be right.

All a prudent investor can do is invest based on the facts, and the facts say that stocks are cheap. If they get cheaper, then even better bargains will be had. If they get dearer, investors will see their portfolio values climb.

Based on fundamentals, it’s reasonable to expect the S&P 500 to be up 10% – 15%, annualized, over the next 5 years. That’s unlikely to be a smooth path upward, but it’s a very likely outcome.

Even better, carefully selected stocks are likely to do much better than that.

And, that’s why I’m as optimistic as I’ve ever been in my 13 years of investing.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Warren Buffett is buying American stocks

I’m not the only one feeling more bullish lately–so is Warren Buffett (yeh, I’m flattering myself).

Warren Buffett is the richest man in the world and probably the best investor alive today. To top it off, he seems like a grounded, happy guy. He still lives in the house he bought in his 30’s, still drives himself around town, and has good relationships with his kids. Pretty amazing for a multi-billionaire.

Buffett wrote a letter to the editor of the New York Times that was published today titled “Buy American. I Am.” You can access it here to read the whole thing.

Buffett’s basic argument is that because the financial world is a mess, this is a historic time to buy American stocks.

He cautions that unemployment will rise, business activity will slow and headlines will be scary. Despite these issues, he’s buying stocks in his personal account (not just for Berkshire Hathaway, the holding company he runs). Up until recently, his personal money was all is U.S. government bonds. But soon, he will be 100% invested in U.S. equities.

As Buffett has said many times before, “Be fearful when others are greedy, and be greedy when others are fearful.” In other words, buy when everyone is scared and sell when everyone is euphoric. This is very difficult to do, but it is also very profitable.

He cautions against investing in highly leveraged companies and businesses with weak competitive advantages. He also cautions that he can’t predict short term movements in the stock market. Let me let you in on a secret–no one can!!! It may keep going down over the next year or two, but in 5 years, it’s the best place to invest (especially at today’s low prices).

Buffett is seldom if ever outright bullish. But, when he says, “What is likely…is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up,” I stand up and listen. What he’s saying is you can’t wait until things look good to invest, because by then you’ll have missed significant gains. I’ve rarely, if ever, heard Buffett say something so bullish. The last time he seemed to be this optimistic was 1982, and that was an outstanding time to invest.

He goes on to give examples of why waiting doesn’t work. During the Great Depression, the stock market bottomed in the summer of 1932, long before the economic picture improved. During World War II, the market bottomed in the spring of 1942, long before it was clear the Allies would defeat Axis powers. In the early 1980’s, when inflation was double-digit and the economy was in a deep, double-dip recession, the time to buy was in 1982, long before the economy’s recovery was clear in 1983 and 1984.

The lesson from a guy who has generated 20%+ returns for over 50 years is: you buy when everyone is pessimistic, and that time is NOW!

He warns that buying stocks only when you feel comfortable leads to poor results, so does selling because you feel scared.

He also warns against sitting in cash. Holding cash now feels comfortable, but it’s an unwise investment decision. Cash doesn’t pay much of a return, especially now, and it will depreciate in value. As he warns, government policies directed at alleviating the current crisis will probably prove inflationary and make cash an even worse investment.

He believes that “[e]quities will almost certainly outperform cash over the next decade, probably by a substantial degree.” You should invest for where things are going, not for where they are today.

At a time when people are looking for something to hang their hopes on, Warren Buffett is a voice of clarity in the maelstrom. I’m listening, and so should you.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.