Warren Buffet's NYT Article on 16 Oct 08

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.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

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. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Source

Berkshire Hathaway Shares Close Below $100,000 For First Time In Two Years

Shares of Warren Buffett's Berkshire Hathaway closed below $100,000 today (Monday) for the first time in just over two years. The most recent sub-$100K close before today was on October 20, 2006.

.
Today's finish at $95,615 is a fresh two-year closing low. The stock fell $5,385 today, a drop of 5.3 percent. That's the biggest one-day point and percentage decline in three weeks, and the fourth biggest percentage drop of the year.
While Berkshire's Class A stock had traded in five-digit territory on Thursday and Friday, it recovered both days to close above $100K.

.
Berkshire shares are down almost 36 percent from their December 10, 2007 all-time closing high of $149,200. They were in the high $130s as recently as early October.Berkshire has dropped 32.5 percent year-to-date, outperforming the benchmark S&P 500's 42.1 percent decline.

.
Three of the four "bombs in Buffett's books", as designated earlier this year by short-seller Doug Kass, are outperforming both Berkshire and the S&P this year.

.
Coca-Cola is down 28.4 percent, Wells Fargo has dropped 7.8 percent, and Kraft Foods is off 19.4 percent.
American Express, however, is down 62.8 percent year-to-date. A piece in Barron's over the weekend argued that the company is in better shape than its stock price, and speculated that Buffett could come to its rescue if things get really bad.

.Source

Warren Buffett’s 10 ways to get Rich

1. Reinvest your profits - this is the only way to take advantage of compound growth, which is money growing on money.

2. Be willing to be different - you follow the herd, you’re gonna get hurt. Going against the herd may be scary, but can pay off if done properly.

3. Never suck your thumb - If you find something good, act. Don’t sit around doing nothing.

4. Spell out the deal before you start - Get all the details in writing before you follow through.

5. Watch small expenses - The article mentions a guy who counted 500-sheet rolls of toilet paper to make sure he wasn’t being ripped off. That seems a bit extreme to me but I see the point of not wasting money.

6. Limit what you borrow - I believe that the only acceptable forms of debt are student loans, car loans (reasonable car loans), mortgages, and possible 0% deals that may pop up every once in a while. Now, don’t mistake that sentence to mean that I think it’s okay to have debt—that’s not what I’m saying. The main thing is to use debt as a tool and use it wisely.

7. Be persistent - Always remember the saying: “If at first you don’t succeed, try, try again.”

8. Know when to quit - You have to know when to say, “when.”

9. Assess the risks - Do some worst-case-scenario analysis before you proceed. In other words, count the costs before you begin.

10. Know what success really means - I love the fact that Buffett is not on an ego trip with his giving. According to the article, Buffett does not want any buildings named after him. That’s soooooo cool! I really respect that about him.

Warren Buffett Echoes His 1974 Advice: Buy Stocks

Ever since Warren Buffett penned his New York Times op-ed piece Buy American. I Am. last month, investors everywhere from blogs to Barron’s have been questioning the soundness of his advice to purchase stocks. Mr. Buffett stated, ”A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” He also warned us that trying to time the markets was dangerous, since it means we might miss a market recovery:

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. So if you wait for the robins, spring will be over.

Remarkably, Mr. Buffett’s exhortation to buy stocks today echoes the prescient advice he gave back in 1974 in a Forbes profile of him entitled “Look At All Those Beautiful, Scantily Clad Girls Out There!”

Economic uncertainty was arguably worse in 1973-’74 than today. Our rivers and lakes were polluted; people were worried about natural-resource scarcity; the U.S. was bogged down in Vietnam; Watergate broke and Nixon resigned; and the Organization of Arab Petroleum Exporting Countries (OPEC) organized an oil embargo against the U.S. for supporting Israel during the Yom Kippur war. From January 1973 to December 1974, the S&P 500 Index declined from peak to trough a whopping 48%. All of which led people to conclude that the so-called American Century had come to a premature and undignified end.

It was in this 1974 environment that Mr. Buffett told Forbes,”Now is the time to invest and get rich.” He stated:

You can’t invest in the anticipation of calamity; gold coins and art collections can’t protect you against Doomsday. If the world really is burning up, “you might as well be like Nero and say, ‘It’s only burning on the south side."

“Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices.”

As it turned out, 1975 was one of the best years ever for the U.S. stock market, and seven years later began the longest bull market the world has ever seen.

Today, we don’t know whether the coming months will be 1974, 1975, or something altogether different. But with the S&P 500 Index down 44% from its all-time high of 1,565 on Oct. 9, 2007, and with Mr. Buffett telling us once again that we should consider purchasing stocks, it might behoove us to listen. After all, the Sage of Omaha also warned us back in 1999 about tech stocks and the so-called New Economy.

Here’s what Mr. Buffett is telling us right now:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Source

Warren Buffett

We all have someone whom we admire and respect. For me one person on my shortlist is Warren Buffett who is sometimes referred to as the “Sage of Omaha“. I first heard about Buffett back in 2001 when I first started getting serious about investing and so I started reading all the titles with his name on it. Off course Buffett hasn’t actually written any of them but they were priceless none the less.

If you have never heard of Buffett, Forbes currently ranks him as the third richest man in the world and he is arguably the world’s greatest investor. He has amassed his fortune by making astute investment decisions and investing in businesses. Here is what I have learnt from Buffett:

1. Rich Is A State Of Mind
“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” - Warren BuffettThe difference between being poor and being rich is really just a state of mind. Poor people think thoughts of poverty and lack, rich people think thoughts of abundance and prosperity. Your beliefs are going to determine the way you perceive wealth, the decisions you make and the way you act towards it.

2. Success Is More Than About Your Bank Balance
When asked by CNBC what is the secret to success, Buffett replied “If people get to my age and they have the people love them that they want to have love them, they’re successful. It doesn’t make any difference if they’ve got a thousand dollars in the bank or a billion dollars in the bank… Success is really doing what you love and doing it well. It’s as simple as that. I’ve never met anyone doing that who doesn’t feel like a success. And I’ve met plenty of people who have not achieved that and whose lives are miserable.”

3. Spend Less Than You Earn
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” -Warren Buffett

It seems like common sense advice and you’ve no doubt heard financial experts preaching about it for years. You can’t possibly get ahead financially if you’re spending more than your paycheck. Buffett is famous for living a simple and frugal lifestyle. He is the only billionaire I know that still lives in the same house he bought back in 1958 for $31,500. He drove a 2001 Lincoln Town Car for years which he bought second hand. Buffett has a net worth in excess of $52 billion and yet lives off an annual salary of $100,000. The relative percentage of his spending based on his overall net worth is minuscule.

4. Avoid Consumer Debt
The sooner we realize that consumerism is a social plague that has been propagated by billion dollar marketing machines to keep you shackled to your job, the sooner we can stop spending money on useless stuff. It is a fool’s game to spend today so that you can work tomorrow to pay it off. It is a losing proposition because one day your working days are going to be over but the debt is still going to be hanging over your head. Clever marketing has convinced our society that to be happy you have to have more, be more and do more. Buffett abhors consumer debt instead choosing to use debt wisely by leveraging it in investments. To help you deal with your debt consider reading “How To Get Yourself Out Of Debt“.

5. You Are Who You Associate With
“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” -Warren Buffett

If you want to succeed financially you need to associate with people who are most conducive to encouraging and cheering on your financial journey. If the people you associate with see money as evil, object to capitalism and find wealth a foreign concept then your financial health and well being is going to be influenced by their views. Whether we like it or not we are all influenced to some extent by the people we spend our primary time with. If you aspire to achieve financial security then you need to find a mastermind of people in your life whom you can all encourage and help each other.

6. Gambling Is A Fools Game
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” - Warren Buffett

While we are young and naive we choose to take risks with our money that are dumb and stupid. Trying to hit a home run with your money every time is a losing proposition with long term consequences. To chase investments that offer a high rate of return you must also assume that it also comes with a higher rate of risk. Bill Gates once quipped “Warren’s and my betting has always been confined to $1 bets” when talking about them paying poker together. If two billionaires take risk management this seriously, it’s time we average punters did the same thing.

7. Give Back To The Community
“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.” - Warren Buffett

They say that to have more you need to give more. A contradiction in terms, maybe, but it’s a simple truth that is as enduring as time. As the bible says “It is more blessed to give than to receive -Acts 20:35”. Buffett has announced in 2006 that he was giving away over $30 billion to the Bill and Melinda Gates Foundation making it at the time of writing the largest charitable donation in history. He also contributes large sums to his children’s charitable foundations.

8. Generosity and Abundance Goes Hand In Hand
“Even though Ben Graham [Buffett's mentor] had everything he needed in life, he still wanted to give something back by teaching, So just as we got it from somebody else, we don’t want it to stop with us. We want to pass it along too.” - Warren Buffett

A famous bible quote goes: “What benefit will it be to you if you gain the whole world but lose your own soul?” - Mark 8:36. The path to wealth isn’t a solo endeavor. How sad would life be if you come to the end of your life and there is no one to share it with. So as you journey on your path to financial abundance remember that there will be many people who generously helped you on your journey so it is only fitting to pay it forward when the opportunity arises. Generosity with your time, with your money, with your resources are great virtues to have. The greatest ally to building a strong friendship is to help others achieve what they want from life.

I leave you with this last quote “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” - Warren Buffett


Source

Warren Buffett’s Value Investing Style

Warren Buffett is the world famous stock marketguru. Recently, he bought stakes of General Electric Co (GE) and Goldman Sachs Group. General Electric Co (GE) is a technology and services giant company which is listed in Dow Jones board; whereas, Goldman Sachs Group (GS) is a financial heavyweight company, which is listed in New York Security Exchange (NYSE). Through his famous investment company; Bershire Hathaway, Buffett invested US$8bil in these two companies. His action startled many people in stock market. When everybody was taking their money out from the Wall Street, he invested such a huge amount of money. There is no surprise actually because he at one time said that the best time to enter the market was when everybody was not interested in stocks. He also stated that it was difficult to buy a popular stocks and made profit from it. Besides, he also said that when everybody was in fear was the best time to enter the market but not when everybody was greedy. According to financial specialists, Buffett investment is a long term investment.

Currently, stock prices are considered as irrational due to the heavy sell down. So, now it is the best time to invest. When investing in a company, we should invest to the company management and market strategy. In this type of investment, good stocks should be held as long as possible by the investors.

When investing in stock market, Warren Buffett is very careful. He sets very strict requirements to select stocks. So, stocks that fulfill his requirements are seldom being found. Earnings versus growth, high return on equity, minimal debts, strength of management and simple business model are five main criteria, which are used by Buffett to select stocks to invest. He usually concentrates in a few solid stocks, which able to give high return of investment. These few stocks usually are in the industries that he understands the most. He is also very careful to the local bourse, which is an emerging market that could be very volatile. Besides, he is also watchful to the market sentiment, which could be easily affected by many other external factors.

Good stocks are worth to hold for as long as possible. This is because good stocks such as blue chip stocks are able to ride through bad times and recover over time. Buffett is the most successful and trusted investors. His investments in GE and Goldman Sachs will restore the confidence of some of the investor on the Wall Street. When Buffett invests in stocks, underlying fundamentals of a company are the must will be investigated by him rather than market sentiment. Because of his astute investment skill, he is dubbed as “The Oracle of Omaha”. Intrinsic value of a business is always will be determined by him and he is willing to pay a good price for it as long as the business has the intrinsic value. Buffett is very prudent and holds a principle that if he can not understand the operation of the business; he will not invest in it. That’s why, he escaped the dotcom market crash. He will check the fundamentals of the companies that he intends to invest by analyzing the companies’ annual reports. This is his simple investment principle.

He is the chairman of Berkshire Hathaway and this company’s stock is the most expensive on Wall Street. In a letter last year to his shareholders, he stated that Bershire was looking to invest to the companies, which had competitive advantage in a stable industry for long-term prospects. His philosophy is that the stock price will increase as long as the business does well. Investment in PetroChina, which is an oil and gas firm in China, was one of his most successful investments. He bought the stake for this company for an initial sum of US$500 mil and then sold it for US$3.5 bil. Investments in companies such as Coca-Cola, American Express and Gillette are also among his successful investments.


Source

Is it the Right Time to Buy the US Stocks?

EVERY time the market suffers another steep drop, it’s tempting to think that stock prices may have come down so much that the elusive market bottom is finally in sight.

Prices have certainly come down. On Friday, the Standard & Poor’s 500-stock index was 44 percent below its peak of a little more than a year ago. Since then, the price/earnings ratio on the S.& P. has dropped from 16.8 all the way down to 12. With numbers this low, is the sell-off nearing an end?

It’s certainly possible, and some canny investors have begun nibbling at stocks. But don’t count on being able to time the market.

While cheap stock prices are always a welcome development for bargain-seeking investors, low P/E ratios haven’t always been an accurate gauge of predicting turnarounds in the market.

If they were, stocks would have surged sharply in the mid to late ’70s, when the market’s P/E ratio sank into single digits. Instead, the S.& P. was pretty much flat throughout that time.

“Cheap valuations are simply a symptom of what’s wrong, not the catalyst to get the market out,” said Richard Bernstein, chief investment strategist at Merrill Lynch. After all, just because stocks are trading at extremely low levels today, it doesn’t mean they can’t become even cheaper tomorrow.

To be sure, investors may be hopeful now that some respected investors — including Warren E. Buffett, chief executive of Berkshire Hathaway, and Jeremy Grantham, a chairman of the investment management firm GMO — say they’ve begun to selectively buy stocks.

But both have gone to painstaking lengths to stress that they weren’t predicting that the worst of the sell-off was over.

In an Op-Ed article in The New York Times, Mr. Buffett wrote: “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.”

Similarly, Mr. Grantham said in an interview that even though his firm began buying stocks in early October, after prices fell to attractive levels, the market had a tendency to “overshoot” during sell-offs. “Market bottoms have this Murphy’s Law style of being much lower than you ever expected in your worst nightmare,” he said.

Mr. Grantham adds that he thinks the odds are roughly two to one that stock prices will sink to new lows next year. If the economy is in a modest recession, Mr. Grantham thinks the S.& P. could fall from its current level of around 870 down to 800. But if the recession turns out to be a severe one, “the S.& P. could fall to a range that’s closer to 600 than 800,” he said.

If that’s the case, why did GMO begin to buy stocks in this market? Because Mr. Grantham doesn’t believe in trying to time short-term market moves.

Mr. Grantham noted that GMO began buying only after its portfolios had fallen below some key thresholds. For example, in GMO’s global balanced portfolio of stocks and bonds, the firm’s minimum allocation to equities is usually 45 percent. But after the market sell-off, that equity allocation dipped to around 38 percent. So once stock prices began to look attractive, GMO started rebalancing back into what it regards as the most undervalued types of equities: emerging markets stocks and high-quality domestic blue chip shares. After a few rounds of purchases, stocks now make up around 55 percent of GMO’s global balanced portfolio.

Mr. Grantham says that although he doesn’t know how well he timed his purchases, “we do know that seven years out, these will be good purchases for us.”

But what if you are determined to be opportunistic? How can you tell if the market is poised to rebound anytime soon — or at least sooner than seven years?

There is no sure-fire answer. But one way is to pay close attention to the asset allocation recommendations of Wall Street strategists. “It turns out to be a tremendous contrarian signal” for spotting market trends, said Mr. Bernstein.

For more than two decades, Mr. Bernstein has tracked recommended equity allocations in balanced portfolios managed by Wall Street firms. He found that when the consensus recommendation for stocks exceeds 60 to 65 percent of a balanced portfolio — as was the case between 2000 and 2004 — it tends to be a bearish indicator for future stock performance. On the other hand, when market strategists recommend keeping only around half of your portfolio in stocks, as was the case in 1997, it tends to be a bullish sign.

In addition to investor sentiment, it’s also worth keeping tabs on the sentiment of another group of Wall Street pros: the analysts who follow individual companies.

In recent weeks, these analysts have begun to lower their forecasts for 2009 earnings. Mr. Bernstein notes that for the first time in seven years, the ratio of upward earnings revisions to downward revisions has fallen to 0.5 — meaning that for every corporate earnings forecast that has grown more positive, two have become more pessimistic. “Analysts may be finally appreciating that the financial crisis has turned into a full-blown economic crisis,” he said.

Still, analysts are far from throwing in the towel on their earnings forecasts, which may be needed for the market to start to rally.

While profit projections have declined, they may still be way too bullish. According to a survey of analysts by Thomson Financial, earnings growth estimates for S.& P. 500 companies in 2009 have fallen well below the rosy 22 percent forecast at the start of October. Still, they’re expecting corporate profits to grow more than 12 percent next year. Since many are predicting a difficult first half of the year, thanks to the weakening economy, this would assume a tremendous profit surge in the latter half of 2009.

Christopher N. Orndorff, head of equity strategy at Payden & Rygel, an asset manager based in Los Angeles, predicts that “the earnings releases in January are going to be poor.” That should drive down earnings forecasts for 2009 even lower, he said.

If earnings forecasts begin to fall substantially, he said, “it will be very difficult for stocks to rally.”

By PAUL J. LIM

Source

Will Warren Buffett Rescue American Express? (AXP)

Barrons had an interesting piece on American Express (AXP) today, suggesting Warren Buffett may come to the aid of the credit card company.

Warren Buffett and American Express have a long relationship and a deep one as well, with Buffett’s Berkshire Hathaway owning about 13% of the company already. The thought is that Mr. Buffett may be willing to invest more dollars into the company or potentially use stock to acquire the company outright. That would not be the norm, as Berkshire Hathaway prefers using cash in its transactions.

We have been following the follies of American Express, and have continued to warn investors that the company made some badly-timed decisions that has put the franchise in a tough position. Management’s timing to expand the credit card portfolio in 2004 put the wheels in motion on the huge credit card losses the company is now dealing with.

The Bottom LineMr. Buffett will likely demand terms similar to his Goldman Sachs (GS) deal, but that is if he feels the bet should be made. With all the deteriorating financials out there, and Berkshire themselves coming off a disappointing quarter, the timing of any American Express deal may be far off and perhaps unlikely. One thing we do know is that there are no signs that the company will be turning around anytime soon, so investors may need to put this name on the shelf until the spending slowdown and the credit card loan defaults trends improve. The company has a dividend yield of 3.60%, based on Friday’s closing stock price of $19.99.


Source

Memo to Warren: AmEx Preferred at 15%, Warrants at $12

Barron's is suggesting that Warren Buffett might come to the rescue of American Express (AXP). Since Berkshire Hathaway (BRK.A) already owns 13% of the troubled credit card issuer, a rescue might make sense. If, that is, Mr. Buffett can price his entry in line with the new reality governing yields and valuations.

On Monday, Fed officials announced that an application to transform American Express into a bank holding company had been approved. Two days later, the company confirmed that it was seeking $3.8 billion in government aid. But that is only part of the story. Besides needing $4 billion from the commercial paper market, American Express must raise nearly $7 billion in longer-dated debt within six months, and another $15 billion within the next year. Quite clearly, Chief Executive Ken Chenault’s strategic decision to rapidly expand the domestic credit card portfolio from $38 billion, in 2004, to $70 billion failed to incorporate the prospects of a serious economic downturn.

American Express shares are down 60%-plus so far this year. So the challenge facing Warren Buffett, or any other investor with deep pockets, is to determine whether (a) the inevitable increase in credit card delinquency rates, domestically and globally, has been factored in at current price levels and (b) the 10% yield on Goldman Sachs (GS) and General Electric (GE) preferred stock investments adequately reflects the reality in this instance, on a company-specific and comparative basis, of today’s fluid bond pricing environment.

If American Express and Berkshire Hathaway longer-dated CDS spread trends are any guide, Mr. Buffett should provide around 850 basis points for default risk alone. Then, given the nature of the yield curve, a more prudent fixed rate benchmark is about 5%. After adding execution costs, a rationally priced preferred should yield 15%.

Of course, as Barron's pointed out, the 5% preferred-with-warrants proposition from the Treasury appears, at first glance, to be a decidedly better alternative for American Express, particularly when the credit card company could also access the FDIC guarantee programme for near-term and medium-term debt issues. But the finer print of the FDIC’s Interim Rule has received serious objections relating to fees, maturity restrictions, guarantee quality and even capital adequacy guidelines. When, if and at what cost the FDIC programme begins is still an open question. In the interim, there is certainly room for Berkshire Hathaway to increase its stake in American Express.

Which brings us to the task of establishing a strike price for the warrants. When Moody’s cut its rating on American Express last month, from “A2” from “A1”, it placed the company on negative watch. And for good reason. Moody’s statement warned that since American Express derived much of its income from fees, as opposed to interest from revolving credit balances though “its lending exposures have increased significantly over time.” Note the important shift in key value drivers.

The statement went to on to point out that “with this shift, eroding economic conditions across the US will likely pose a higher burden on Amex’s asset quality and profitability. In its latest disclosure documents, Citigroup (C) conceded that it is virtually impossible, at this point in time, to assess how the fate of the global economy will influence the quantum of credit card default provisions required during 2009. Note the uncertainty.

This writer’s bearishness on American Express shares (Friday close: $19.90) is firmly rooted in the belief that unless Washington can resolve the crisis in jobs (including job quality) and housing on a high-priority basis, consumer delinquencies must rise exponentially in forthcoming weeks and months. Believe the optimists, who invariably talk of 5-year and 10-year time horizons, if you must. For the record, if this is any comfort to AXP bulls, Barron's is of the view that the market is presently over-reacting, and that American Express has ample liquidity to ride out whatever tough economic conditions lie ahead.


Source

Warren Buffett: Why I’m Buying U.S. Stocks Now

Warren Buffett wants the world to know that it’s time to get greedy right now, as fear sends stock prices plunging across the globe.

Using the widely-read opinion pages of The New York Times, Buffett writes that he’s been buying U.S. stocks for his personal account, picking up a “slice of America’s future at a marked-down price.”

READ WARREN BUFFETT’S NEW YORK TIMES OPINION PIECE

Besides his Berkshire Hathaway shares, Buffett reveals that he used to own nothing but U.S. bonds. Now, he writes, “If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent” in American stocks. (Remember, he’s talking about his own holdings, not the billions of dollars of stock owned by Berkshire Hathaway itself.)

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”


Source

So How Does Warren Buffett Find Low-Priced Value?

Here we look at some of the questions that Buffett asks himself when he evaluates the relationship between a stock's level of excellence and its price. Keep in mind that these are not the only things that he analyzes:

1. Has the company consistently performed well?

Sometimes ROE is referred to as "stockholder's return on investment." It tells the rate at which shareholders are earning income on their shares. Warren Buffet always looks at the return on equity (ROE) to see whether or not a company has consistently performed well in comparison to other companies within the same industry. ROE is calculated as follows:


= Net Income
Shareholder's Equity

Just having a high ROE last year isn't enough. The investor should view the ROE from the past five to ten years to get a good idea of the historical growth.

2. Has the company avoided excess debt?

The debt/equity ratio is another key characteristic that Warren Buffett carefully considers. Buffett prefers to see a very small amount of debt, which means earnings growth is being generated from shareholders' equity. The debt/equity ratio is calculated as follows:

=Total Liabilities
Shareholders' Equity

This ratio indicates the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt--rather than equity--is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities.

3. Are profit margins high? Are they increasing?

The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates that the company is executing its business well, but increasing margins means that management has been extremely efficient and successful at controlling expenses.

4. How long has the company been public?

Buffett typically considers only companies that have been around for at least ten years. As a result most of the technology companies that have had their IPOs in the past decade wouldn't get on Mr. Buffett's radar. It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. Never underestimate the value of historical performance, which demonstrates the company's ability (or inability) to increase shareholder earnings. Do keep in mind, however, that the past performance of a stock does not guarantee future performance--the job of the value investor is to determine how well we can trust that the company has a capacity to perform as well as it did in the past.

5. Do the company's products rely on a commodity?

Initially you might think of this as a radical approach to narrowing down a company, but Buffett tends to shy away (but not always) from companies whose products are indistinguishable from competitors, and those that rely solely on a commodity such as oil and gas. He does not put his money into companies that rely on the price of an underlying commodity. If the company does not offer anything different than another firm within the same industry, be wary as a value investor.


6. Is the stock selling at a 25 percent discount to its real value?

6. Is the stock selling at a 25 percent discount to its real value?

This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the key for value investing, and finding a company that is trading at a 25 percent discount is not always easy. To check this, we must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues, and assets. A company's intrinsic value is usually higher than its liquidation value, which is what a company would be worth if it were broken up and sold today--the liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements.

Once Buffett determines this intrinsic value of the company as a whole, he compares it to its current market capitalization, which is the current total worth (price) of the entire company. If his measurement of intrinsic value is at least 25 percent higher than the company's market capitalization, Warren Buffet sees the company as one that has value. Sounds easy, doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his criteria, we certainly have no way of knowing exactly how he gained such precise mastery over calculating value.

Conclusion

Well, as you have probably noticed, Warren Buffett's investing style, like the shopping style of the bargain hunter, reflects a practical, down-to-earth attitude. This attitude Buffett maintains toward also his lifestyle and overall philosophy on life: he doesn't live in a huge house, he doesn't collect cars, and he doesn't take a limousine to work. The value-investing style is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2003, he holds the title of the second richest man in the world, with a net worth of over $30 billion (Forbes 2003). If you choose to practice this kind of investing style, keep in mind that it takes time to do the proper analysis and to get good at it.

Source

What is the Buffett Investing Philosophy?

Value investing looks for stocks whose prices are low for their companies' supposed intrinsic worth, which is determined by an analysis of certain characteristics and fundamentals of companies. Mirroring the mentality and shopping style of a bargain hunter, value investors looks for products that are beneficial and high quality but cheap in price. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not quite recognized as such by the majority of other buyers.

Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the Efficient Market Hypothesis but trust that the market will eventually properly start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't concerned with the supply and demand intricacies of the stock market. In fact, he is not really concerned with the activities of the stock market at all. He chooses stocks solely on the basis of their overall potential as companies--he looks at each company as a whole. Holding these stocks for the extended long term, Warren Buffett seeks not capital gain but ownership in quality companies that are highly capable of generating earnings. When Warren Buffett invests in a company, he is not concerned whether the market will eventually recognize the company's worth; he is concerned with how well that company can make money as a business.


Source

Warren Buffett Buys Eaton Corp., ConocoPhillips, U.S. Bancorp., NRG Energy Inc., Sells Bank of America Corp.

The long awaited Warren Buffett portfolio is out today after the market close. Berkshire has a new position Eaton Corp., and adds to ConocoPhillips (COP), as GuruFocus has anticipated. These are the details of the buys and sells during the third quarter.

Warren Buffett buys Eaton Corp. during the 3-months ended 09/30/2008, according to the most recent filings of his investment company, Berkshire Hathaway. Warren Buffett owns 40 stocks with a total value of $69.9 billion. These are the details of the buys and sells.

New Purchases: ETN,
Added Positions: COP, NRG, USB,
Reduced Positions: BAC, WTM,

For the details of Warren Buffett's stock buys and sells, go to http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett

Added: ConocoPhillips (COP)
Warren Buffett added to his holdings in ConocoPhillips by 40.66%. His purchase prices were between $72.74 and $90.46, with an estimated average price of $80.2. The impact to his portfolio due to this purchase was 2.54%. His holdings were 83,955,800 shares as of 09/30/2008.

ConocoPhillips is a major international integrated energy company with operations in some 49 countries. ConocoPhillips has a market cap of $70.65 billion; its shares were traded at around $49.18 with a P/E ratio of 3.89 and P/S ratio of 0.31. The dividend yield of ConocoPhillips stocks is 3.61%.

Added: U.S. Bancorp (USB)
Warren Buffett added to his holdings in U.S. Bancorp by 6.27%. His purchase prices were between $25.43 and $37.53, with an estimated average price of $31.1. The impact to his portfolio due to this purchase was 0.22%. His holdings were 72,937,126 shares as of 09/30/2008.

U.S. Bancorp is a financial services holding company. They operate full-service branch offices and ATMs and provides a comprehensive line of banking brokerage insurance investment mortgage trust and payment services products to consumers businesses and institutions. U.S. Bancorp is the parent company of Firstar Bank and U.S. Bank. U.S. Bancorp has a market cap of $46.15 billion; its shares were traded at around $27.38 with a P/E ratio of 13.20 and P/S ratio of 4.06. The dividend yield of U.S. Bancorp stocks is 5.7%.

Added: NRG Energy Inc. (NRG)
Warren Buffett added to his holdings in NRG Energy Inc. by 54.41%. His purchase prices were between $26.41 and $41.97, with an estimated average price of $35.5. The impact to his portfolio due to this purchase was 0.06%. His holdings were 5,000,000 shares as of 09/30/2008.

NRG Energy Inc owns and operates a diverse portfolio of power-generating facilities primarily in the United States. Its operations include baseload intermediate peaking and cogeneration facilities thermal energy production and energy resource recovery facilities. NRG Energy Inc. has a market cap of $5.28 billion; its shares were traded at around $23.85 with a P/E ratio of 6.00 and P/S ratio of 0.83.

New Purchase: Eaton Corp. (ETN)
Warren Buffett initiated holdings in Eaton Corp.. His purchase prices were between $57.41 and $81.71, with an estimated average price of $71.1. The impact to his portfolio due to this purchase was 0.23%. His holdings were 2,908,700 shares as of 09/30/2008.
Eaton Corporation is a global diversified industrial manufacturer. Eaton is one of the leaders in fluid power systems electrical power quality and controls automotive air management and fuel economy and intelligent truck components for fuel economy and safety. Eaton Corp. has a market cap of $6.79 billion; its shares were traded at around $42.58 with a P/E ratio of 5.66 and P/S ratio of 0.46. The dividend yield of Eaton Corp. stocks is 4.45%.

Reduced: Bank of America Corp. (BAC)
Warren Buffett reduced to his holdings in Bank of America Corp. by 45.05%. His sale prices were between $21.24 and $37.48, with an estimated average price of $30.3. The impact to his portfolio due to this sale was -0.11%. Warren Buffett still held 5,000,000 shares as of 09/30/2008.

Bank of America Corp. is one of the world's leading financial services companies. Bank of America provides individuals small businesses and commercial corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever wherever and however they choose. Bank of America Corp. has a market cap of $82.39 billion; its shares were traded at around $17.1 with a P/E ratio of 14.28 and P/S ratio of 1.80. The dividend yield of Bank of America Corp. stocks is 10.59%.

Reduced: White Mountains Insurance Group Ltd. (WTM)
Warren Buffett reduced to his holdings in White Mountains Insurance Group Ltd. by . The impact to his portfolio due to this sale was 0.97%. Warren Buffett still held 89,279 shares as of 09/30/2008.

White Mountains Insurance Group Ltd. is engaged in the business of property and casualty insurance and reinsurance. White Mountains Insurance Group Ltd. has a market cap of $3.33 billion; its shares were traded at around $348 with P/S ratio of 0.96. The dividend yield of White Mountains Insurance Group Ltd. stocks is 2.32%.


Source

From WARREN E. BUFFETT

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.

Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

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. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Source