Time to Buy?

Individual investors will be getting their statements from October.  The news is not good.

Most people react in the wrong way, looking backward rather than forward.  This is the main reason that the individual investor, attempting to time the market, gets about half of the average rate of stock market gains.

Three Factoids

Sometimes the picture can be captured in a snapshot.  Here are three facts to consider:

  • Investors are bailing out of mutual funds.  The latest report is a massive sell of $21.9 billion.
  • Warren Buffett is buying — not just for Berkshire Hathaway, but for his own account.  Doug Kass highlighted the Buffett performance on market calls.  (Full disclosure:  We are fans of Doug Kass, writing for a paid site at TheStreet.com. We write there also.  We were paid subscribers, profiting from the advice, before we joined the team.)  We are quoting at length with the suggestion that readers might wish to get this information in a timely fashion.  Here is part of  Doug's comment from October 20th:
Based on my analysis of his public quotes and opinion, the Oracle of
Omaha has made only three boldly positive market calls in his career;
the latest one was on Friday.
The first two calls were prescient.
    • Bullish call No. 1, 1974: Over the two-year period following Warren Buffett's 1974 call (see above quote), the Dow Jones Industrial Average and the S&P 500 soared by 86% and 70%, respectively, over the next two years.
    • Bullish call No. 2, August 1979: In an interview in Forbes, Buffett stated,

      Stocks now sell at levels that should produce long-term returns far
      superior to bonds. Yet pension managers, usually encouraged by
      corporate sponsors they must necessarily please, are pouring funds in
      record proportions into bonds. Meanwhile, orders for stocks are being
      placed with an eyedropper…. Can better results be obtained over, say,
      20 years from a group of 9.5% bonds of leading American companies
      maturing in 1999 than from a group of Dow-type equities purchased, in
      aggregate, at around book value and likely to earn, in aggregate,
      around 13% on that book value?… How can bonds at only 9.5% be a
      better buy?

      Over the next two decades, the S&P achieved an annualized return of 17.3%, nearly twice the average 9.6% return for bonds.

  • The Gong has Rung.  Our Gong model now indicates an attractive risk/reward environment for equity investors.  The Gong has patiently waited out the massive October volatility, so it deserves some respect.


There are many conflicting straws in the wind for investors.  Much of the media coverage emphasizes what has gone wrong, bailouts, and the potential for a massive depression.

Investors must ask whether equity prices already reflect a severe recession. For our investors we are finding plenty of stocks available at fire sale prices.

And of course, this approach may not be an "instant winner."  There is plenty of skepticism in the market and each investor's situation is unique.

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  • Sebastian November 1, 2008  

    Jeff, just FYI.
    The $21.7 billion figure is actually understated by quite a bit.
    From the Investment Company Institute (mutual fund industry association):
    “…Highlights: Long-term funds – stock, bond, and hybrid funds – had a net outflow of $63.54 billion in September, vs. an outflow of $12.14 billion in August.
    Stock funds posted an outflow of $56.15 billion in September, compared with an outflow of $19.71 billion in August. Among stock funds, world equity funds (US funds that invest primarily overseas) posted an outflow of $22.48 billion in September, vs. an outflow of $17.41 billion in August. Funds that invest primarily in the US had an outflow of $33.67 billion in September, vs. an outflow of $2.30 billion in August…”
    Second, even these large numbers aren’t a record when calculated as a percentage of total assets. In July, 2002 there was an outflow of $52.63 billion from stock mutual funds, representing 1.7% of the total assets (at the time) of $3.09 trillion.
    There are over $4.9 trillion in stock mutual fund assets now, so the September, 2008 outflow of $56.15 billion is “only” about a 1.1% drop.
    I’d agree that for an investor with a long-term perspective, willing to ride-out some wide swings for another year or more, this is likely a good buying opportunity. It’s just that there’s not any particular rush.:)

  • Turley Muller November 2, 2008  

    Buffett buying for his own account, that cracked me up. He said he had always held treasury paper, and now he’s buying stocks. What’s so fascinating is the man is almost 80 years old, an age when one should only have slight exposure to equities.
    Overtime, stocks out perform bonds, but in short-run bonds are less volatile. Thus the equity risk premium compensates for the short-term vol, but in theory, and how Buffett looks at it, in the long-run, stocks are less risky than bonds because they outperform. Having a long-term investment horizon, stocks can be bought at a discount due to equity risk premium which is a risk long-term holders won’t face because short-term volatility isn’t a concern. But what is so compelling is that Buffett said he might move into 100% equities, and he isn’t going to live forever, he’s coming to the end of the rope, so he doesn’t have time to assuage the ST volatility risk. I guess stocks to him look so cheap he can’t help himself but buy them. And that he sees a rebound down the road, sooner than all the panic-stricken invesors who buy selling out, might as well be handing their wallets to Buffett. Jeff, great to hear you mention it, I thought it was pretty significant the old man was buying stocks for his personal.
    I want to be fully invested here because money could pile in a hurry and the market takes off. and I don’t want to miss the upward move.
    That’s going to happen sooner or later. Yet, The market could drop a good bit more, but it will eventually come back. Like said, sooner OR Later. Once it goes up though, it might never come back.
    The fundamentals of our economy are strong, its just we have to work off the housing supply so that home values can start appreciating again. Homes are the underlying collateral for loans/securities held investors/banks which they use as collateral for other ST borrowing, repos, or collateral for creating new securities. It all goes back to the underlying, tangible asset, the real property.
    If all else fails, and/or DC politicians get in the way of the experts Barnanke and Paulson, then we’re just going to have to bite the bullet and government buy up all the housing supply and bull doze it. That’ll bring prices back.

  • Michael Comeau November 3, 2008  

    Jeff, you use the Gong model, but I prefer the Mom model. As in my Mom calling me to tell me that she wants to cash in her IRA and put it all in CD’s. I seem to remember this last happening in 2002!