I have been a big fan of Warren Buffett, as his record is undisputed in the history of investing. I have a small notebook where I write the most important lessons I have read about investments that I keep for my 10 year old daughter, and the person I quote the most in there is Warren Buffett as i think his investment wisdom is beyond most other gurus. I am a holder of Berkshire Hathaway’s stock. Unlike Dog Kass, I think Buffet knows exactly what he is doing and in fact I have even added to my Berkshire Hathaway position in the past 30 days. That said, I cannot understand Buffett’s comments in his Oct. 16 New York Times article “Buy American- I am”. In that article, Buffett was basically telling us to buy stocks of American companies.

Buffett famously wrote: “If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.” I was under the impression that Buffett meant what he said, he would buy American Equity as these prices, as they were looking attractive to him.

Fixed income debt instruments and preferred shares are not United States equities. In fact, as far as asset allocation goes, you add to your fixed income positions when you think stocks are getting to risky for you. So let’s say you would be 60% stocks, 40 % bonds and fixed income, if you want to reduce your risk, because of your lower expectation on future stock returns, you would add to your bonds and other fixed income positions like preferred shares or corporate notes, and you would reduce your equity positions. So from our example of 60% stocks, 40 % fixed income, you may go to 50% stocks and 50% fixed income.

So we cannot count recent purchases by Berkshire in Goldman Sachs preferred, General Electric preferred or Tiffany debt or Harley-Davidson senior unsecured notes at 15% annual interest payment as equity positions, or as Buffett following his own NYT article’s advice. Not only these are deals we mortals cannot get since we are not Buffett, but none of these are American common stocks and therefore do not qualify as “United States equities” as he writes in his article.

Granted, Buffett never wrote in the article that he would buy more stocks for the Berkshire Hathaway’s portfolio, he only talked about his personal portfolio. But still the point remains: if it was such a good deal to buy stocks, why not buy more stocks for Berkshire?

From where I stand, things now get a bit more confusing, as based on the latest 13B fillings; he actually sold a lot of American stocks during the same quarter he wrote his “Buy American” article. He sold a large portion of his positions in : Procter & Gamble (PG), Johnson & Johnson (JNJ), ConocoPhillips (COP), US Bancorp (USB), UnitedHealth (UNH), and most those proceeds went into non equity instruments, like debt or preferred stocks paying Berkshire a very nice yield. A good place to park your money while American equity is going south. Yes, Buffett said he realy did not want to sell them, but then with the money from the sales, Buffett purchased $300 million of debt from USG Corp; preferred shares of Goldman Sachs with a 10% yield; $2.6 billion into Swiss Re instruments with a 12% yield. These are all great allocations with amazing yields, but these are all asset allocations away from “United States equities”.

Buffett wrote: “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.”

Now, he tells us the American economy is in shamble for some time. I assume some people must have purchased equities encouraged by Buffett’s article and they probably would not have done so if he would have told them, I am selling some stocks as I write this article, and I am putting the money in debt instruments with great yields. As a Berkshire shareholder I am happy he got into those great yields, but I am still confused on the article. If Soros would write such an article I would not be confused: since Soros admits to changing his opinion on a dime and one of his traits as a contrarian is that he always considers not only that all others may be wrong in their assumptions but even that he may be wrong in his assumptions. Soros is a trader and that is how he survives and prospers.

But Buffett, unlike Soros, is a long term investor, if he writes something in October 2008 I believe his opinion is not going to change so easily. October may still turn out to be a good time to have purchased United States equities in the long term, but I feel we all may need to get even more skeptical in these hard times of what we hear and read. Some you may not like my conclusion, Buffett is still a great investor but I will put less value on his articles from now on, as he seems not to follow it himself. At the end of the day, nowadays we can only rely on the facts of what actions were taken, what stocks were purchased and what was sold, the rest is just talk,or worst just noise, and should unfortunately be treated as such.

Good discussion, however, I think we all need to re-read his article.

I saw the same confusion over his derivatives article where the defenders of the status quo were critical of Buffett and defended the instrument, completely ignoring the key point to his article - the counterparty and daisy chain risk. Repeatedly, it seemed that the authors failed to read the actual article.

Here's the article link (see below)- Buffett clearly states that he was talking about his personal account directly stating that he's 'leaving aside' his Berkshire Hathaway holdings. Individuals, pensions and insurance companies all have somewhat different operational realities as was made clear by the fact that Buffett was personally able to go to 100% bonds while BRK stayed invested.

[www.nytimes.com]

I should have added, that I think it would be more educational to first determine the differences in those operational realities between Buffett personally and BRK before trying to argue that Buffett's actions were hypocritical in any way.

Moreover, individuals need to look at their own operational realities before adopting any generalized advice.

>But still the point remains: if it was such a good deal to >buy stocks, why not buy more stocks for Berkshire?

Berkshire's most precious asset is not GEICO or Coca-Cola, or even Warren himself; its most precious asset is its reputation for absolute financial stability. That sounds very intangible, as if it has no real value, but it certainly does have value in the here and now; it yields huge cash flows every year not available to any other company. For example:

- Berkshire is the world's only remaining AAA reinsurer and can charge more for a commoditized product. That is a true moat.
- Berkshire was able to write the market puts and some CDS without posting collateral - few other institutions would have that privilege.
- The municipal bond contracts detailed in this year's letter are a great example - Berkshire is getting paid to backstop someone else's commitment.

These cash flows generally come to Berkshire upfront, at little cost, and with any eventual cost deferred into the future while Berkshire's investments compound. If Warren feels he needs to invest a fraction of Berkshire's portfolio at 10% instead of 15% to keep customers and counterparties sleeping tight, that is a bargain.

The explanation Buffett gives for selling JNJ/COP/PG in his letter is, as you would expect, a smart and succinct version of the above.

You raise valid and important points, and this chatter is now all over the Internet and should be addressed.

Your basic analysis, which I have seen elsewhere (seekingalpha.com, etc.), reminds me of the game "whisper down the lane", in that Warren said one thing, but many people heard something else.

[www.nytimes.com]

"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."

So Buffet, as it turns out, was specifically discussing his PERSONAL portfolio, NOT Berkshire Hathaway.

Despite the article's clarity, many people failed to draw the important distinction between what Warren Buffet was doing for himself personally, for his own account, and what Berkshire was doing for its businesses. Each serves a different master with different desires.

Berkshire Hathaway is managing a portfolio of not only investments, but also of insurance firms and policies.

Berkshire must be very careful about its AAA rating, and in the annual report, Buffet specifically mentioned that as the reason for selling JNJ, et. al.

The AAA rating at Berkshire Hathaway is sacrosanct, for among other reasons, it allows Buffet to charge premium prices for insurance, especially now.

As such, Berkshire Hathaway's investment portfolio must have some balance between equity and debt (or debt-like) securities. The preferred stock of GS and GE are debt like securities but with equity kickers in the form of warrants. So, WB was nicely threading the needle there.

Next, Buffet was not railing against good bonds at attractive prices, whatsoever, but only against CASH.

"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."

So the operative word was "cash".

As WB likes to say, he would always take a lumpy 15% return over a 12% return, but Berkshire must balance that desire with its insurance investment portfolio that is rated and graded.

In fact, outside of the NYT, in other conversations on CNBC and the sort, Buffet did talk about the extreme value available in corporate bonds, but analyzing bond value vs. risk is simply beyond most Americans.

There are other issues with bonds, such as that they have limited holding periods, there are different levels of security, and purchasing them is not always so efficient.

Better and easier for most Americans to simply to start buying stocks below Dow 9000. The article specifically mentioned avoiding stocks with lots of leverage and weak competitive positions.

I wish Warren would have mentioned indexes and dollar cost averaging, but maybe that was beyond the scope of his intent, which was to compare equities to cash and to provide some clarity to Americans in the midst of a severe stock market correction.

And what if the markets drop much further?

Well, they have since, and they may continue to fall, but Buffet considered that.

In fact, Buffet dedicated two paragraphs of valuable space in the article to make the point as clear as possible that he could not predict the market lows, and that certainly they could yet come, but that he could not say when they would come, if at all.

The only thing Buffet could say, which he did say, was that at DOW 9000, the stock market was at or below fair value when compared to holding cash.

So, while I understand your points (and the points of others such as Roubini, Grantham, and Shiller), Buffet, in my opinion, was right on point for most American investors to whom the article was targeted.

Buffett is not a macro investor. If you are looking for timing you never should follow him. Macro-oriented investors such as Jim Rogers, Marc Faber, George Soros, and Jeremy Grantham are better at calling macro events.

Even when Buffett is right, it is not a macro signal. For instance, Buffett's most famous call was the 1974 bottom but anyone who casually invests lost more money, if you adjust for inflation, in the late 70's than they probably ever did. The actual bottom was in 1982.

What Buffett is good at is having a sense of valuation. I think he is largely correct in saying that American equities are starting to get attractive--similar to 1974. Don't ever mistake this with the notion that we have hit "the bottom" and somehow passive investors will see continuous gains from here on. Buffett and many other value investors made more money in the late 70's than in the 80's but it was not "the bottom".


Also, if you are a value investor or any sort of contrarian, don't equate the economy with the stock market. Although popular wisdom holds that they move together, that's not really the case at all times. For instance, the stock market had a severe correction from 2000 to 2002 the economy wasn't badly off. Similarly the market crashed in 1987 with no economic problems. Conversely, the economy was very weak from 1933 to 1936 yet we had a massive bull market in stocks (the biggest 4 year gain in American stock market history!) Even now, the economy will likely see low growth whereas the market collaspe doesn't equate to that. Valuation has mattered more than the economy during most of history!!!

>> Berkshire is the world's only remaining AAA reinsurer.

The idea that an AAA rating was worth a lot of money helped create the crisis we are now in. That idea had it's era.

Lloyds for example dominated the reinsurance business for centuriess with a totally different business model. That model eventually failed too. Credit became too easy.

The interesting question is what the new credit market will look like when all this is history. Who will have access to cheap credit and what will be the criteria. Somehow I think the credit markets (and therefore bond markets) of the coming decade will not be the same as the credit markets of the past decade.

credit as in "credence" and "incredible" two words that have some relation to those sacrosanct AAA ratings.

Businesses models based on sacrosanct AAA ratings are dead.

Warren Buffett + Myopic View on stock markets (in this case 6 months)does not equal to good returns....