Why Buffett Loves This Market Turmoil

Published in Investing on 9 August 2011

Words of advice from the world's greatest investor.

As I write these words, London's flagship FTSE 100 index is a number beginning with a "4" -- and not a "5" or a "6". Given that the market was above 6,000 a month ago, that's scary stuff.

And, of course, other markets around the world have experienced similar -- if not even greater -- falls in value.

Yet one man, I guarantee you, will be rubbing his hands in glee, or greed, or both. That's right: Warren Buffett, the Sage of Omaha.

Most readers will be familiar with Buffett's well-known "be greedy when others are fearful" quote. It's famous, and rightly so. Even if he was just echoing the words of an earlier investing genius, Sir John Templeton, who said "the time of maximum pessimism is the best time to buy".

But there's another, lesser-known Buffett quote that I always think sums up the situation even better.

Hamburgers

Somewhere in the dusty recesses of my office is a copy of Fortune magazine from December 2001 ‑‑ archived in an era when it wasn't so easy to just go on‑line to re‑read fascinating articles.

The article in question was by Warren Buffett, co‑authored with Buffett's long‑time friend, the redoubtable Carol Loomis, a financial journalist who is still writing for the magazine, despite ‑‑ like Buffett ‑‑ now being in her 80s.

And in it, Buffett neatly sums up his approach to the opportunities thrown up by periods of market turmoil.

"When hamburgers go down in price, we sing the Hallelujah Chorus in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying ‑‑ except stocks. When stocks go down and you can get more for your money, people don't like them anymore."

And unquestionably, the stock market's hamburgers have just gone down in price. AstraZeneca (LSE: AZN), Aviva (LSE: AV), Rolls-Royce (LSE: RR), BT (LSE: BT-A), BAE Systems (LSE: BA), BP (LSE: BP) -- as I wrote last week, Britain's blue chips have gone on sale.

Canny moves

What's Buffett buying right now? I've no idea, and won't have until Berkshire Hathaway's next quarterly filing.

But what we do know is that he did very nicely last time around.

There's a nine‑figure profit coming his way in October, for instance, when a $3bn loan to America's General Electric matures -- a loan taken out by the industrial powerhouse when it was caught short in the credit crunch, and Buffett's Berkshire Hathaway was one of the few businesses that would lend to it.

Another high-profile loan was to Goldman Sachs. According to the latest quarterly filing, his $5bn loan to Goldman has so far earned him $806m. That's almost £500 million. Not bad when you can lend to bankers, is it? Especially when it's at eye-watering interest rates.

And, of course, he made some canny share purchases, too, taking the opportunities thrown up in 2008 and 2009 to buy stakes in high-yield dividend-paying businesses such as Dow Chemical and Wrigley.

Be greedy

A friend of mine has just been on the phone. "The market is down again," he worried. "What are you doing?"

I'm buying, I told him. And I'm darned sure I'm in good company. And in the weeks to come, we'll find out just what Buffett has been buying.

But in the meantime, what are you buying? Answers in the box below, please!

More on the markets:

> Malcolm owns shares in BT, BP, AstraZeneca, Aviva, Rolls-Royce and BAE Systems. The Motley Fool owns AstraZeneca and BAE.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

JimDiGritz 09 Aug 2011 , 11:54am

Sorry Malcolm is the same Berkshire Hathaway that has been recently downgraded by S&P?

Stop being an equities cheerleader for a few moments and have a long hard look at the macro-economic picture.

Look at the squeeze on natural resources, the unwinding of the largest credit bubble in history and the absence of any real term growth in the world.

Only QE and synthetic stimulus will prop up the zombie economy and equity markets, but it won't last.

Deflation, then depression.

TonyTwoTimes 09 Aug 2011 , 12:07pm

Hi JimDiGritz,

Is this the same S&P that gave triple-A credit ratings to baskets of mortgages which the borrowers couldn't afford to service?

S&P hasn't downgraded Berkshire; it's put it on watch along with the whole of the insurance industry.

Buffett has a brilliant track record in times like these. And there's still plenty of growth out there in the world, just most of it is going to come from emerging markets

millgate1 09 Aug 2011 , 12:20pm

Why all the talk of deflation and depression? Rather inflation as the easier way out and one far more palatable for politicians. Whichever way, it seems that companies are better than countries, shares better than bonds( longer term) and gold the best of all.

I can't understand why people prefer the bonds of a debt ridden country such as the US, yet shuns well managed companies like Shell, Microsoft et al. One of life's mysteries!!

donovan5 09 Aug 2011 , 1:16pm

Didn't the government effectively bail Buffet out with QE though.
I seem to remember him saying there was no problem with the banks and everyone should pile in

LastChip 09 Aug 2011 , 4:08pm

Just grabbed some Tesco. Not sure they're at the bottom, but either way, you can't argue with the value, looking at a five year view.

Defensive as well!

The only slight doubt I have, is this may just be the beginning of a total collapse and if it is, my timing will prove to be appalling. But if you can't take the knocks, don't play with the big boys!

I'm convinced the EU will disintegrate, it's just a question of when and to what degree.

atalbot9 09 Aug 2011 , 4:39pm

"as I wrote last week, Britain's blue chips have gone on sale."

And since then they're down another 10% or so. I think that says it all. I guess now my plan is to trickle money in each month to quality yielders: BA., AV., RSA, and EMG; not getting emotional if they lose 10, 20, 50%...

Also I'm liking the look of ESSR and GLEN for the bottom drawer.

F958B 09 Aug 2011 , 7:30pm

LastChip

The world will probably not end and we won't care how much we've lost on paper if it does end. Maybe some gold would be helpful, but even gold is looking stretched.

A deflationary depression is unlikely now that the ECB is leading the way with a variant of QE. Most likely seems to be a period of stagflation or inflation and erratic economic growth, similar to the late 1970's.
In the late 1970's (and also immediately after the 1987 crash), despite the relatively high inflation, P/E ratios around 10x were common, which is not far from where we find the FTSE today.
I outlined a summary of the 1970's on a recent post on the HYP Practical boards.

From the similarly-low 10x (-ish) P/E ratios in the late 1970's as we have today, the markets delivered annual average returns for the next two decades of about 13% on capital, plus dividends which started at about 5% and increased in most years.
Over the long term and over a large group of shares, the reciprocal of the P/E ratio (i.e. the earnings yield) is quite a close approximator of the inflation-adjusted returns in future years (e.g. P/E of 11 = 9% expected long-term return after inflation).

I'm a keen buyer of selected high-quality companies - mostly non-cyclicals - at these prices. Such non-cyclicals are not likely to rise as fast once the markets hit bottom, but they should be excellent as long-term-buy-and-forget "cash cows".

I'm not looking for a quick profit, but I am looking for steady long-term performers which I can tuck away, enjoy the yields and not have to worry much about the companies.
As Buffett says: buy shares in companies which can be run by an idiot because sooner or later, they will be.

...........

On the subject of quality though....
AV, RSA, EMG, ESSR or GLEN do not meet my "quality" criteria because they are not dependable through good times and bad.
Just when you might come to need their dividends to supplement income in bad times, they often suspend dividend payments and the shares often languish at low levels (remember 2003 and 2009?) and it can be difficult to sell for a profit to bring in some cash in a time of need.

But, as I said: those that fell the hardest are likely to see the greatest bounce when we find the bottom.

LastChip 09 Aug 2011 , 9:22pm

F958B all I'll say is; we'll see.

In fact I'll add this; QE1, 2, 3 or 1500, will not make any difference to the ultimate outcome. One day the penny will drop with the moron's governing us, you can't spend your way out of debt.....

and this;

I said a few weeks ago there would be blood on the streets on the Fools sister site - LoveMoney. I just didn't expect it to happen quite so quickly.

Ignore the signs at your peril.

ukvalueinvestor 11 Aug 2011 , 9:14am

I don't see why a depression is a bad thing, from an investing point of view. You only have to look back at the previous depression in the 30's or the near depression in the 70's to see that they were the best times to be buying.

As long as investors are buying things that will almost certainly be around in 10 or 20 year's time then a depression is a good thing.

Or perhaps it was better to be buying when everybody thought the streets were paved with gold back in 1999, or 2007?

Personally I have recently loaded up with AZN, BP, BAE, BBY. With those yields I don't care if the price goes down. The question will always be - where is this company going to be in 5 or 10 years time?

That's what I care about.

John @ ukvalueinvestor.com

AleisterCrowley 13 Aug 2011 , 9:43pm

"be greedy when others are fearful"

Aaarggh. That damn quote is getting a bit of use this week.

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.