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EJ
05-07-07, 06:41 PM
http://www.itulip.com/images/buffettrose.gifBuffett predicts more market turbulence (http://www.chicagotribune.com/business/chi-070505berkshire1-story,1,4740659.story?coll=chi-bizfront-hed)
May 5, 2007 (James P. Miller - Chicago Tribune)

Investor Warren Buffett expects periodic turbulence in the stock market in the future, and warned that such normal disruptions are likely to be amplified by the hair-trigger buy-and-sell proclivities of the "electronic herd" of investment managers around the world.

Still, the fabled investor told 27,000 stockholders of his Berkshire Hathaway Inc. investment company this morning that Berkshire plowed $5 billion into the stock market in the first quarter of 2007.

Buffett said that, if he had to choose, he and investing partner Charlie Munger would rather own stocks over the next two decades, rather than buy twenty-year bonds.

AntiSpin: Warren Buffett once said, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ." It's no secret that Warren Buffett owes his success to a combination of method and access. The way to make money by investing in established companies in mature markets is so boring that not very many people are willing to do it. It demands the repeated, consistent application of a method of analysis over many years.

To make a new investment, first identify an industry, such as soft drinks or railroads, which are likely grow faster than the annual rate of inflation is likely to rise.

Next, identify the one company in that industry with the the most room to grow with the best sustainable differentiating advantage. That advantage can be entirely brand (e.g., Coke), or related to some macro trend, such as rising distance trucking costs (e.g., Burlington Northern). You will not see Buffett invest in a company that relies primarily on technology for differentiation–too much special knowledge is needed to evaluate pure technological advantage. Many experts get it wrong and the advantage may be fleeting.

Determine the fair market value for the stock of a hypothetical leader based on total available market revenue and profits potential over 10 years.

Identify all of the incumbent and insurgent players in an industry to determine the leader. If their stock is fairly priced relative to market share and total available market, keep digging.

Create a template to evaluate all of the major companies in the industry, listing the attributes of each. Attributes are industry specific.

Develop a set of questions designed to determine which company either has the most market share or is likely to acquire it, which has the most pricing power, and so on.

Now comes the part that prevents most people from investing like Warren Buffett: get direct access to management at the companies you are looking into to get your questions answered.

Use a team of analysts trained to know how to get the questions answered.

Verify that the answers are true.

Evaluate the companies using the template, weighing the relative advantages of each company.

If you find you've missed anything, or find two competitors are very close, go back with more questions.

Identify any factors, such as new technology or demographic shift, which may disrupt the order at some point in the future.

Repeat.

The result? During the period from 1980 to 2003, the stock portfolio of Berkshire Hathaway (http://www.gurufocus.com/holdings.php) (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years.

This approach will not work to determine the likely winner among early stage private companies in a nascent market. A venture capitalist, for example, is more concerned that a start-up company's founders have relevant experience, a clear vision of where they are going, and are highly motivated. But in the realm of large public companies, Buffet's is the way to pick a leader.

Buffett is methodical. He is also wise. Over the years, we find that most of his pet peeves are the same as ours. He knows the markets offer no free lunch. He doesn't like asset bubbles. He finds state gambling offensive. But he is not as focused on financial market and economic history as we, so there are areas where he comes to different conclusions.

In this analysis of his recent speech, we start where we agree.
Asked about gambling stocks, the plainspoke Buffett initially equivocated, but then warmed to his task.

"I'm not a prude," he said, "but to quite an extent gambling is a tax on ignorance." It is "revolting," he said, when a government preys on its citizens' weakness rather than trying to provide them with services. "

"It's not government at its best," he concluded.

The normally silent Munger, who provides gravitas and plays straight man to Buffett's loquacity, weighed in on the gambling industry as well. "It's a dirty business," the 83-year-old Munger said bluntly. "I don't think you'll see a casino in Berkshire's portfolio."
We hate state sponsored gambling. Our glossary (http://www.itulip.com/glossary.htm#S) defines the state lottery as "a regressive tax imposed by the state on those of its citizens it has failed to provide a basic education in the laws of probability."

"The nature of private equity isn't a bubble that bursts." But the trend will weaken eventually, when the currently narrow gap between junk debt and investment-grade bonds widens, he added.
Disagree. It's a bubble in the fashion of the mortgage and housing bubble. Both are driven by the same engine of leverage that Buffett warns about, specifically, CDOs. See Jim Finkel, CEO, CDO firm Dynamic Credit (http://itulip.com/forums/showthread.php?t=757).
Warren Buffett said on Saturday problems in the U.S. subprime lending industry were unlikely to pose a major threat to the overall U.S. economy.
Buffet is arguably the world's most capable investor, but he doesn't understand the long term implications of Risk Pollution (http://www.itulip.com/riskpollution.htm). Credit toxins are oozing out of the financial system in the sub-prime segment of the mortgage market first, in its most vulnerable sector. Soon enough it will be oozing out everywhere.
Buffett warned about the dangers of derivatives — financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. The Federal Reserve’s efforts to regulate the use of credit to purchase securities have been made irrelevant by derivatives, he said.

“The introduction of derivatives just made any regulation of leverage a joke. It’s an anachronism,” he said. Because of them, “there will be some very unpleasant things that happen” in the financial markets. “We may not know exactly where the danger begins and at what point it becomes a super danger.”
Here's where Buffett needs to make the connection among the sub-prime mortgage market, derivatives, private equity, and the housing bubble. The impact and risks posed by the development of non-transparent derivatives has been known since at least 1999 when banking expert Martin Mayer wrote the article Somebody Turn on the Lights (http://www.brookings.edu/views/articles/mayer/199911.htm), Derivatives Strategy (Brookings Institution) on over-the-counter derivatives. Today, iTulip Select publishes our interview with Martin Mayer. more ($ subscription)... (http://www.itulip.com/forums/showthread.php?t=1302)

General Cole
05-07-07, 09:03 PM
So, Eric, you are saying you know the market trend better than Warren Buffett.

I disagree with your point of view. I believe sub-prime is a problem, but it is not big enough a problem to post major threat to the U.S. economy. That's my take. I stick with who I believe in this one, Buffett. I'm 70% stock, 30% bonds. I will continue to purchase stocks at a dip (like the one in March). I believe the best way to beat inflation is by investing in stock (foreign and domestic), not by buying gold.

From my research, statistic & observation, I don't see U.S. in a stock bubble. Housing bubble, definitely, but not stock bubble yet.

I, too, saw 2000 tech bubble as well. I sold before the crash. I'm a conversative investor, not a speculator.

FRED
05-07-07, 09:16 PM
So, Eric, you are saying you know the market trend better than Warren Buffett.

I disagree with your point of view. I believe sub-prime is a problem, but it is not big enough a problem to post major threat to the U.S. economy. That's my take. I stick with who I believe in this one, Buffett. I'm 70% stock, 30% bonds. I will continue to purchase stocks at a dip (like the one in March). I believe the best way to beat inflation is by investing in stock (foreign and domestic), not by buying gold.

From my research, statistic & observation, I don't see U.S. in a stock bubble. Housing bubble, definitely, but not stock bubble yet.

I, too, saw 2000 tech bubble as well. I sold before the crash. I'm a conversative investor, not a speculator.

We're not saying Buffett's wrong that sub-prime is not an economy killer, but that he doesn't understand that the sub-prime fiasco is the start of a longer more serious process of risk toxins, the result of a decade of Risk Pollution, coming to the surface as liquidity is extracted. If the problems started and ended with sub-prime, we'd be in agreement.

Appreciate the perspective that stocks are a better inflation hedge than gold, at least if inflation can be contained and managed. This is largely a political matter. If inflation is allowed via the political process to "complete the circuit" that starts with high energy costs and ends with wage increases, the earnings inflation equity game will end. The socialists in France just lost, and perhaps they will here, as well. So you may be betting wisely on a managed inflation.

Darin
05-07-07, 09:57 PM
LOVE the glasses. I've always found the 'Oracle of Omaha' to be a likable and wise man. Mostly, because I've agreed with him. Either itulip and myself are wrong about sub-prime or Warren is, there doesn't seem to be much in between room on this one.

I've never known Buffett to be unmethodical, wrong yes, but not methodical. I wonder if his guys over at the Shaw Industries , his carpet manufacturers (housing bulls) pulled one over on him. Or maybe the folks at California Prudential (housing bulls) thought we could 'growth' our way out of it.

bill
05-07-07, 11:16 PM
Credit toxins are oozing out of the financial system in the sub-prime segment of the mortgage market first, in its most vulnerable sector. Soon enough it will be oozing out everywhere. [/B]]



It is very clear Asia sees and smells the toxins and pollution. In general the main stream sees the crisis insurance pooling being set up in Asia as a non-event. The two biggest holder of US debt China and Japan seem to be very concern. Will they continue to fund the US ? How much more can the US consume?
The actions taken by the ASEAN group tells me they are getting ready for a liquidity crisis. They want to prevent a out side lending group (IMF) coming in and getting their nations into debt (I mean financial help) ending up in a future liquidation factory.
Buffet doesn’t have to worry about long term implications at his age, but if he was in his 30’s-40’s I think he would not hesitate to apply his formula in a place that has the best long term potential, Asia.

http://www.atimes.com/atimes/Asian_Economy/IE08Dk01.html




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Ishmael
05-08-07, 12:04 AM
Buffett is like any other CEO but more so.

Do you think he is going to come out and say the stock market is going to crash and watch all of his investments go into the crapper.

A couple of years ago Buffett came out and said he wished he had sold a number of his key holdings like Coca Cola. I think Buffett's action speaks for themselves. He is keeping $40 billion in cash, moved a large amount of currency out of the US dollar and making foreign investments.

He is kind of like the chinese and japanese. He made such big investments in some companies that he can not get out with out cratering the investment before he gets out.

Sapiens
05-08-07, 12:18 AM
Buffett is like any other CEO but more so.

Do you think he is going to come out and say the stock market is going to crash and watch all of his investments go into the crapper.

A couple of years ago Buffett came out and said he wished he had sold a number of his key holdings like Coca Cola. I think Buffett's action speaks for themselves. He is keeping $40 billion in cash, moved a large amount of currency out of the US dollar and making foreign investments.

He is kind of like the chinese and japanese. He made such big investments in some companies that he can not get out with out cratering the investment before he gets out.

Bingo! Watch what they do, not what they say...

DemonD
05-08-07, 12:26 AM
Ish, I agree with your sentiments.

Further, Buffett has stated that his "50% return" would be partly done by options and derivatives, although he is correct in saying that the proliferation of derivatives is a really dangerous thing.

Also, I would DISAGREE that one could not invest like Warren Buffet. The people that bought handfuls of shares of Altria in 1999 and 2000 are sitting on 5 and 6 baggers, not including dividends. People who bought Pepsi, Walmart, Johnson and Johnson 10, 20 years ago are sitting on huge returns. Because yes, his method is boring, but it can be duplicated. It's called "value investing." As a retail investor, I can identify a stock or a bunch of stocks that I find are compelling as investments... and then I can wait. I have no personal responsibility to any shareholders or third party investors. This is how I was able to pick up a canadian oil producing company in early january for a discount ("Mr. Market" didn't like oil companies for a few weeks back then).

And also, realize that for all of Buffett's methods, he does get it wrong sometimes.

Anyway I love warren, he's the man, someday I hope to be 1/100th as rich as him.

Jim Nickerson
05-08-07, 12:38 AM
Anyway I love warren, he's the man, someday I hope to be 1/100th as rich as him.

Let's see, 30,000,000,000 / 100 = 300,000,000 that's million with an "M".

I would say the probability is that when you are worth that much, the bonar will be inflated to the degree the Weimar deutsch mark was--if that is what they called it back then.

c1ue
05-08-07, 01:47 AM
I have the utmost respect for Mr. Warren Buffet; his record speaks for itself.

While his words are always worth contemplation, one item I always keep in mind is that he is a person in a significant position of financial influence.

This matters because there will be situations where he likely cannot speak his own views due to the impact on the market/society.

Examples:

1) Salomon brothers

Warren bought into Salomon Brs. preferred stock - one of a relatively few examples of a poorly disciplined entry into an investment - in 1987 for the princely sum of $700M.

For those who haven't read 'Liar's Poker' by Michael Lewis http://www.amazon.com/Liars-Poker-Rising-Through-Wreckage/dp/0140143459

I strongly recommend it. Entertaining through and through - and Salomon Brs. is the firm employing the people profiled in the book.

In August 1991 - a scandal broke out where it turned out Salomon Brs. was doing naughty things with the Treasuries it was privileged to bid for.

Warren wound up taking over management of Salomon, and used his personal influence to prevent dissolution of the firm even though by all rights such treatment was warranted.

2) AIG 'enroning' its reserves

Warren admitted he knew of AIG's boss - Hank Greenberg's - concerns about AIG's reserves. He also almost certainly knew about the reinsurance contract which General Re agreed to take with AIG - as it was $500M in the form of 2 reinsurance tranches in FY2000.

Of course, Warren is a smart guy and probably also knows that 'aiding and abetting' commitment of financial fraud is not itself convictable.

Lastly I would not confuse 'value' investing with what Warren presently does.

Warren was (and probably still is) a heck of a stock picker, but that is vastly different than what Berkshire Hathaway presently does. While Warren has made high profile investments which have paid off in American Express, Coca Cola, and a few others, I would also note that any company that survived the period from when these investments were first made likely would show pretty darn good performance.

Keep in mind that what Berkshire does today is buy largely monopoly owners in stable industries or areas and pile up cash.

It is no coincidence that Warren and Bill Gates get along; they both understand that the best way to win in business is to make sure you're the only game in town.

Bill got his by being first mover in a new industry, Warren gets his by creating a conglomerate using insurance float which is so large and with such a strong reputation that he can buy monopoly businesses in most industries outright.

You could say that Warren and Berkshire are actually a specialized form of private equity - predating many of our present splashy examples.

I defy any small investor to be able to do what Berkshire has been doing in the past several decades; besides the insurance float and size (Berkshire I think is a top 20 size firm in the US by revenue, certainly top 10 by profit), Berkshire these days does all kinds of foreign investments as well as currency derivatives.

Sapiens
05-08-07, 09:15 AM
http://www.marketwatch.com/news/story/buffett-sees-no-orchestrated-credit/story.aspx?guid=%7B4F64B684-2B88-4023-9348-9B23203884A0%7D


Buffett sees no 'orchestrated' credit contraction

By Barbara Kollmeyer
Last Update: 12:03 PM ET May 5, 2007


OMAHA, Neb. (MarketWatch) -- Berkshire Hathaway Chairman Warren Buffett said on Saturday that he sees no "orchestrated (http://dictionary.reference.com/browse/orchestrated)" credit contraction, but added that credit markets will likely "seize up" from time to time in future, as they did after hedge fund Long-Term Capital Management collapsed in 1998. Concerns about a credit crunch were sparked earlier this year when rising defaults triggered turmoil in the subprime mortgage business, which caters to poorer borrowers with blemished credit records

Well, he is right. The Fed may not want a credit contraction, but what can they do when people can no longer service their debt?

-Sapiens

DemonD
05-08-07, 09:38 PM
I defy any small investor to be able to do what Berkshire has been doing in the past several decades; besides the insurance float and size (Berkshire I think is a top 20 size firm in the US by revenue, certainly top 10 by profit), Berkshire these days does all kinds of foreign investments as well as currency derivatives.

Of course, no small investor can do what Berkshire does. But why would we want to? The idea is to get the returns that berkshire does, or to beat them, and that is possible on the consumer level.

Also, I would say what Buffett does is "value" investing. When he buys a company, he buys it at a discount or at attractive p/e ratios. When BRK bought that israeli steel company last year, their bid was significantly less than other companies that made offers for the company. They decided to be bought out by BRK because the future of them as a subsidiary of BRK was better than being bought out by others.

In this way, BRK is not at all like private equity, at least private equity in 2007. PE in 2007 is all about buying a company, then reselling pieces of that company for profit, or maybe slashing and burning jobs, then IPO'ing it at a premium. The actual health of the company be damned. If BRK outright buys a company to integrate into the Berkshire family, it's to help grow both that former company's business and to add to the cash flow of the Berkshire.

c1ue, I do completely agree at your point that Buffett has to be careful about what he says, and likely doesn't make his private feelings known, because his words could definitely cause market disruptions if he didn't measure those words well. Fortunately, he seems to get his message out without ever hitting a panic button with the markets.

Christoph von Gamm
05-09-07, 02:27 PM
Buffet is not the only one. I met Kenneth Lewis, CEO of Bank of America today here in Zürich at a function and asked him: "Are we in a Credit Bubble?"

Read the milder part of his answer on Bloomberg (http://www.bloomberg.com/apps/news?pid=20601087&sid=aq35YzpEUzBE&refer=home)

Ishmael
05-09-07, 03:49 PM
Christoph:

I just read that article before coming here. He went on to say that there was no credit bubble in lending due to the increase in jobs and salaries.

So, is this guy that out of it or did he stop in Amsterdam to smoke some wacky before going to Zurich. Quite obviously the jobs numbers in the US have been cooked for at least the last two months.

I got to tell you, here in S Cal I find it hard to believe that housing will not fall back 20 to 40 percent. Housing is selling for 10 times income. That is unaffordable and good jobs are leaving because they can not get people to move here.

It is Nanu Nanu land! He needs to get out into the trenches more!

Christoph von Gamm
05-10-07, 03:28 AM
Hi Ishmael

the quotes I took from him are on my questions more hard than the Bloomberg guy did write:

1. We're close to a bubble. (If that a senior banker says this, my view is: we're full monty in it!!)
2. All deals we have turned down [for bad risk] have been quickly taken up by others.
3. Here are too many immature players there
4. It smells all like "this time it is different".
5. We will soon be saying we did some stupid things that time.

Before he said:
1. I will expect at best in 2H a 2% US GDP growth, which is quite contrary to what others said.

Just before the salmon for lunch came, I could clearly sniff the smell of fear of 100 bankers...

Ishmael
05-10-07, 09:28 AM
Christoph:

Thanks for your response. I was an audit manager with Arthur Andersen and worked through the last big banking panic in the US in Oklahoma and Texas. I watched as companies received unbelievable loans to businesses with no assets (oil and gas reserves). That ended badly with two of the top ten banks in the US failing -- Continental and Seafirst. Ultimately practically every large bank in Texas and Oklahoma failed. Real estate was the biggest reason for failure then.

What I am seeing now makes then look like a bunch of punters. Supposedly 70% of bank assets relate to real estate now. Add to that loans to hedge funds. Stir in some loans to LBO and what do you have -- massive bank failures.

They should be scarred. A bunch of new MBA's who have never been through a down turn are leading us to bad times.

FRED
03-09-09, 06:00 PM
So, Eric, you are saying you know the market trend better than Warren Buffett?

Yes. He didn't get it.

Asia DayAhead: Buffett Says U.S. ‘Fallen Off a Cliff’ (http://www.bloomberg.com/apps/news?pid=20601081&sid=akYoIqUfMfYY&refer=australia)

March 10 (Bloomberg) -- U.S. stocks fell, extending the worst weekly slump in the Standard & Poor’s 500 Index since November, after Warren Buffett said the economy “has fallen off a cliff” and the World Bank predicted a global contraction. General Electric Co.’s Jeffrey Immelt says he’s prepared to steer through a financial “armageddon” that has wiped out 78 percent of GE’s market value in a year and forced its first dividend cut since the Great Depression.

Warren Buffett Says Economy Has ‘Fallen Off a Cliff’

Billionaire Warren Buffett, whose Berkshire Hathaway Inc. posted its worst results ever in 2008, said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s. more... (http://www.bloomberg.com/apps/news?pid=20601081&sid=akYoIqUfMfYY&refer=australia)
Now re-read the original post: Buffett predicts more market turbulence (http://www.itulip.com/forums/showthread.php?p=10085#post10085)

Buffett ought to subscribe to iTulip and save his investors' money.

goadam1
03-09-09, 07:20 PM
I keep trying to tell people to "means test" you guys and then they will be believers.

FRED
03-09-09, 07:29 PM
I keep trying to tell people to "means test" you guys and then they will be believers.

Few people means test.

They think: If it wasnt' on CNBC it can't be true!

goadam1
03-09-09, 08:05 PM
I know it was kind of a lame joke.

GRG55
03-10-09, 11:57 AM
Few people means test.

They think: If it wasnt' on CNBC it can't be true!

Given CNBC is owned by General Electric, you'd have thought Maria and Co. would have been prompted by the decline in their savings plans and "discovered religion" by now...:rolleyes: