NEW YORK (Reuters) - Warren Buffett tried to persuade demoralized investors the U.S. stock market is not falling off a cliff. Not everyone was immediately convinced.
The second-richest American and perhaps the world’s most revered investor, says he is buying U.S. stocks for his personal account.
“A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful,” Buffett, 78, said in an opinion piece published Friday in The New York Times. “Most certainly, fear is now widespread.”
As usual, he did not identify the stocks he is buying.
The piece — titled “Buy American. I Am” — called for confidence in U.S. business, something in short supply after the credit crisis spiraled into something resembling a market crash. Buffett has been relatively unscathed by the turmoil.
His buying excludes his stake in his insurance and investment company Berkshire Hathaway Inc (BRKa.N)(BRKb.N), which is committed to philanthropies and constitutes the bulk of his estimated $50 billion net worth.
He said if equities stay cheap, his non-Berkshire net worth will soon be 100 percent in U.S. stocks from 100 percent in government bonds.
In better times, such a clarion call from Buffett — amplified Friday by repeated commentary on CNBC — might spark a big stock market rally. Yet stocks ended another volatile session lower on Friday, after fresh economic data elevated worries about a potentially deep recession.
Buffett said he is not calling a market bottom. He may have company, including prominent investors such as GMO’s Jeremy Grantham and BlackRock Inc’s (BLK.N) Bob Doll who are betting equities have fallen below their intrinsic values.
Yet equity investors appear resistant to efforts to unlock credit markets and shore up economies, which if they work could help extract stocks from their abyss.
Almost daily reassurances from President George W. Bush and Treasury Secretary Henry Paulson often seem to fall on deaf ears. A reworking of a $700 billion emergency U.S. rescue failed to soothe frazzled nerves. The Wall Street Journal said even prominent hedge fund managers are hoarding cash.
Ordinary Americans are worried, too. U.S. consumer confidence in October suffered its steepest monthly drop ever, the Reuters/University of Michigan Surveys of Consumers released on Friday shows.
The longer-term impact of Buffett’s new approach to investing for himself remains to be seen.
“It is a huge statement. He does not come out and make statements of this kind very often,” said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, which invests one-fifth of its assets in Berkshire.
“Stock market volatility, demonstrated by lemming-like behavior of investors who drive the Dow Jones average down 700 one day and up 700 some other day, is patently stupid,” he said. “If you have a time horizon measured in years rather than hours, you will do very well with U.S. equity investments.”
Buffett said stocks should turn higher before sentiment or the economy do. That is what happened in the summers of 1932 during the Great Depression and 1982 during a deep recession.
Like virtually all investors, Buffett said he cannot forecast short-term stock movements. But he said equities will probably substantially outperform cash in the next decade.
Still, going 100 percent into stocks is not wise for a typical 78-year-old, especially one who depends on investment income for living expenses. Buffett is, of course, not the typical 78-year-old and lives more than comfortably.
Even Berkshire’s own equity portfolio is no model of diversity. About 42 percent was tied up as of June 30 in just four stocks: American Express Co (AXP.N), Coca-Cola Co (KO.N), Procter & Gamble Co (PG.N) and Wells Fargo & Co (WFC.N).
And stocks do not always go up over extended periods. Bearish investors might point to the 1929-1954 period, when U.S. stocks essentially gained nothing.
“His position is probably the opposite of what someone close to his age should be doing: keep more of their money in Treasuries,” said Charles Geisst, a finance professor at Manhattan College and the author of “Wall Street: A History.”
“I understand the sentiment, but this situation is unlike anything we’ve seen since 1932,” he added. “In downturns such as 1987 and early this decade, we never had a real clear view of what caused markets to go down. In this case, we have much too clear a view. This is the first time we’ve seen systemic problems affect the markets since the Great Depression.”
Buffett often appears out of step with the market.
For example, at the height of the technology bubble, Berkshire shares fell 20 percent in 1999, while the Nasdaq .IXIC rose 86 percent. Berkshire's book value per share barely budged, while the Standard & Poor's 500 index .SPX rose 21 percent. In his annual letter to Berkshire shareholders, Buffett gave himself a "D" for capital allocation.
In moving to stocks, Buffett is aligning his own holdings with some of the moves he has already made at Berkshire.
The Omaha, Nebraska-based company has derivative contracts that require payouts only if the S&P 500 is lower more than a decade from now than when the contracts were written.
In the last month, Berkshire invested a total of $8 billion in General Electric Co (GE.N) and Goldman Sachs Group Inc (GS.N) preferred stock, all with a 10 percent dividend, and got warrants to buy an equal amount of common stock at a discount. Given the attractive terms, some saw these as opportunistic investments rather than a signal of a market bottom.
Berkshire has also made several multibillion dollar commitments this year for acquisitions and corporate buyouts.
Geisst said many investors have much shorter time horizons than they once did and expect bad markets to be followed by stronger ones very quickly. That may not happen this time, given the potential for a long economic recession, he said.
But Buffett said buying stocks now is better than trying to time markets and guess when a turnaround will happen.
Referring to arguably the greatest hockey player ever, he wrote: “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.’”
Additional reporting by Jennifer Ablan and Christian Plumb; Editing by Andre Grenon, Richard Chang