Times are pretty desperate. Investor sentiment is very low. Consumer sentiment and spending have fallen off a cliff. The VIX “Volatility Index” investor fear gauge spiked to 70 Friday. This same indicator was below 10 for much of 2005 to 2007 as the world slumbered in apathy and oblivion. Sadly, idiots fiddled while Rome burned, again. Now that financial pain has struck, people are wide-awake in fear and anxiety.
I attended a fund-raising Gala last night. The attendees were more affluent than the average Canadian and most were commenting with concern about the shocking decline in the economy this year. Since so few people are ever prepared for the downturns, most have been taken unawares.
Net worth is being hit across the board with simultaneous drops in business revenues, real estate, and investment portfolios. People have the feeling that they are literally under siege, they are traumatized and weakened by it. None of this is unusual or unprecedented. These are the common symptoms of every economic downturn. The only aggravating feature this time is that the downturn is across all asset-types and business, as de-levering is taking place all around the world and at once.
The last times this type of broad-based downturn hit was 1973-74 and 1980-82. Few business people or investors that are experiencing this downturn had much to lose during those previous down cycles that long ago. That is why many today feel like present conditions are unprecedented. Most have never seen anything like this recession. But this too shall pass.
Warren Buffett tried to reassure Americans this week in an op-ed article entitled: “Buy American. I am.”:
“The financial world is a mess, both in the United States and abroad. Its problems moreover have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise business activity will falter and headlines will continue to be scary. So…”[and here is the money quote the investment sales crowd will jump on] “I've been buying American stocks.”
Far and wide, buy always investment types will be grabbing Buffett's quote and screaming it from the roof tops in an effort to suave the wounds of those that have bought “buy and hold advice” throughout the past few years to their financial detriment. But here is the part of Buffett's quote that is most crucial of all and yet, will be widely over-looked:
“This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds.”
Buffett is buying now because prices have been pummeled. And because his net worth has not. He has had his entire personal account in cash-like equivalents throughout this downturn. He is in a position of strength now, because he has cash and because he has protected himself from a savage bear market over the past year.
The virtue of cash and is that you then have a position of strength when others are weak and desperate.
This is the point that I have been trying to make for the past couple of years. If you never leave the party of a bull market, you never get to come back and clean up later. If you never see the need to build up cash and pay down leverage in your business, you will never be prepared for an economic downturn.
It is also worth noting that unlike 99.9% of the world, Buffett has no debt, incredible income and billions in savings. And even with his incredible resources he saw the need to go to TBills and defend his personal account from the market downturn. Because of this, now he is ready and able to buy.
Having been out of equities this past year, Buffett [and our clients] are now in a position of strength as we watch for our re-entry points. Remember this the next time someone try’s to tell you that you can't avoid down markets or that Buffett never sells and always holds. It is simply not true.
Cory’s Chart Corner
“An explosive critique about the investment industry: provocative and well worth reading.”
“Juggling Dynamite, #1 pick for best new books about money and markets.”
“Park manages to not only explain finances well for the average person, she also manages to entertain and educate, while cutting through the clutter of information she knows every investor faces.”