QE asset recovery. Great, now what?

With stock markets off to a rough start for the year, long-always prophets have been prominently featured assuring ‘little folks’ that all is well and the financial wizards have capital risk all under control. Valuations off the charts? Dividends pathetic? Business cycle long in the tooth? Volumes low? Volatility picking up? Never us worry… the best time to buy is every time we have any cash to give our sage and savvy financial managers, right? Why even Warren Buffett says he is finding attractive value don’t you know.

Time to sober up. The chart below casts light on the truth about dear old, folksy, Warren. His fund Berkshire Hathaway has long been much too large and US focused to be anything other than a broad market buy and hold, bell weather. Sure he loves to talk about his internal book value gains, but the fact is that investors in Berkshire aren’t holding a private fund that will redeem their investment when they wish to cash out. Berkshire investors hold publicly traded shares that move in near perfect correlation with the S&P 500. This means Berkshire holders have lost 50% of their investment value twice with the S&P since the secular bear began in 2000.

Berkshire and S&P March 17 2014

No wonder Warren praises the Bernank and says QE was a smart idea. Before QE, Buffett (and the other long-always masters) had their investment “genius” dilapidated twice as their followers rode wild volatility over a decade of flat to negative returns. The QE reflation trade has literally saved their investment reputations over the past two years. As valuations traded back to cyclical highs, Warren’s own net worth enjoyed a huge pop since 2011, now ranking him once more within the top 2 wealthiest people in the world. QE has been a wonderful recovery of billions!

But now the plot thickens. Since Buffett’s fund virtually is the S&P Index, and since Buffett can’t sell the majority of his market-moving positions even if he wanted to, his followers should be asking “what now?” With stock valuations back at notorious record highs, how do we protect our capital from the next bear market swipe? QE has been good to Buffett and company, no question. But investment genius? Give us a break.

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