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Follow Warren Buffett, this is a time for the lazy investor

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With due respect to the Sage of Omaha he does not seem to have been over-active recently, apart from making the monocline insurers an offer that they chose to refuse. And if Warren Buffett can not find a good investment in these troubled markets then perhaps for mere mortals this is also time to stay on the sidelines.

If you overlay a graph of the Dow Jones Index from last October on to the start of the 1973 downturn in stocks then you get a good indication of what lies ahead for investors. There is then a pretty bumpy ride down to a market bottom next spring, and for the real economy 2009 will be worse than 2008.

For our old friend the richest man in the world that means he can bide his time almost until he turns 80. US stocks are going to get cheaper and cheaper, and the rest of the world will follow downwards in the wake of the US collapse.

Unwinding sub-prime

How can it really be otherwise, whatever the optimistic voices on Bloomberg and CNBC suggest? Residential property is the biggest asset base in the US and prices are tumbling downwards, and there can be no end to mortgage write-offs at the banks until prices have bottomed out. And the idea that this whole crisis can unwind without impacting on consumer spending just has to be nonsense.

Stocks can only bottom out when all this bad news is in the market, and we are just not there yet. Ben Graham’s Mr. Market is not just having a bad day this time, he is in serious trouble and while the Fed can smooth the downward path for stocks that is the only road ahead.

Besides quite a big part of the Fed’s corrective medicine is more of the opium that brought on the trouble in the first place: excess liquidity and low interest rates. Feeding an addict the same medicine can ease the pain but it is no cure. Recovery requires a rebasing of asset price levels and an elimination of debt.

Spreading the pain

Devaluation and inflation courtesy of the Fed’s policies will help to spread this pain widely. But the risk is surely that the US economy struggles over the summer and has a last hurrah before the presidential election, and then truly collapses in 2009.

In this scenario rushing back into financial markets as an investor is likely to prove suicidal. Just wait for the market bottom in the same way that any rational home buyer will wait for the real estate market to stop falling before buying.

Time to get out

But if you are fully invested you should come out while you still can. There will likely be another year of downside like in 1973-4 and you can buy back later at much lower prices.

Why do people believe that the market will bounce back having only hit its high last October? If you look at the 2000-2003 dot-com crash it took three years for stock prices to bottom out.

That is how it goes in bear markets, and unless you are clever at shorting stocks, and few people are that good, this is a time to be a lazy investor and do nothing except sit on cash and wait for the US dollar to bounce.

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Written by Peter Cooper

April 3, 2008 at 7:28 am

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