Archive for the ‘Warren Buffett’ Category
Arabianmoney likes to think in terms of long-term investments, not which stock to buy this morning to sell by noon. Sadly the day trading mentality is pretty entrenched in the Gulf and this adds to market volatility and the inevitable losses for those who just have to trade.
However, that is true for any stock market. The big gains are made by the likes of Warren Buffett who buy the right stocks and stick with them.
When to buy
Of course, you need to know which stocks to buy and when. Let us focus on the issue of when to buy. Spotting a market bottom is not easy, and perhaps impossible, but that is the point you want to put your hard earned money into the right stocks.
It was interesting to see Daman Investments launch its AED200 million fifth fund focused on Gulf investments last week. This closed-end fund closes on April 7th.
Group managing director Shehab Gargash commented: ‘Markets go through up and down cycles. The GCC markets are well poised to chart an impressive recovery. We’ve seen it happen before and we will see it once again.’
This is certainly a contrarian approach. GCC stock markets have been in the doldrums since their last crash in late 2005, and have been hit hard by the global financial crisis and credit squeeze.
Yet buying good stocks on the cheap is precisely how Warren Buffett made his billions. Mr. Gargash supports his case with the following comments on valuations:
• The regional GCC markets are currently trading at forward estimated valuation multiples of 10.2x for year end 2010 earnings estimate which are at a discount when we compare to then historic price-to-earnings average range of 18x for the past five years.
• Taking price-to-book ratios we continue to find further support for the valuation case with the GCC region trading on 1.4x 2010e.
• The full-year 2010 dividend yield at regional markets is estimated to be at an average of 3.9 per cent with many individual stocks having yields in excess of double digit figures making the region an attractive play for income related investors.
These valuation metrics make GCC markets look comparatively cheap. But arabianmoney thinks they will get cheaper. Readers will know that we consider a global stock market correction or even a big crash imminent, and in such a storm all ships have a tendency to sink.
However, as soon as this storm is over that might be a very good time indeed to invest in Gulf stock markets. There is a seven-year cycle running in these markets from boom to bust, and the last bust was already five years ago.
Nobel Prize-winning economist Joseph Stiglitz of Columbia University has sobering words for those expecting a quick recovery in the US economy, like most of Wall Street?
1. Stay out of all equities. This is a monstrous valuation bubble driven up by zero interest rates. Rates have to go up, and stock markets down. Markets will correct when something reminds them that this is the future outlook.
2. The dollar rally has further to go, and the dollar will go higher as equities fall, so keep to cash and treasuries until the dollar tops out.
3. No need to diversify into foreign currencies in 2010, except for dollar-linked currencies like the UAE dirham that offer higher interest rates and an explicit government guarantee on all deposits.
4. Buy gold and silver on price weakness when the US dollar rally tops out, and oil stocks.
5. Beware emerging markets like Brazil, Russia, China and India. What has gone up in a hurry will crash in a heap.
6. This will be the ‘Year of the Short’ so, if you want to play the market look to options or short ETFs.
7. Real estate is locked in a downtrend. Interest rates are very low, and real estate only bottoms out when rates are high.
8. Stay liquid for the lifetime buying opportunities that will follow a big crash. Then buy when Warren Buffett says.
9. Do remember to save some of what you earn for future investment opportunities which otherwise tend to occur when you have no savings.
10. Remember that in an era of low interest rates the value of a job is considerable because it would take a much higher capital sum to earn the same in interest. Look after your job.
Having dismissed equities as an investment for 2010 unless or until there is a substantial correction or crash (click here), then readers are still owed a more positive view of how to actually invest. For even dollars in a bank account are a play on the greenback and the bank.
Yesterday I had lunch with my old friend and Dubai’s Dr. Gold, Andre Homberg and we chewed over the question of gold versus cash for 2010.
Dr. Homberg, and he holds a doctorate in investment analysis, is a gold broker and presently working 18 hour days, such is the local interest in precious metals right now. He not surprisingly thinks every investment portfolio should have a gold allocation.
But even Andre concedes that the US dollar looks to be on a roll and that could set the gold price back to $1,050 or even $1,000 within the timeframe of a couple of months. That would be a great gold buying opportunity for the price outlook is very good on a one to three or four year view.
For short-term gains then the US dollar is a good bet, and the greenback only started to strengthen at the end of last week, so investors have not yet missed this trend. But hurry up, the sudden unwinding of the equities rally and a collapse in many commodity prices, including a downslide for gold, will power up the dollar.
Dr. Homberg likes the UAE dirham for it is essentially a US dollar with a higher yield as the exchange rate is pegged and the interest rate set by the UAE Central Bank. And with all Dubai’s current debt problems the risk of a flight of capital demands that interest rates be set higher than elsewhere.
Yet the real risk of holding dirhams has to be one of the lowest imaginable. You have an explicit guarantee from what is arguably the world’s richest country per capita, and a net creditor nation whatever Dubai’s debts might be. Is that not better than US T-bonds?
As a leading local gold broker Dr. Homberg is not without an interest in recommending a switch to gold once the US dollar rally is done. But he does have a very logical point.
Devaluation and deficits
The US deficits continue to mount and no currency can rally for long under such circumstances if history is to be our guide. Therefore, a dollar rally and weakening of the gold price would be a great opportunity to switch to the currency that can not be printed by central banks.
For leverage to the gold price you can not do much better than silver, but this is only for investors who can ‘handle 50 per cent price volatility’ says Dr. Homberg.
In the meantime, there is a good deal to be said for shorting global stock markets. Those who understand options know how to go short. For those with less technical knowledge but confidence about the direction of the market there are the short ETFs.
You do have to be careful with short ETFs. These are instruments with an element of leverage. That is fine if you get the directional trend right, but not if you get it wrong. On the other hand, if markets move sideways the losses are quite small and exact market timing is only really an option for time travelers or insider traders.
Short ETFs have been terribly battered by the rally since March, and that ought to make them among the best bargains in the stock market if a correction is due as I have argued very recently (see this article).
You do have quite a choice. To short the S&P financials then FAZ and SKF are available. Personally I like QID to short the Nasdaq and EDZ as a short on emerging markets.
Of course, the moment markets turn down these ETFs will react instantly – or at least they should do, there are court actions pending from investors disappointed by some tracking performance but you will capture the direction and a leverage of the movement.
The problem is more that jumping in at the last minute is going to be costly in terms of missed performance. Perhaps the best thing is to buy when markets are moving sideways, or even better falling very gradually as they are this week, and then you have a position for when the real action starts.
However, short positions or short ETFs should never be more than a kicker in a portfolio. There is the risk of losing money as well as making a great deal in a serious stock market correction. Experts will tell you actual market short positions are less expensive.
That is true but a short ETF has a manager to handle the options for you, and to keep them rolling over, which individual investors with other concerns might forget to do. So keep a few short ETFs in your portfolio for 2010 and you should be pleasantly surprised as these instruments will rocket as markets plummet.
Indeed, the nicest thing about short ETFs is that they should leave you in the money when everybody else has just lost a fortune. That will make you keen to buy stocks again at exactly the right moment.
Remember at the end of last year when Warren Buffett called the market bottom? He was a little early but if you had bought then and held for this year’s rally you would have done very well.
If markets plummet in 2010 then with cash, gold and short ETFs you are well placed to go bargain hunting with the Warren Buffetts of this world.
If markets drift sideways then you will preserve your capital with the upside on gold compensating for losses in the short ETFs. Only if stock markets manage another leg upwards to even more astonishing levels of overvaluation will you loose out.
Sat in Dubai watching the local stock markets crashing this week perhaps makes me particularly clear on what the outlook for 2010 might hold, so I offer this as a different perspective on financial markets.
Stock market observers have been mesmerized this week by the biggest deal of Warren Buffett’s long and highly successful career as an investor, his $26 billion in cash and $10 billion in debt acquisition of US railroad Burlington Northern Santa Fe.
Clearly the Sage of Omaha is one step ahead of the game as usual. Perhaps the trick to understanding his move is to think what is he exchanging for this acquisition.
Actually Buffett will not have his $26 billion in cash. It will largely be held in treasury bonds. So rather than see this as a vote in favor of an over-valued stock market, you could see this as a vote against bonds.
US bonds pay very little return and are denominated in a devaluing currency, or one that was devaluing until its recent uptick. Viewed in this light exchanging bonds for a US railroad – with stable and possibly rising income and solid assets that will inflate in value over time – does not look so stupid.
At the same time, Buffett is taking this public company private, or at least into his conglomerate where it will no longer be valued as a railroad. It will be re-rated to become a part of Berkshire Hathaway.
So is Buffett out to dump a very large bond position in advance of some sort of coming bond crisis over US debts and devaluation?
If you read the history of major financial crises then they have never ended before a crisis in the bond market. If you were the Sage of Omaha sat on billions dollars of bonds would you not seek an exit before that particular crisis hit the fan?
And what if you could find a way of achieving that while being able to trumpet a pure investment in America Inc. like Burlington Northern Santa Fe?
Repositioning in current markets is a game for the experts, and it is not for nothing that Warren Buffett was voted the world’s wisest investor in a Bloomberg poll last week. But you need to dig deeper to get a handle on what he is really doing.
Why on earth is Warren Buffett forking out $26 billion in cash and assuming $10 billion in debt to assume control of the US railroad Burlington Northern Santa Fe?
This is the ultimate cash for clunkers deal. The railroad might have a replacement value of twice what its stock is selling for today, but then that is because nobody in their right mind would want to build a new one. A barrier to entry perhaps!
Painful cash piles
My friend Chris Mayer, editor of Capital & Crisis reports that the top 500 US companies are sitting on a $1.1 trillion in cash, up 28 per cent in the past year and the highest level of cash as a percentage of assets since 1960 at 11 per cent.
Is this cash just about to burn a hole in their pockets? Well it certainly would make acquisitions swift if the companies can spot value or see consolidation opportunities. But given the experience of the past 12 months these corporate chiefs are ultra cautious.
Does that mean Buffett is wise to rush out and buy? It is certainly a contrarian move. Those railroad trucks clunking along through the night earn a better return than cash sat in treasuries or on deposit. They are basic infrastructure and energy-efficient.
Buffett can clearly see cash in clunkers. But what does this say about the wider economy? Are tech companies and banks doomed? Would he not be buying into Wall Street again if this offered better prospects?
Many times in the past decades Buffett has explained that he looks for value independent of the share price, although he does like a cheap entry point whatever the theory. It seems he thinks US railroads are an undervalued utility.
That could still leave the rest of the US economy highly overvalued, and the proposition that Buffett is making a huge bet on America Inc. is preposterous. Moreover, he could still be buying at the wrong point in the stock market cycle, towards the top of a rally.
This does smack of a deal lined-up for an October market crash that never happened, and so it was decided to go ahead anyway. Such cash deals at market tops do not have a good track record. But Buffett is different of course! Others who get brave are likely fall guys.