Warren Buffett is a housing bull

Billionaire investor Warren Buffett believes housing is a better investment than stocks right now:

Warren Buffett says along with equities, single-family homes are a very attractive investment right now.

Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "millions" of single family homes if it were practical to do so.

If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.

His housing recommendation is likely based on the fact that mortgage rates are incredibly low right now. Nationally, home prices are no cheaper than their pre-bubble norm, although it varies depending on where you live.

I believe that some housing markets are far better buys than others. Cities with very high unemployment rates have dirt-cheap home prices right now. Places like Las Vegas, Phoenix, Detroit, and most of Florida have prices below their historical norms.

Warren Buffett: New recession unlikely

Billionaire investor Warren Buffett thinks the likelihood of a new recession is low:

Warren Buffett says Berkshire Hathaway has been buying stocks at bargain prices, including shares of his own company. ...

The Omaha billionaire isn't worried his new purchases will be caught up in a 'double-dip' for the U.S. economy. He thinks "it's very, very unlikely we'll go back into a recession... We're coming out of a recession."

I agree with him. I track eight specific leading indicators on the St. Louis Federal Reserve website. Of the eight, five are in positive territory, one is negative, and two are borderline. (For most of these indicators, I find the year-over-year percentage change to be a better leading indicator than the current level.)

Positive

• Initial jobless claims (YoY)
• Interest rate spread between 3-month and 10-year Treasuries
• Manufacturer's new orders of capital and durable goods (YoY)
• Money supply growth (YoY)
• New housing permits (YoY)

Negative

• St. Louis & Kansas City financial stress indices

Borderline

• ISM Manufacturing Index
• S&P 500 (YoY)

The two borderline indicators have a history of producing lots of false positives. As the saying goes, "The stock market has predicted nine of the past five recessions." The financial stress indices are probably negative because of what's happening in Europe, rather than because of what's happening here.

This graph shows the Leading Index for the United States through August. Notice that while it normally dips during or prior to recessions, there is no dip this time.

Warren Buffett's stocks on sale

Warren Buffett—the greatest investor alive—has a simple investing strategy: buy low and hold forever. He prefers companies with long-term competitive advantages. He doesn't time the market. He just buys when the stocks look like a bargain.

A potentially successful investing strategy, then, would be to buy the stocks he owns when they sell near or below his purchase price. As of late February 2011, here are stocks that meet that criteria:

• ConocoPhillips
• Johnson & Johnson
• Kraft Foods
• Munich Re
• Sanofi-Aventis
• U.S. Bancorp
• Wal-Mart Stores
  

Warren Buffett on the U.S. economy

As always, Warren Buffett—the most successful investor alive—is optimistic about the long-term future of the United States economy:

Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

Basicland: An economic parable by Charlie Munger

A parable by Charlie Munger, Warren Buffett's partner in crime.

A bubble warning from Warren Buffett

From Berkshire Hathaway's newly release shareholder letter:

The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable — in fact, almost smug — in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim "cash is king," even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

I agree that intense fear has caused a high risk premium. This risk premium has caused a bubble in ultra-safe assets (i.e. government bonds) and an incredible long-term investment opportunity in riskier assets (i.e. stocks). Ordinary investors worried about the possibility of being laid off during this recession, however, have no choice but to make sure they have an unusually large emergency fund.

The gradual decline of the housing bubble is causing this recession. Since housing is still overvalued, it will continue declining in the near term, which will continue to weaken the economy as well. When the pace of the housing decline slows, it will probably be time to go full-bore into the stock market even if the economy has not yet recovered. (The stock market typically turns upward six months before the end of a recession, and it typically turns upward rapidly.)

Warren Buffett's and Robert Shiller's stock valuation metrics agree

Carol Loomis of Fortune has a new article out saying that Warren Buffett's valuation metric says it's time to buy stocks. I decided to compare Warren Buffett's stock valuation metric with Robert Shiller's. They both compare nicely.

Warren Buffett's stock valuation metric: Total stock market value as a percent of GNP.

Yale economist Robert Shiller's stock valuation metric, based on Benjamin Graham's advice in Security Analysis: S&P 500 10-year price/earnings ratios.

Robert Shiller doesn't compare the S&P 500 only to its current year earnings. Instead, he compares it to the average of the past ten years, adjusted for inflation. This way, he avoids getting fooled when single-year corporate earnings rise and fall with the business cycle.

Although Warren Buffett's and Robert Shiller's valuation methods are entirely different, they both seem to track each other fairly nicely. Knowing what happened in 1929, however, it looks like Robert Shiller's valuation method is slightly better than Warren Buffett's.

Buffett says Detroit automakers must change

Warren Buffett gave his thoughts on the automakers in a recent interview:

Billionaire investor Warren Buffett said U.S. automakers need a new business model to better compete, whether it takes bankruptcy or a government bailout to achieve.

Buffett said any automaker bailout package should include a business solution and be negotiated by the president, not Congress.

The government should insist top executives at Ford Motor Co., General Motors Corp. and Chrysler LLC invest a significant percentage of their own net worth in the Detroit-based companies, Buffett said, ensuring both executives and taxpayers would share in any profits or losses.

Buffett said the government should be able to drive a deal like one of the ones he makes when Berkshire buys businesses, because automakers appear on the brink of bankruptcy.

Buffett said he'd tell the auto executives, "'We'll give you more upside [than bankruptcy], but you're going to lose if we lose."'

Bankruptcy would be a poor solution for the auto industry, Buffett said, so he hopes a better way can be found to work out the union contracts and other issues the companies face.

Buffett stocks on sale

Warren Buffett is widely regarded as the world's greatest investor. His basic strategy is to buy great companies at low prices, and then hold them forever. Many investors try to emulate Buffett's investing method when making their own stock picks, but few can match Buffett's success.

However, one investing strategy available to ordinary investors is buying stocks that Buffett actually owns, when they fall below his original purchase price. Luckily, he lists his major holdings in Berkshire Hathaway's annual letter to shareholders. With a little basic math, you can figure out how much he paid for the stocks he bought.

Today, with the recent stock market sell-off, many of Buffett's holdings are selling for less than what he paid for them. This gives you the opportunity to buy them on sale. I have calculated the purchase price for his major holdings. Here are the ones that are currently on sale.

Stocks currently selling below Buffett's purchase price, and the price Buffett paid:

• ConocoPhillips (COP) — $59.34
• Kraft Foods (KFT) — $33.38
• Johnson & Johnson (JNJ) — $61.35
• Sanofi Aventis (SNY) — $43.21
• US Bancorp (USB) — $32.80
• USG Corporation (USG) — $31.40
• Wells Fargo (WFC) — $34.96

Stocks currently selling slightly above Buffett's purchase price, and the price Buffett paid:

• Burlington Northern Santa Fe (BNI) — $77.78
• Procter & Gamble (PG) — $61.14
• Wal-Mart Stores (WMT) — $47.23

Although this second group is slightly above his purchase price, a single down day in the stock market could push some of them below his purchase price.

Honestly, I don't know what he's doing owning USG. It's a no-growth company, paying no dividends, tied to the housing market. The others, however, would likely serve you well.

While the prices above are what he paid, according to his letters to shareholders, he also just recently bought more BNI at $79.65 per share.

Warren Buffett says buy stocks now

Warren Buffett, the world's greatest investor, has a message for people who have become fearful of today's stock market: Buy stocks now!

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. ...

Over the long term, the stock market news will be good. ... Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset.... Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. ... Today my money and my mouth both say equities.

Warren Buffett wisdom

Stock market thoughts from the Sage of Omaha:

You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.

Buffett suggests improvement to TARP

From Fortune Magazine:

Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise.

Buffett, the chairman and CEO of Berkshire Hathaway, called the problems facing world markets "unprecedented" and warned of a "disaster" if Congress does not move faster to shore up the economy.

"We had an economic Pearl Harbor hit," he said ... "For a couple of weeks we've been arguing about who's at fault [and] fooling around while things have gotten a lot worse." ...

"It will cost more to solve this problem today than it did two weeks ago," said Buffett...

But he described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would kickstart demand for mortgage-backed securities, help find a market price for these troubled assets and make it more likely that taxpayers would be made whole or even come out ahead in the bailout.

Under Buffett's plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.

"Now you have someone with 20% skin in the game," explained Buffett. "Believe me, I won't be overpaying if I'm buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed."

Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them. ...

He said the [financial] problem boils down to widely-held assumption during the housing boom that prices could only go up.

Under this scenario, the private investors would benefit by being able to borrow at ultra-low interest rates that normally only the government can get. They could also get higher potential returns by having higher leverage. Meanwhile, taxpayers are protected because the private investors would take a 100% loss before the government lost a penny. This gives the private investors a very strong incentive to protect taxpayers from a loss.

Buffett warned Congress of "biggest financial meltdown"

Buffett urged Congress to pass the Troubled Asset Relief Program:

Legendary investor Warren Buffett warned Congressional leaders Saturday night of "the biggest financial meltdown in American history" if they did not act to secure the financial system.

Buffett, by telephone, was consulted by lawmakers who were in marathon talks on Capitol Hill to forge a deal on the administration's $700 billion economic bailout plan, according to two sources.

One lawmaker in the negotiations said that the participants called Warren Buffett to get his help in gauging potential market reaction. ...

Earlier in the week, Buffett also warned that the financial crisis is "everybody's problem," not just Wall Street's. The potential collapse of financial institutions would cause industry to grind to a halt, he told CNBC Wednesday, and could have "gummed up the economy."

Buffett Supports Bailout; Says Gov't Will Make Money

In a long interview uninterrupted by commercials on CNBC this morning, Warren Buffett voiced his support for Treasury Secretary Paulson's proposed bailout. He also said the U.S. government will make a very good profit on the deal (15%+ rate of return), if it buys at market prices.

Fed Chairman Ben Bernanke stupidly suggested yesterday that the government should buy at significantly above market prices. Buffett said that is not a good idea.

Buffett didn't mention this, but I should point out that if the government follows Bernanke's stupid idea and pays above market prices, it would remove less bad debt off of bank balance sheets than if it paid market prices. (The higher the price, the less you can buy.) Bernanke needs a refresher course in microeconomics, since he's suggesting paying more than the equilibrium price.

Buffett also said that President Obama or President McCain should keep Hank Paulson as Treasury Secretary for the first year of their presidency. (I think Obama could probably do quite well with NJ Governor Jon Corzine as Treasury Secretary, if he wanted. Jon Corzine, a Democrat, was Paulson's predecessor as CEO of Goldman Sachs.)

Here is the full interview:

• Part 1
• Part 2
• Part 3
  

While on the topic of the bailout, let me point out that Carnegie Mellon University economist Allan Meltzer has his own proposal:

if they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think — that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them. People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way — if we're going to do this, then that's the way we should do it.

Somehow, I doubt that if the government follows Meltzer's idea it will earn a 15%+ rate of return. However, I do like the idea of prohibiting dividend payments until the credit crisis has passed.