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Is Warren Buffett Smoking Crack?

Written by Nickel - 28 Comments

Not quite a week ago, I wrote about Warren Buffett’s bullish stance when it comes to the stock market. Sure, the economy is currently in a tailspin, but Buffett sees a lot of value in the stock market right now. But guess what? Not everyone agree with the Oracle of Omaha.

In a recent article in Barron’s, Alan Abelson took exception to Buffett’s rosy outlook. Here’s how Abelson sees it:

As always, Buffett was folksy in his explanation of what prompts his bullishness… He sprinkled his advice with some obvious caveats and cautioned that he hasn’t any idea what the market will do in the short term — a month or even a year from now — but he’s confident that it will turn up before sentiment or the economy does. In any case, most major companies “will be setting new profit records five, 10 and 20 years from now.”

And he’s quite emphatic that the investor who has been sitting with cash and calmly watching the carnage should lose no time in piling into stocks. “If you wait for the robins,” he warns “spring will be over.”

In contrast to Buffet’s view, Abelson when on to argue that:

We needn’t go through the obligatory obeisance to Buffett’s investment prowess and peerless common sense. We think he’s great. And sure, we believe the country will survive and prosper in the future. No argument most stock prices are down sharply. But we don’t agree this is the time to dive headlong into the market.

For one thing, Buffett can afford to be patient as long as he chooses. Most investors don’t have that luxury. For another, the economy is in the early stage of unraveling and we don’t think the market decline has discounted the havoc this unraveling may wreak by a long shot.

And he closed with:

Most of all, Buffett despite his long experience and savvy hasn’t run into a crisis quite like this one because, pure and simple, it has no true precedent. That alone anyone should give anyone with fewer resources than Buffett, intellectually and otherwise, pause. Contrary to what he’s saying, we can’t remember anything that deserves to be called a bull market that had to be caught early and it certainly wasn’t true of the last two we’ve enjoyed.

So… What do you think?

Is Buffett off base? Or is Abelson being needlessly risk averse? I think a big part of the divergence in views has to do with the timeline. While Abelson argues that Buffett can afford long-term patience, Buffett clearly states that he’s looking ahead 5/10/20 years, which is exactly what one should be doing when investing in the stock market.

Abelson sums up their difference of opinion quite nicely at the end, when he states that Buffett has an “early bird gets the worm” outlook vs. his own “second mouse gets the cheese” stance.

Source: Barron’s Online

Published on October 23rd, 2008 - 28 Comments
Filed under: Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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28 Responses to “Is Warren Buffett Smoking Crack?”

  1. 1
    Russ Says:

    Truth is we’ll only know which of these gentlemen is correct well after the fact.

    What strikes me as interesting is the fact that Buffett clearly states that while he is optimistic and investing for the long term, he has no idea what will happen in the future.

    Mr. Abelson, on the other hand, comments that “. . . the economy is in the early stage of unraveling and we don’t think the market decline has discounted the havoc this unraveling may wreak by a long shot.”

    In my opinion, Mr. Abelson has no idea where we are in this economic cycle. Neither does Mr. Buffett and neither do I. We might be in the “early stage of unraveling” but we might also be in the late stages.

    Again, no one knows, but I’m always skeptical of anyone who has an opinion based on their “knowing” where we are today or where we’re going tomorrow.

    Great piece, and I’m in Buffett’s camp on this one.

  2. 2
    Tyler @ Dividendmoney Says:

    I’ve been saying for weeks now that I am waiting until November and December to initiate positions.

    RIght or wrong, I would rather wait until after the political attack ads are off the television.

    I also believe that many financial institutions (especially my favorite Canadian banks) have thier fiscal year ends on October 31, 2008 – at which time we will see some additional information.

    Regrdless of what either of these gentlemen say, I have to believe that the entire world economy will re-invent itself and develop additonal value added goods and services that the world’s inhabitants will consume. (ie. business is not dead).

    Sure many businsses will fail, but others will flourish and when the rising tide comes that lifts all boats, I want to be in the captain’s seat!

    That said, I’m in no rush to throw money at this market “willy nilly”, but I know I’ll kick myself in 10-15 years if I don’t gradually dip my toes in over the next 3-12 months.

  3. 3
    Mr. ToughMoneyLove Says:

    Abelson is dead on: Buffet can afford to take enormous risks because (a) his reputation is already established and (b) he has wealth that cannot be imagined. I could make those same speeches if I had his money. In fact, with his resources, I could make those speeches without ever reading a word of market data. He might as well say: “I have so much money that I can afford to invest billions right now and not care what happens to it. The rest of you should be more careful about what you do.”

  4. 4
    kitty Says:

    When Buffett expressed concerns about the overvalued stocks in 1999 a lot of people thought he didn’t understand the “new economy” and that the internet boom was somehow different from what happened in the past.

    So far Buffett correctly predicted future bull markets in 1979 and, if I am not mistaken, 1990. He also correctly called the potential crash in 1999 and 2004. OK, he didn’t specifically mentioned crash, but he did express concern about stocks possibly being overvalued. Now, his predictions didn’t turn out to be true immediately, but still if you followed his advice in 79, 90, 99 and 2004, you’d come out ahead. How good is Abelson’s record? (This is not a trick question, I really want to know).

    I think I’ll gradually move some of my stable value 401K investments into market as well as buy some select individual stocks in my taxable account over the next year or so. I’d be buying now, but I am out of cash momentarily, although I have CDs. As I collect more cash and as some of my CDs mature, I’ll consider buying.

  5. 5
    Mike Says:

    1) You didn’t link to the Barron’s article

    2) Who is Alan Abelson? Why should we trust him? What credibility does he have? Is he a billionaire like Buffett? Is he a blowhard from Brooklyn? You failed to establish who he is and why his Buffett-bashing matters.

    3) Maybe you’re the one smoking crack

  6. 6
    KC Says:

    I’ll take Buffett on this one. Granted he has billions and can take a little risk, but what Abelson says about Buffett having time is incorrect. Buffett is old, he doesn’t have time. His company may have time, but he doesn’t. Right now I’m in the process of a long distance move and buying a much larger home so I’m keeping most everything in cash. But once this gets settled in a couple of months I’m investing in either a broad based index fund or Berkshire Hathaway stock. There will be more downs for a while, but for the most part we’re at a bottom.

  7. 7
    nickel Says:

    Uhhhh, Mike? There’s a link to the Barron’s article at the end of my piece. See where it says Source: Barron’s Online? Click it. Who’s smoking crack now? :)

  8. 8
    nickel Says:

    As for the issue of “Who is Alan Abelson?,” he’s a longtime columnist and former editor of Barron’s. Here’s what Wikipedia has to say:

    ———

    Alan Abelson (born 1925) is a veteran financial journalist, and has long written the influential “Up and Down Wall Street” column in Barron’s Magazine. He was editor of Barron’s in the 1980s and early 1990s. Mr. Abelson appeared on a national television network “morning show” in the 1980s and offered his amusing and witty insights about investments and world economic conditions. One of his memorable comments: “Gold is the apocalyptic investment. If you think the world is going to end soon, then buy gold!”

    Abelson’s columns have sometimes spawned controversy because of his often harsh critiques, and in the 1980s he was sued by some targets of his column. However, the suits were unsuccessful, and Abelson is widely viewed as a pioneer of tough coverage of Wall Street.

  9. 9
    Dave Farquhar Says:

    History is on Buffett’s side. People are fond of pointing out that the market didn’t reach its 1929 peak again until 1954. But that’s assuming one bought at the peak, which one has approximately a 1 in 365 chance of doing. Dollar-cost averaging takes care of that. An easy way to do that is to just make the habit of buying a little bit of stock each payday.

    It seems a lot of people are conveniently forgetting we did recover from the Great Depression. And this time around, the powers that be all realized much more quickly that there’s a problem and started taking steps to minimize or correct it.

    One should buy stocks intending to hold for 10 or 20 years or more. The people who do that today are getting the chance of a lifetime. The Great Depression made my grandfather a multimillionaire, because he bought up stocks in the 1930s and held onto them for decades. This downturn/recession/depression, whatever you want to call it, can do the same for many other people. This isn’t just a depression. At worst, Wall Street is holding the sale of the decade. At best, it’s holding the sale of the century.

  10. 10
    J Says:

    Alan Abelson is a life long perma-bear.

    Just keep that in mind whenever you read his stuff.

  11. 11
    gm Says:

    3 things:
    1) Any losses Buffet suffers in the stock market is unlikely to impact his standard of living in the far or near term in any significant way. So he can afford to be sanguine unlike most of us.

    2) Buffet’s serious investing (as opposed to a billion here or there that he sometimes throws around) results in significant control of the company or its policies. So he is in a stronger position than the Joe-Sixpack investor in terms of influencing company policy and profiting from his investment.

    3) My personal view is to wait until the middle of the next year to see how the wind is blowing. There might be a rally following the election around the end of the year or the beginning of next, but only a few months after that will let the dust settle and give a clearer sense of direction. Preserving the capital I have left makes me willing to miss any short term gains in the near future.

    For a stock market recovery to inspire confidence in me, it has to be slow, and guided by fundamentals. This is absent in the volatility of the recent past.

    However I will continue to invest in my retirement plans through salary deductions and let DCA work its wonders. My post above concerns previously invested funds that I have removed from the market into CDs or money market.

  12. 12
    Taxrascal Says:

    Abelson isn’t making much of an argument. I guess it is okay for him to say that Buffett is lying about his motives — but why stop there and not argue that Buffett is lying about buying, plain and simple?

    Abelson also seems to imply that for most of market history, everything that happened had an obvious precedent — but I can think of no precedent for: the conglomerate-pooling mergers of the 1960’s, the collapse of the dollar and price controls in the 1970’s, the LBO boom of the 1980’s, the dot-com era in the 1990’s, or the rise of derivatives and structure products in the last few years. The markets have been weird and incomprehensible ever since Abelson started writing (go back and read his columns from the 1960’s — he was bearish then, too). And they have to be weird, too: if we all know what’s going on, we’ll act on that information, until we reach the point of confusion or overconfidence, or we run out of money.

    As I pointed out earlier (http://www.taxrascal.com/optim.....kinds/196/), Buffett would want you to do your own research, not just to follow him blindly. Abelson’s argument seems to be: “Don’t follow him blindly — follow me blindly instead!”

  13. 13
    mapgirl Says:

    “We don’t agree this is the time to dive headlong into the market.”

    Well is there ever a time for that? Professional advice tells us not to time the market, but Buffett says, “Be greedy when others are fearful.” I figure now is just as good as any other time to go long on BRKB while everyone around me is scared witless, including myself.

    When would Abelson advise getting into the market if not now at some historic lows for some stocks? If he’s so knowing about when to time the market, where’s his fortune?

    I don’t agree that Buffett has all the time in the world to wait. He’s an old guy as many critics like to remind me when I write about holding BRKB. He may not last this downturn, but I have faith that his recent purchases will outlive him to my financial benefit.

  14. 14
    Joe Says:

    Buffett has earned the privilege of being called an “oracle” these days. Whenhe makes a comment like that, it has the power to directly influence the markets.

    However, I agree with Abelson on this one. The crisis may be well underway, but its effects will be lasting as unemployment rises, retirement savings evaporate leaving America’s largest population of retirees ever little recourse in paying for ever-increasing medical expenses and basic items such as food and energy.

    There will be an eventual turnaround but by then America will have an impaired ability to compete in the world market. It’s actually very sad to me, but consider that the law of compounding returns is working against us, and our future potential is being exponentially affected by current losses. Meanwhile China enjoys a 9% / year growth of GDP, even in this climate.

  15. 15
    kitty Says:

    Joe, you have a point, but many companies including the US companies are international. The largest US companies make a lot of money in China and India. Some of these companies are still doing fine – I can name a few who just reported great earnings, gave great guidance and said they have no cash flow problems – yet their stocks are beaten down. When we get back to fundamentals some of these companies are likely to go up.

    I don’t know when the market will turn around. It is true that economy is bad and is likely to get worse near-term, but the markets anticipate the changes not follow them. At some point, all bad news and low expectations are factored in. Maybe we aren’t there yet. But the market doesn’t move up or down gradually, it often jumps by a high amount. Missing just a couple of big jumps when it does turn around will cut into overall return by quite a lot.

    All I know is if I had followed Buffet advice and bought in 1990, sold all in 1999 and 2004 when he warned about overstaying at the ball for too long (1999) and that stocks are overvalued and derivatives are dangerous (2004), I’d be rich. Sure it might not have been the absolute bottom or absolute top – these are hard to predict, but it’s better to buy a little early or sell a little early then miss big jumps or falls later on.

    Sure, Buffet can afford to lose money. Doesn’t mean he likes it – otherwise he’d not moved to bonds in his personal account as he said long before this year.

    As to his ability to influence the company – he told he is buying stocks in his personal account, not Berkshire, so the amounts are smaller. At least none of us know which stocks he bought so the amount must not be big enough for him to influence companies much.

  16. 16
    mbhunter Says:

    I thought it was pretty clear why he’s recommending stocks: He owns a lot of equities, and wants to see BRK rebound a little bit. It’s down $35k per share from its peak. People listen to what he has to say, and it doesn’t cost him much to try.

    Besides, he didn’t say which stocks he’d be buying.

  17. 17
    Shadox Says:

    Buffet may be smoking something, but whatever it is I am smoking the same thing. I am continuing to invest in the stock market by investing a fixed amount of money in an index fund every 15th of every month. Patience and level headedness, people…

  18. 18
    Linda Says:

    When everyone was purchasing the .com stocks Warren Buffett did not. He told people that they were inflated and not worth what was being charged for the stocks. I’m currently reading “Snowball” about Warren Buffett’s life.
    Interesting read. Buffett knew more about money in school than most of us know now.

  19. 19
    Trav Says:

    I honestly don’t understand this line of nonsense:

    “For one thing, Buffett can afford to be patient as long as he chooses. Most investors don’t have that luxury.”

    Buffett is talking to investors with risk capital sitting around in cash. *Everyone* has the luxury of leaving their investmet money in cash as long as they want to.

    (Except for people who think they need to invest soon so they can earn capital gains soon, and those people probably have never heeded investment advice in their lives…)

    Buffett doesn’t time markets. He just buys stuff when it’s worth the price, and sells when it’s not.

  20. 20
    mrm Says:

    Buffett is probably just trying to talk the economy up but obviously his “buy at the bottom” notion will always hold true. You’d probably be crazy NOT to invest in the broader market right now.

    But I am still trying to figure out what he’s thinking supporting BHO for president.

  21. 21
    Joe Says:

    mrm-

    I thought it was interesting to find that Paul Volcker is one of Obama’s economic advisers – perhaps the greatest fed chairman ever. maybe that has something to do with it.

    kitty-

    oil is still falling, which is a huge indicator of forward-looking perceptions on global production. it will most likely continue to fall for the remainder of the year. meanwhile, opec will cut production, exacerbating the coming spike in oil prices when the dollar starts to fall. also, the financial crisis will continue easily into the beginning of next year. after that, all the “bad stuff” will be priced in (what- we’re just NOW starting to admit we’re in a recession??) and we can start looking for a (slow) turnaround. because of this crisis, global production will be down. thus, even from a “fundamental” standpoint, recovery will be slow. what i mean by that is that we won’t see yesteryear’s highs for a long time to come. maybe 10 – 20 years. i’m in and out of short indexes (i’m in a roth IRA so capital gains are inconsequential to me) all the way till the turn of the year, then depending on how things are going, i will start going long on strong-valued companies.

  22. 22
    Joe Says:

    one last thing – i’m looking at this crash as an excellent buying opportunity, and the lower it gets, the better the opportunity (to an extent of course). so this presents an excellent opportunity to me… but the people who were planning on retiring soon are the ones most hurt by this. that’s what really upsets me. and also the fact that the entire world is suffering so that some ultra-rich people could get even more ultra-rich.

  23. 23
    Nick Says:

    The market is so volatile right now it’s hard to jump on anything. Personally I don’t think that the ‘bottom’ is here yet, but there are still some stocks out there that will inevitably go up, even in the short run. That’s more the exception though, rather than the rule.

  24. 24
    Charles Says:

    When they are crying , you should be buying.. And that is that.. We don’t know how low the market will go, but saying you will wait til it bottoms is a soft position of market timing .. which we know does not work well.. So, you buy now, knowing that it might go down, but stocks are Cheap, Now.. They may get cheaper but no one knows when the bounce will happen.. The bounce Will happen.. Everything is discounted and will be worth, Much More in five years , perhaps more or less. Buy..

  25. 25
    Buffett Fan Says:

    Warren Buffett is very good at what he does, but there are undoubtedly many ways to skin a cat. It is clearly much better to buy at the bottom then sell at the top then buy at the bottom again. Warren Buffett tends to just buy and wait. But he is buying equities now for the first time in years which is very significant. That doesn’t mean of course that he is sure that we are at the bottom just that he is prepared to wait 5 years or more, he’s playing the odds basically and he has calculated that the odds are massively in his favour. I’s worthbearing in mind too that he was buying when the DOW was at 8200 but that when it started moving up he stopped buying.

  26. 26
    Nick Says:

    I think this “economy event”… thingee… that goes on, is a bluff, big fat bluff. and if you go with the “sound sense” not the “common” one, you could care less. As does Warren. In the hardest times you have to eat, breath… had a roof over your head, insure that roof…;) Hi Warren…!!! You just have to be in charge of what you do, the way he is. Otherwise you bend and hold your breath, while someone else is pickpocketing you.

  27. 27
    Nabloid.com Says:

    Buffett is right and wrong. Due to inflation, which occurs on all fiat currencies, assets will be worth more in the long-term future than they are today (well they aren’t technically worth more, but when valued in our dollars, they will be worth more dollars – perhaps more so because the dollar is worth less.)

    Buffett is right, it is time to buy CERTAIN companies… SOME great companies are on sale right now. That said, not every company will weather the storm, and the economic outlook for the U.S. isn’t great due to the boomer’s retiring and the massive deficits, debts, unfunded liabilities, increased competition overseas that uses no min. wages and manipulate thier currency to remain lower than ours for currency arbitrage, etc, etc.) Then tack on increased taxes. I’m not doomsday preaching, I just think we have some big issues we need to deal with and until we do, there are a lot of other economies that may fare much better. That said, I’m an INVESTOR in COMPANIES, and each company has different prospects for the future.

  28. 28
    iLadekzdroj Says:

    Hello there! This blog post couldn’t be written much better! Going through this article reminds me of my previous roommate! He constantly kept talking about this. I will forward this post to him. Pretty sure he’ll have a great
    read. Many thanks for sharing!

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