Before I question the wisdom of the “Oracle of Omaha,” let me start with a few important caveats.
- Warren Buffett is the second-richest person in the U.S. which has way more billionaires than any other country.
- He is the classic modern-day manifestation of the original Graham-Dodd value investment approach that first emerged in the mid-1920s and is still a relevant and successful model today — as Buffett has so demonstrated… and last but not least…
- He’s just a damn likeable, down-to-earth, non-pretentious guy that eats burgers and barbecue but still seems healthy at his age.
Today he is America’s everyman’s economist — something he never really intended to do. I blame this on Becky Quick at CNBC. She got him on the show talking and people loved him so much that now you hear him everywhere….
Buffett used to start any discussion on stocks with something like: “I have no idea whether the stock market is going to be up or down at any point in the future… I don’t take the economy and the markets into account. I just buy really good companies that have long-term potential when they are at good valuations.”
I think he’s making a strategic mistake by commenting more on the economy rather than stock selection — and worse — becoming a cheerleader for the U.S. economy. He’s basically been telling people that the government is largely doing the right thing and things will be alright as America is still a great country.
Well, you know my view: The government is doing the worst thing possible and is killing the golden goose of free-market capitalism… or “corrupting” it as David Stockman, our keynote speaker for our recent IES conference calls it.
But my main difference with Buffett is more critical: Things are NOT going to be alright.
Such an over-extension of the already greatest bubble in modern history can only lead to either a greater financial crisis and depression, or worse, a multi-decade “coma economy” like we witnessed in Japan.
I’m not going to go into all the reasons why this is the case at this moment, as you’re familiar with my take on this subject. I’m simply going to bring some reality into the midst of the largest bubble in history.
These major bubbles and great resets or depressions to follow only come once in a lifetime so most of us never saw a major bubble or depression before. Even Buffett at age 84 was only a child in the Great Depression.
I often comment in my speeches that if you had bought blue chip stocks like the Dow in 1929 and retired, you would have been dead before you broke even. The Dow peaked in 1929, suffered an 89% loss at worse, and didn’t reach those levels again until 1953… 24 years later.
We all know that almost no one would hold stocks through that big a rout, so they would have never broke even no matter how long they lived.
Warren was saying on CNBC earlier this month that he doesn’t see how you could go wrong if you buy a really solid company with products that everyday people use. That would be a true statement most of the time — but NOT today!
AT&T was a really solid company with affordable products everyone uses and a dominant market position during and after the last great bubble. This stock peaked in 1929 at $51 and fell 81% into 1932… it didn’t even regain its high until 31 years later.
General Motors peaked in late 1928 at $395 and fell to $4 in 1932, down 91%. It was still down 67% in 1938 and didn’t hit new highs until 1950. GM was vying with Ford for leadership in the hottest new consumer industry of the day, and it ultimately became the greatest company in the world by the mid-1960s.
But you would have been underwater for 22 years.
Sears & Roebuck was the greatest retailer of its time, and even more so into the 1960s. It topped in late 1927 at $48 and fell as low as $2.50. That’s a whopping 95% drop! It briefly hit a new high in 1946, but then fell back and didn’t hit a sustainable new high until 1950.
This is not the time to listen to Warren.
By the way, he’s also investing in a retail car dealership company just when baby boom spending on autos is due to peak at age 53 this year. The echo boom won’t return us to similar sales levels until around 2043 to 2045.
This isn’t the time to buy stocks or to make any investment during the greatest bubble in modern history.
If there are great long-term companies you like, wait a few years. Our long-term cycles are the worst they’ve been since the early 1930s. Once they’re down by 50% to 60% or more, take a second look.