Why Buffett's Buying
A rogue question: Are we now in a cash, or CD, 'bubble'?
I know it sounds ridiculous. But so many investors have dumped everything else and stampeded into federally guaranteed certificates of deposits, no matter what the interest rate.
They're even bragging about it. Strangers practically buttonhole you on the street to boast about all the money they hold in FDIC-backed accounts, the way they bragged about their dotcom stocks in 1999 and emerging market stocks last year.
In bars across every big city, you can hear characters with loud voices jabbering about all the cash they hold. They got out of equities just before the market crashed.
No one seems to want anything else. Not gold stocks. Not muni bonds. Not defensive equities. Cash, cash, cash.
And here comes Warren Buffett, who has made about $40 billion being righter about this stuff than anyone, ever, with a timely warning.
'Today people who hold cash equivalents feel comfortable,' he warns in the New York Times. 'They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.'
Buffett says he is buying stocks. And no wonder.
Stocks are cheap.
It's not just Wall Street. It's the whole world.
Look at our charts. They show the overall valuation of the world's stock markets going back to the mid-1980s, on three separate measures. The first chart compares share prices to the companies' total annual sales. On that measure, world equities are now the cheapest they have been since 1986. They are half the levels seen at the peak of the stock market bubble, in 2000. They are well below the levels seen at the bottom of the bear market in 2002-2003.
The second chart shows 'enterprise value to EBITDA.' Enterprise value is the value of a company's shares and debt. And EBITDA is roughly equivalent to operating cash flow: operating profits before you deduct debt interest, taxes, depreciation and amortization. And once again, the picture here is remarkable: Share prices around the world are the cheapest they've been since the mid 1980s.
The third chart compares share prices to the companies' net asset, or book value, per share. The picture is similar, even a little more flattering. We are a long way below levels seen at any time since 1985.
Many investors, when they are told Warren Buffett is buying stocks, tend to wonder which stocks to buy.
There's good news and bad news.
The bad news is that if you buy individual stocks right now, you are almost certainly wasting your time. The chances are slim to none that your picks will do better over time than a simple index fund.
The good news is that you don't have to. Just pick some low-cost mutual funds that spread your risks and relax. These days you can invest globally, and not just in the U.S., at the click of a mouse.
Anyone investing for the long term, five or 10 years out, needs to be buying in this environment. |
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