Last week saw one of the biggest crises ever to exist on Wall Street. It's not every week that starts with a major investment bank, Lehman Brothers, filing for bankruptcy and ends with a massive rally prompted by the U.S. government's willingness to bail out struggling banks.
Some analysts, however, suggested the jubilance would be short-lived. Seattle hedge-fund manager Bill Fleckenstein predicted the U.S. government's moves are bound to fall flat given the weighty problems plaguing the world's biggest economy.
"They're not going to fix the fundamental problem that the homeowner has a house he can't afford. The economy is weak and getting weaker," he said. Fleckenstein has long warned about many of the problems, such as unrealistic real estate prices and excessive consumer and government debt, now plaguing the United States. He argues there was a "complete abdication of responsibility on the part of regulators."
Is there a ready solution for this market crisis? Warren Buffett responded on Friday by announcing he was buying Constellation Energy, a company badly beaten down by the market. But he also responded by staying put in the market. Warren Buffett's Berkshire Hathaway Inc. which has avoided major acquisitions in the financial sector in recent months may have had a $3.5 billion two-day paper profit on six major banking and financial services investments.
Buffett has long favored investments in undervalued businesses with strong earnings and management. That has helped him transform Berkshire since 1965 from a failing textile maker into a conglomerate with at least 76 companies.
"He's always felt Wells was very well-managed," said Frank Betz, who oversees more than $800 million at Carret/Zane Capital Management LLP in Warren, New Jersey. "Why does he like banks? Like Willie Sutton said, it's where the money is."
In times of crisis, it is wise to follow leaders. Here’s some of his wisdom (taken from Andrew Kilpatrick’s Of Permanent Value.
“I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.” Buffet partnership letter, July, 1966.
“As Ben Graham sad “In the long run, the market is a weighing machine _ in the short run, a voting machine [OR WRECKING BALL, SOME SAY!] I have always found it easier to evaluate weights dictated by fundamentals than votes dictated by psychology.” Buffett partnership letter, 1969
“The sillier the market’s behavior, the greater the opportunity for the business like investor. Follow [Ben] Graham and you will profit from the folly rather than participate in it.” Preface to the fourth edition of The Intelligent Investor, 1973
“The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive them who do not know what they do,” 1982 Annual Report
“All I want is one good idea every year. If you push me, I’ll settle for one good idea every two years.” Financial Review, Dec. 1985.
“The fact that men will be full of greed, fear and folly is predictable. The sequence is not predictable.” Channels magazine, talk to Patricia Bauer, 1986
“The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses. You simply have to behave according to what is rational than what is fashionable.” Fortune, January 4, 1988.
“I don’t know what it’ll (the stock market) will do tomorrow or next week or next year. But I do know that over a period of 10 or 20 years you’ll have some very enthusiastic markets and some very depressed markets. The trick is to take advantage of the markets rather than letting them panic you into the wrong action.” (widely quoted).
“The most important quality for an investor is temperament, not intellect. You don’t need tons of IQ in this business. You don’t have to be able to play three-dimensional chess or duplicate bridge. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. You know you’re right, not because of the position of others, but because your facts and reasoning are right.” Adam’s Smith’s “Money World” show, June 20, 1988.
“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.” (Fortune, December 19, 1988).
“Stocks are simple. All you do is buy is buy shares in a great business is intrinsically worth, with management of the highest integrity and ability. Then you own those shares forever.” (Forbes, August, 1990).
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