Sunday, May 4, 2008

Buffet: Don't invest based on macroeconomy forecast

In an article appears on CNN Money prior to shareholders meeting, Buffet continues to emphasize one should not invest based on macroeconomy forecast.

The good news is that Buffett continues to insist that no one should invest on the basis of a macroeconomic forecast; his point is that the investor's task remains the same no matter what the markets are doing around you. You should continue to look past stock prices to analyze whether the underlying business can continue to grow, paying special attention to whether customers would continue to want a company's goods and services if it had to raise prices. That's one of the main reasons he found the Wrigley/Mars deal attractive, even though (by conventional measures like Wrigley's P/E ratio) it did not come cheap.

I agree with him if one has a very long view but most would agree that he does timed the market quite well though not buying exactly at the bottom. Look at his Kraft purchase last year, he bought it around 10% from the bottom, extremely well timed in my opinion for a big block of shares acquisition.

Berkshire took a hit on $ 1.2 B losses on derivatives in first quarter 2008. Most may start to raise eye brows but not many dare to confront him: what the hell are you doing? Don't over-react, read on.

(Financial Times)The investment losses at Berkshire, an insurance-to-sweets conglomerate, were concentrated in two areas. The company recorded a $1.2bn unrealised loss on put contracts on the S&P 500 index and three other indexes.

Under these contracts, Berkshire will have to pay investors between 2019 and 2028 if indexes are below a pre-determined level. The recent decline in world stock markets forced it to take an accounting loss on the contracts.

OK, it's put contracts. It's very far, between 2019 and 2028, long term trend of stock market is up, he knows it very well. Knowing Buffet, odds should be on his side though I did not have a chance to look at the S & P index target. Why? He will always exploit others irrationality under uncertainty. Most will be extrapolating pessimistic outlook (prior to March 2008) into the future. The result? Miscalculation. How do I know? Because it's Warren Buffet, the master of risk management. Don't play poker with him. You will lose all your pants(skirts)? He will not do it if odds are not on his side.


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