Buy American. I Am. by Warren Buffett:
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A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense.
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Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.
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Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.
Yet more great advice from Warren Buffett. I must admit I think buying stocks from the USA and elsewhere is wise, but there isn’t any reason to listen to me instead of him.
Related: Financial Markets Continue Panicky Behavior – Great Advice from Warren Buffett – Stock Market Decline – Warren Buffett’s 2004 Annual Report – Does a Declining Stock Market Worry You?
FDIC to double bank fees in face of $40bn loss
About 90 per cent of US banks will see their basic deposit insurance fees double in the first quarter of 2009, from between 5 cents and 7 cents for each $100 of deposits to between 12 cents and 14 cents, according to a plan laid out yesterday by the FDIC, a government-backed agency that insures consumer deposits up to $250,000. From the second quarter that range would widen to from 10 to 14 cents per $100.
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Banks with the riskiest profiles could end up paying fees as high as 77.5 cents for every $100 of insured deposits under the plan, compared with a maximum of 43 cents under the current structure.
The FDIC insures bank deposits with fees charged to banks. The recent increase of the FDIC Limit to $250,000 seems to indicate that taxpayers will now pay for any costs for covering above $100,000 per account-holder (which I think is a mistake – the fund should be self supporting). But this increase in fees is to restore the fund to the minimum capital requirements of the insurance fund.
Related: posts on banking – Avoid Getting Squeezed by Credit Card Companies – Where to Keep Your Emergency Funds?
| Jim Rogers webcast: Fannie Mac and Freddie Mac should not have been bailed out. Jim Rogers is one of the most successful investors in the last 50 years. He and George Soros (together with the Quantum Fund) and then separately along with Warren Buffett have made the most as investors (that I know of – I could easily be wrong).
How you want to accept their opinions on the current crisis is up to you. I believe they are worth listening to – more than anyone else. That does not mean I believe they are totally right. To me the long term track record of each is very impressive. Especially Jim Rodgers and George Soros have been making big investment gains largely on macro economic predictions in the last 20 years. |
In The Dollar is Doomed (July 2008) Jim Rogers predicts the United States Federal Reserve is so badly run it will be gone in a decade or two. I disagree with that sentiment. He certainly has much more expertise than I do but in evaluating such a comment you need to look at what really matters to him. He doesn’t need the Federal Reserve to actually cease to exist to make profitable trades based on his prediction that the Federal Reserves policies are dooming the dollar.
Another thing to note with Rogers and Soros is they will make strong statements and take huge positions but will change their mind when conditions change (often quickly). So you can’t assume what they said awhile back is still their belief today.
Related: Jim Rogers: Why would anybody listen to Bernanke? – investment books – Rodgers on the US and Chinese Economies – A Bull on China
401(k)s are a great way to save. Yes, today those that have been saving money have the disappointment of bad recent results. But that is a minor factor compared to the major problem: Americans not saving what they need to for retirement in 401(k)s, IRAs, even just emergency funds… Do not use the scary financial market performance recently as an excuse to avoid retirement savings (if you have actually been doing well).
The importance of saving enough for retirement is actually increased by the recent results. You might have to re-evaluate your expectations and see whether you have been saving enough. I am actually considering increasing my contributions, mainly to take advantage of lower prices. But another benefit of doing so would be to add more to retirement savings, given me more safety in case long term results are not what I was hoping for.
Now there can be some 401(k) plans that are less ideal. Limited investing options can make them less valuable. Those limited options could include the lack of good diverse choices, index funds, international, money market, real estate, short term bond funds… My real estate fund is down about 2% in the last year (unlike what some might think based on the media coverage of declining housing prices). And poor investing options could include diverse but not good options (options with high expenses… [ the article, see blow, mentions some with a 2% expense rate - that is horrible]).
But those poor implementations of 401(K)s are not equivalent to making 401(k)s un-viable for saving. It might reduce the value of 401(k)s to some people (those will less good 401(k) plans). Or it might even make it so for people with bad 401(k) options that they should not save using it (or that they limit the amount in their 401k). I don’t know of such poor options, but it is theoretically possible.
The tax deferral is a huge benefit. That benefit will only increase as tax rates rise (given the huge debt we have built up it is logical to believe taxes will go up to pay off spending today with the tax increases passed to the future to pay for our current spending).
And if you get matching of 410(k) contributions that can often more than make up for other less than ideal aspects of a particular 401(k) option.
Also once you leave a job you can roll the 401(k) assets into an IRA and invest in a huge variety of assets. So even if the 401k options are not great, it is normally wise to add to them and then just roll them into an IRA when you leave. If the plan is bad, also you can use an IRA for your first $5,000 in annual retirement savings and then add additional amounts in the 401k (if they are matching funds normally adding enough to get the matching is best).
401(k)s, 403(b), IRAs… are still great tools for saving. The performance of financial markets recently have been poor. Accepting periods of poor performance is hard psychologically. But retirement accounts are still a excellent tool for saving for retirement. Using them correctly is important: allocating resources correctly, moving into safer asset allocations as one approaches and reaches retirement…
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The panic driven declines in worldwide stock markets have been remarkable. Deciding whether to join the panic and sell, or hold firm, or buy in now is very difficult. In general trying to time the stock market is difficult and not something many have succeeded trying to do. When I look at the long term values of individual stocks I see plenty that seem like bargains to me. Of course I have no idea if they will be greater bargains in a week, a month or a year. And I could easily be wrong that they are bargains at all.
Still I have bought some Google (GOOG), Templeton Dragon Fund (TDF), Toyota (TM) and ATP Oil (ATPG). The first three I am happy to buy and hold for 10 years (and actually there is a greater than 90% chance I will hold the shares I have now own 10 years from now). The fourth one is fairly speculative, we will see how it goes. I did sell one stock, not because I think it is overvalued but because I liked what I could buy if I sold it (the price had held up well so relatively I could trade it for more shares of what I wanted today than I could have a month or 6 months… ago) – Comtech Telecommunications (CMTL). Often those stocks that hold up well in declines are very strong and do very well once the market corrects, so this could well turn out to be a mistake.
Trying to time when things have hit bottom is very difficult. So I am not trying to do that. I did not invest all my cash now, and will be adding to my positions over the next year (most likely). I have been fortunately that I have been saving up cash and not buying into the market much (I wasn’t smart enough to sell though, and my retirement accounts were still going into stock funds primarily). I am guessing the declining prospects (due to the worsening economy) on the stocks I am buying have been more than offset by the declining stock prices. Only time will tell whether that was a profitable move or not.
Related: Does a Declining Stock Market Worry You? – 12 Stocks for 10 Years June 2008 Update – Beating the Market – Another Great Quarter for Amazon
The FDIC limit has been raised to $250,000 which is a good thing. The increased limit is only a temporary measure (through Dec 31, 2009) but hopefully it will be extended before it expires. I don’t see anything magical about $250,000 but something like $200,000 (or more) seems reasonable to me. The coverage level was increased to $100,000 in 1980.
What does federal deposit insurance cover?
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.
Joint accounts are covered for $250,000 per co-owner. The limit is per person, per institution, so all your accounts at one institution are added together. If you have $200,000 in CDs and $100,000 in savings you would have $50,000 that is not covered.
FDIC is an excellent example of good government in action. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 and serves to stabilize banking by eliminating the need to get ahead of any panic about whether the bank you have funds in is in trouble (which then leads to people creating a run on the bank…)
From an FDIC September 25 2008 news release: the current FDIC balance is $45 billion (that is after a decrease of $7.6 billion in the second quarter). The FDIC is 100% paid for by fees on banks. The FDIC can raise the fees charged banks if the insurance fund needs to get increased funds.
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Anyone involved in finance should understand mania in the markets. It is not a shock that financial markets do irrational things. They do so very frequently. Anyone who has not read, Manias, Panics, and Crashes: A History of Financial Crises, should do so. Leverage often is a catalyst that turns bad investments into panics that damage the economy. A previous post on this topic: Misuse of Statistics – Mania in Financial Markets.
Enron was the pit canary, but its death went unheeded
As for the lessons we’ve forgotten, how about this one: financial statements aren’t supposed to be fairytales.
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when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn’t work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it’s that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down.
I think the odds that Wall Street has brought itself down is very low. Even that the ludicrous excesses of Wall Street are at risk is very unlikely. Perhaps for a few years their might be some restraints put on excesses. But most likely politicians will respond to huge payments by arranging favors for those that want to bring excesses back. If this can be prevented that would be great, but I doubt it will.
Related: Investing books – Tilting at Ludicrous CEO Pay – Losses Covered Up to Protect Bonuses
Since the S&P/Case-Shiller 20 city home price index peaked in June 2006 it has fallen 19.5%. In the year ending July 2008 the decline was 16.3%. That is a record drop. In that year Las Vegas declined 29.9%, Phoenix 29.3% and Miami 28.2%. For the largest cities: New York City declined 7.4%, Los Angeles 26.2%, Chicago 10% and Dallas 2.5% (the second lowest decline – Charlotte declined 1.8%); Houston and Philadelphia, the 4th and 5th largest cities are not included in the 20 city index.
Only one city shows a decline in housing values since January, 2000: Detroit is down nearly 7%. Washington is up 95% since January, 2000 (even with a 15.8% decline in the last year), Los Angels and New York are tied for second at 93% increases. The 20 city index is up 66% from January 2000 to July 2008.
The S&P/Case-Shiller Composite of 20 Home Price Index is a value-weighted average of the 20 metro area indices for single family homes.
Source: Record Home Price Declines (pdf)
Related: Housing Prices Post Record Declines – Home Price Declines Exceeding 10% Seen for 20% of Housing Markets – Fourteen Fold Increase in 31 Years – The Ever Expanding House – Coming Collapse in Housing?
SEC to temporarily ban short-selling: report
Wow, that would be very surprising to me (especially if you asked more than a month ago the chances of this happening). But given these crazy times I can believe it. I wish they just properly regulated short selling the last 10 years (the failure to do so has been very disappointing). And I would be against banning short selling unless there were a very extreme situation. I don’t see that are necessary now, but I have far from all the details so maybe it is warranted now (though I am skeptical).
Update: SEC Halts Short Selling of Financial Stocks
Given the importance of confidence in financial markets, the SEC’s action halts short selling in 799 financial institutions.
Related: Naked Short Selling – Shorting Using Inverse Funds – Investor Protection Needed
Watching your new worth decline isn’t fun. But when investing over the long term you will have some good periods and some bad periods. Diversification can help smooth out the extremes but the markets are often driven by emotion. And those emotions (greed, fear…) cause extreme price swings. I am getting ready to invest more in the market. I don’t know how much further we will go down, or if we are at the bottom now (unlikely). But there are investments I am happy to own at these prices. The main reason I don’t buy more is the limitation of my capital. And I would rather buy in slowly so if prices decline I can get more for my money.
Not surprisingly the stocks I am looking at are those in the 12 stocks for 10 years portfolio. I am looking at buying more Templeton Dragon Fund, Toyota and Google for myself now. I am happy to be able to buy more of these stocks for the long term. It is not fun to see my net asset value decrease but that does provide some opportunities for buying stocks at lower prices. They may turn out to be bargains, or maybe they will drop much further. That only time will tell, but I am happy to add to those positions at these prices.
On the overall market I am waiting and watching. But I am leaning now toward moving more of my long term investing into stocks – I am already over-weighted there compared to the conventional wisdom but that is my style. I am willing to take more risk with a long long term investment portfolio. As the time frame shrinks (and the assets grow) I believe in reducing the risk profile for the overall portfolio (though I still believe conventional wisdom over-emphasizes price volatility risk (compared to inflation risk, for example). This market does have real potential for creating serious long term problems, which is why I need to think more (and get more information) about the long term implications.
Related: Investment Risks – books on investing – Does a Declining Stock Market Worry You? – Uncertain Economic Times