Welcome to the Oracle of Omaha’s “Long, Deep Recession”

Warren Buffett Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”

by Alexander Green, Chairman,

Investment U

Investment Director, The Oxford Club

Friday, May 30, 2008: Issue #801

Warren Buffett opined that the United States is already in recession, even if it’s not in the sense that economists would define it: two consecutive quarters of negative growth, in an interview with the German magazine Der Spiegel on Saturday. Furthermore, Buffett argues the recession “will be deep and last longer than many think.”

Sounds pretty ominous.

After all, Buffett is now the world’s richest man - he recently surpassed Microsoft chairman Bill Gates - and is easily one of the planet’s most successful investors. If Buffett himself thinks the economic outlook is lousy, the average punter thinks, maybe I should get out of the market.
If you have money in the stock market that you will need in the next few months ahead, you should. (Not because the market is about to go down - although it may - but because money earmarked for short-term expenditures shouldn’t be in the market in the first place.)

However, if you own stocks to meet your long-term financial objectives, stay put. And look for fresh opportunities, too. After all, that’s what Buffett himself is doing…

Warren Buffett’s Global Investment Opportunities

One of the reasons Warren Buffett was in Germany is that he shares our view that you should search worldwide for the best investment opportunities. Right now Buffett would like to put Berkshire Hathaway’s cash war chest to work in a few well-managed German family-owned businesses.

But why would Buffett buy companies if the economic downturn is likely to be deeper and last longer than generally expected?

Because he knows that nobody can accurately or consistently predict something as big, diverse, and dynamic as the global economy. (Work like this is better left to the experts: you know, palm readers and Ouija boarders.)

Warren Buffett knows that even if you somehow knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market. Stocks fall during good times. They often rally during bad times. Money manager Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing.

Buffett knows that the stock market is a discounting mechanism. It takes the news and reflects it into stock prices immediately. Who in their right mind would sell their stocks today because he realizes the economy is slowing down. We’ve known that for months already.

And, finally, Buffett knows that nothing beats the long-term returns available in equities. Where else can you put your money to work today? In real estate that is in a death spiral? In bonds that pay less than 5%? In money markets yielding 2%?

Warren Buffett’s Investment Strategy

In the same interview with Der Spiegel, talking about his investment strategy, Warren Buffett said “If the world were falling apart I’d still invest in companies.” In other words, he gets it. There is no superior alternative to common stocks. The long-term returns of every other asset class pale by comparison.

In an interview in the April 28, 2008 issue of Fortune, Buffett said “I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don’t want capital markets that function perfectly if you’re in my business. People continue to do foolish things… and they always will.”

Realize that when other investors sell too cheap or buy too dear, it creates opportunities for those of us on the other side of their trades.

Buffett ends his Fortune interview by saying, “Stocks are a better buy today then they were a year ago. Or three years ago… The American economy is going to do fine. But it won’t do fine every year and every week and every month… The only way an investor can get killed is by high fees or by trying to outsmart the market.”

Amen. They don’t call him the Oracle of Omaha for nothing.

Good investing,
Alex

Learn more.
Today’s Investment U Crib Sheet
Some define recession as two successive quarters of negative real economic growth. Others use a more general framework of a decline in economic activity lasting for more than a few months with visible declines in GDP, employment, production and income.

The average length of recessions for the past 50 years has been 11 months. So as an investor, you can’t confirm if we’re in a recession until we’re almost halfway through it. For those deciding whether they should hold on or sell their holdings… take a look at the performance of the S&P from past recessions.



By looking at the numbers for the last nine recessions, we see some surprising and encouraging figures. The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst.

For the last 50 years, the average return for the S&P 500 has been around 12.5%. Investors focused on the long term, who didn’t panic and who stayed fully invested in the market, found themselves with an average return of 42.4%. With those returns, it’s understandable why a great investor like Warren Buffett likes to see the market shake out from time to time. Here’s a look at one of Buffett’s most recent buys… and how to profit by following in his tracks.

More on this topic (What's this?)
World Economy Falling Faster Than in 1929-1930 (naked capitalism, 4/6/09)
How Buffett Has Failed the True Test of Leadership (The Enlightened American, 1/27/09)
Buffett Bargain Hunting Despite 2008 Losses (Money Morning, 2/12/09)

Read more on Warren Buffett, U.S. Economic Cycles at Wikinvest

http://www.investmentu.com/IUEL/2008/May/warren-buffett-investing.html

Roundtable: Buffett's Biggest Berkshire Bomb

Roundtable: Buffett's Biggest Berkshire Bomb
By Motley Fool Staff
May 4, 2009 Comments (5)

As you’ll see throughout the week, the Fools were out in force at this weekend’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) conference. How can you resist trekking to Omaha to sit at the feet of Berkshire leaders Warren Buffett and Charlie Munger as they pontificate on the biggest financial crisis (hopefully) of our lifetimes? There were insights galore, but let’s start with these three questions. First, the big one:

What was the biggest bomb Buffett dropped?

Morgan Housel, Motley Fool writer: Forget the biggest bomb from this year's shareholder meeting; I think Buffett dropped the biggest bomb ever this weekend when he said he would have been comfortable putting his entire net worth into Wells Fargo (NYSE: WFC) when it fell below $9 a share in early March. "If I had to put all of my net worth into stock, that would be the stock" he said. I nearly threw up at first, but he made a convincing argument: Well Fargo's cost of capital is the lowest in the industry (and falling), which essentially fosters the birth of a new alpha-bank when the rest of the industry is slowly dying.

Ilan Moscovitz, Motley Fool editor: At a time when nearly everyone is condemning faulty compensation practices that have come to light at major financial institutions like Merrill Lynch and AIG, Buffett went one step further, remarking that compensation procedures are “way worse than practically anyone recognizes.” He said CEOs basically get to pick their own compensation committees, and since no one wants to be paid rationally, you have people being paid to do very irrational things. Boards generally function as a rubber stamp because members know that disturbing the “club-like” atmosphere could endanger their salaries and the prestige their position confers. As a start, he recommended abolishing directors’ salaries, and having compensation plans be drawn up at the board level instead of in committees.

Anand Chokkavelu, Motley Fool editor: I was only a few sips into my strawberry smoothie when Buffett said the words that made me smile the rest of the weekend. Basically, he got better terms on some of his much-maligned equity puts, which I think are great. Check this out: With a strike price, and the relevant put options on the S&P 500 in the 1500s, Berkshire incurred huge mark-to-market losses last year. But his counterparties were forced to “manage risk” by buying expensive credit default swaps on Berkshire Hathaway ... so even when they win, they kinda lose. To mitigate this quirk, they allowed Buffett to lower the strike price to the high 900s (the S&P is currently around 900). All he had to do was lower the term to 10 years from 18 years. Um, thanks for the do-over ... looking forward to the resulting mark-to-market gains.

As Morgan said, Buffett was strong on Wells below $9 a share. If you had to put your whole life savings into one company for the next 10 years, which would it be and why?

Morgan Housel, Motley Fool writer: Johnson & Johnson (NYSE: JNJ) would be near the top of my list. Acquiring absolutely top-tier businesses and leaving management alone to do its thing is the only way you can make a megaconglomerate work, and it's a skill Johnson & Johnson (and Berkshire) have proven spectacularly capable of. Charlie Munger described J&J's culture of decentralized subsidiaries "very Berkshire-like" over the weekend, which really solidified this point. Take the strongest brand names in the world in an industry where the target demographic (aging baby boomers) is exploding and put them all together under one roof, and good things are bound to happen.

Ilan Moscovitz, Motley Fool editor: Aside from Berkshire (the obvious choice), I tend to invest in small caps, so I don’t have many holdings that I would feel comfortable plowing all of my money into. I don’t necessarily like the price right now, but if I had to pick one strong-moated company from among my current holdings that I’d want to have all of my money in, it would probably be Google (Nasdaq: GOOG).

Speaking of bombs, during our press conference with Buffett and Munger yesterday, Munger remarked that “Google has a huge new moat. I’ve probably never seen such a moat.” Buffett explained that some keywords fetch $70 per click and their advertising machine generates its own positive feedback and momentum. To try to parse what he’s talking about, Google has a few positional advantages that feed off one another: a dominant share of the search market, a strong brand, and targeted ad capabilities that produce a network effect between advertisers and end users. Advertisers get a wider market, while end users aren’t pained by sightings for male enhancement products when all they wanted was to buy some flowers for Mother's Day.

Anand Chokkavelu, Motley Fool editor: The fact that we have no idea what the government will do with the banks precludes me from naming a bank. Now Wells Fargo has tons of upside if things go right, and no one knows Wells better than Buffett, but as I watched Buffett sitting at the podium, I couldn’t help but notice the Coke can in front of him. Really, Warren, you’d be more comfortable holding Wells Fargo than one of your other huge holdings, Coca-Cola (NYSE: KO)?

All three of us are shareholders. Is your faith in Berkshire Hathaway higher or lower than it was before the meeting? Why?

Morgan Housel, Motley Fool writer: My faith is unwavered. People like to hint at Berkshire's impending collapse as soon as Buffett and Munger die, but I've always thought this argument is incredibly short-sighted. Berkshire's long-term potential will be more of a product of what Buffett and Munger have spent the last 40 years creating, not solely the product of what they can create in the future -- sort of like Sam Walton's enduring contribution to Wal-Mart (NYSE: WMT). Buffett has almost no input whatsoever on day-to-day operations of Berkshire's 60 subsidiaries, yet some insinuate they'll shrivel and die without him. The potential for future homerun investments will obviously shrink without Buffett at the helm, but that's already assured given Berkshire's size. As Munger said a few years ago, "If you get Warren Buffett for 40 years and the bastard finally dies on you, you don't really have a right to complain."

Ilan Moscovitz, Motley Fool editor: About the same. The meeting reiterated Berkshire’s moats: A sterling reputation that attracts deals, a strong financial position that gives them the ability to act quickly and boldly when opportunities present themselves, and brilliant and capable leaders with independent thought and the right incentives.

Anand Chokkavelu, Motley Fool editor: The equity put reset (see my answer to the first question) reminded me why I finally bought in a few months ago ... people are just throwing money at Buffett these days.


This roundtable article was compiled by Anand Chokkavelu. Anand owns shares of Berkshire Hathaway. Google is a Motley Fool Rule Breakers pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Berkshire Hathaway, Coca-Cola, and Wal-Mart are Motley Fool Inside Value picks. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor recommendations. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/general/2009/05/04/roundtable-buffetts-biggest-berkshire-bomb.aspx

Using Buffett's Simple Yet Powerful Philosophy

Invest Like Warren Buffett: A Simple Yet Powerful Philosophy for Investing

By Dr. Steve Sjuggerud, Chairman, Investment U
September 26, 2002: Issue #174

Legendary investor Warren Buffett said yesterday in London that things aren’t that bad right now, and that the stock market is “way out of sync with the economy.”

When the greatest investor on the planet is optimistic, that’s as bullish a sign as you’ll find anywhere.

Warren Buffett became the second wealthiest man in the world (with $36 billion) by investing with one simple principle: He only invests in businesses he understands, and at prices so cheap that there’s plenty of margin for safety if things go wrong.

You, Too, Can Invest Like Buffett… Using His Simple Yet Powerful Philosophy

We’ve touched on these points before… but Warren Buffett has built a fortune based on a few simple ideas that anyone can follow. Let’s break Buffett’s basic investment philosophy down into two parts. You can use it to test your own investment decisions:

1. According to Buffett, you need to invest only in a business you understand… and NOT in companies you hear about at cocktail parties. Bottom line - if you don’t know what the company does then you shouldn’t invest. It’s your money. Take the time to do the homework and research on any company you’re considering investing in. Plenty of free tools are out there on the Internet to help you to this end.

2. Buffett also believes in buying cheap. Admittedly, the idea of “buy low, sell high” is easier said than done. But the point is a valid one: by buying “cheap” on what you invest in, you greatly reduce the chances of losing money. Think about it: you shop around for the best prices on nearly everything you buy. Likewise, why wouldn’t you do the same with your investments?

Warren Buffett’s Take on the Recent Market Declines: “Nothing Frightening”

When asked about the recent stock market declines, Buffett said: “I find nothing frightening about it at all. If I own a good business, I don’t really care whether the markets open tomorrow.”

“I have no idea what business is going to do next month or next year,” Buffett continued. “I don’t think it’s important whether you’re confident about tomorrow or next week.” Warren added that his confidence comes from taking a long-term view of the investment market and the economy.

“If the economy does well over a long period, markets will do well over a long period,” he said. “In the short run, the market’s a voting machine and sometimes people vote very unintelligently. In the long run, it’s a weighing machine and the weight of business and how it does is what affects values over time.”

Buffett in Conclusion

Much has been written about Warren Buffett in the last 20 years. Yet these few paragraphs sum up his simple investing philosophy. If he’d been asked these same basic questions 20 years ago, at the beginning of the great bull market, his answers would have probably been exactly the same. If you’re looking for comfort today, take it in the fact that the greatest investor of our time likes the market forecast and remains bullish.

One of the real keys to successful investing is having your own investment philosophy and sticking with it. If you don’t have one yet, you may want to borrow Warren Buffett’s. From zero to $36 billion in worth, I’d say it’s done okay for him

Good investing,
Steve
Today’s IU Crib Sheet

A final point about what Warren Buffett had to say: Taking a long-term view of the market and the economy is very important. In today’s world of real-time stock quotes, daily market analysis and the likeit’s very easy to become clouded by the news of the day (or the week.) But remember: if you’re investing for the long run you need to take a long-term view of the stock market. Try to avoid making hasty decisions based on the events of a few days or a few weeks.

More on this topic (What's this?)
Investing in Water Stocks (Clean Energy Sector, 4/17/09)
What I learned from Warren Buffett’s Most Recent Letter to Shareholders (Dividend Growth Investor, 2/28/09)
5 Common Warren Buffett Myths Debunked (Stock Trading To Go, 3/16/09)
Read more on Warren Buffett, How To Invest at Wikinvest

http://www.investmentu.com/IUEL/2002/20020926.html

Align your portfolio with what a sustained market recovery

Get smart



For those who prefer to invest rather than speculate, there are far smarter ways to proceed -- and to align your portfolio with what a sustained market recovery will probably look like. As shell-shocked investors return to equities, they'll likely do so judiciously, newly aware of the benefits of bonds, for example. And for the equity sleeves of their portfolios, a focus on cash-flow kings with tremendous track records of success -- and beaten-down share prices -- will be in order.



http://www.fool.com/investing/value/2009/05/04/this-rally-is-ridiculous.aspx?source=iedsitmrc0000001

PepsiCo offers to buy bottlers in $6bn deal

From The Times
April 21, 2009

PepsiCo offers to buy bottlers in $6bn deal

Christine Seib in New York

PepsiCo has launched a $6 billion takeover of its largest bottlers to cut costs as cash-strapped and increasingly health-conscious Americans turn away from fizzy drinks in favour of water and juice.

The maker of Pepsi cola offered $29.50 a share in cash and shares for the two thirds of Pepsi Bottling Group (PBG) that it does not already own. PBG is the biggest independent bottler of Pepsi products. At the same time, Pepsi offered $23.27 a share for 57 per cent of PepsiAmericas (PAS). The price represents a 17.1 per cent premium to both companies’ closing prices on Friday. Shares in Pepsi were down almost 5 per cent at $49.86 at the close yesterday, despite beating expectations with a $1.14 billion net income for the first quarter.

The bottling companies said that they would evaluate Pepsi’s offers, which are worth about $6 billion (£4 billion) combined. Pepsi calculates that buying the bottlers will save it about $200 million a year, an important consideration as consumers in North America increasingly turn away from soft drinks.

According to research by Beverage Digest, sales of soft drinks were down 3 per cent last year, their fourth consecutive annual fall, and the nonalcoholic drinks industry as a whole suffered its first decline in decades.


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The bottling companies make, distribute and sell Pepsi’s soft drinks – the main company owns the rights and markets the brands. The bottlers do not, however, for the large part handle Pepsi’s other drink brands, which include Tropicana juices and Gatorade.

The bottlers are also less well-equipped to manufacture so-called enhanced water, the flavoured and vitamin-added water products that are popular at the moment. Indra Nooyi, Pepsi’s chief executive, complained last year that dealing with large bottling companies, which PepsiCo spun off in 1999, made it difficult to react quickly to market innovations. She said that buying the bottlers would give Pepsi control of 80 per cent of its North American distribution, making it easier to test new concepts.

Ms Nooyi described the offers as a fundamental reshaping of Pepsi’s business model. PBG employs 67,000 people and PAS 20,000. Neither has operations in the UK. Worldwide, PepsiCo has 198,000 employees and says that its products can be found in nearly 200 countries.

http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6135405.ece

Britain's water companies flush away £1m every day

From The TimesApril 6, 2009

Britain's water companies flush away £1m every day

Robin Pagnamenta, Energy and Environment Editor

Britain's water companies, who are preparing to hand over their next five-year investment plans to the industry regulator tomorrow, are “pouring £1 million down the drain every day”, according to KPMG.

The professional services company said that its analysis of the water industry revealed inefficiencies in the supply chain that could total more than £2 billion over the next five years.

The 22 water companies will ask Ofwat to allow them to boost their collective spending on upgrades to the UK's water and sewage network to £27 billion over the 2010-14 regulatory cycle, a 30 per cent increase on the five-year budget that is about to end.

But Adeeb Dhallai, advisory partner at KPMG, said that many of them could achieve the same improvements to the network for up to 20 per cent less than the figures they have proposed to Ofwat. He said that companies were wasting money by “gold-plating” engineering specifications for water filtration and purification plants and pumping stations. “Sometimes the specifications are far higher than what the business actually needs,” he said.


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Multimedia
GRAPHIC: What a waste of water

Mr Dhallai also blamed Britain's water companies, which include United Utilities, Severn Trent and Thames Water, for poor planning and budgeting decisions and said that many were mismanaging their relations with suppliers such as manufacturers of steel piping, filter beds and chemicals used for water treatment.

Ofwat will issue a draft response to the industry on July 23 followed by a “Final Determination” in November, which will split up its recommended budget between the companies and set the level of price rises that they can impose on their customers.

The companies, which are allowed to raise prices by an average 4.2 per cent a year above inflation, are urging Ofwat to allow them to increase customers' bills even as the retail prices index drops.

Mr Dhallai said: “They can deliver their capital projects for less than the allocated budget and retain the difference to help fund better customer service levels — or possibly better returns for shareholders.” He said that in the present economic climate, there was certain to be more pressure on the water companies to reduce price rises. “Ultimately, this action on efficiency could benefit all concerned — the water companies, their suppliers, and their 26 million UK customers.”

Turnover for Britain's water companies in 2007 was £9.2 billion, while operating profits rose £149 million to £2.9 billion. Capital expenditure, typically half of turnover, was equivalent to 53 per cent of turnover that year.

A spokeswoman for Ofwat declined to comment on the KPMG report.

Tony Wray, the chief executive of Severn Trent, which supplies water and sewage services to 3.7 million customers in the Midlands and Mid-Wales, said that it was focused on identifying waste and improving efficiencies throughout the business. He said that the company was targeting £200 million of capital efficiencies over the five-year period.

“This new approach will help us to reduce construction costs, enhance links across our supply chain, improve design efficiency, decrease waste and drive innovation,” he said.

From The TimesApril 6, 2009

Stocks of drugs dwindle as chemists sell them abroad for higher profits

May 3, 2009

Stocks of drugs dwindle as chemists sell them abroad for higher profits

Tom Bawden

Stocks of hundreds of medicines are running low as British pharmacies export UK supplies to profit from the weakness of the pound.

Evidence has emerged that pharmacists are over-ordering drugs, a practice known as “skimming”, with a view to selling the stock overseas and profiting from higher prices in foreign currencies. The Times has learnt that drug wholesalers have restricted the supply of 370 medicines to pharmacies believed to be engaged in skimming.

The wholesalers fear that the exports, which have led to temporary shortages, could potentially keep some patients from receiving the medicines they need in time and result in death.

Skimming, which is not illegal, has grown in recent months as the fall in the value of the pound has made it profitable to buy drugs in sterling and sell them for euros. Furthermore, on January 1 the Government's Pharmaceutical Price Regulation Scheme came into force, imposing a 5 per cent price cut on prescription medicines bought by the NHS, further increasing the profit to be made from drug arbitrage. About 10 per cent of Britain's 12,500 pharmaceuticals are involved in “parallel exporting”,according to IMS Health. That has left those 370 drugs — all still patented and prescription-only because they are more in-demand and expensive — in danger of running out.

http://business.timesonline.co.uk/tol/business/industry_sectors/health/article6216779.ece

Even the investor's friend is counting his losses

But fans of folksy wisdom did not leave empty-handed. Mr Buffett said that he never used spreadsheets or formulae to decide whether a company was a good investment.

“It should be so obvious that you don't have to carry it out to tenths of a per cent,” he said.

From The TimesMay 4, 2009

Even the investor's friend is counting his losses

Christine Seib in New York

They came in record numbers, more than 35,000 of them, searching, perhaps, for a chink of light amid America's recessionary gloom and the kind of homespun wisdom that gladdens an investor's heart — and they got yet more bad news. Gathered at the feet of the Sage of Omaha, gloomy shareholders heard Warren Buffett disclose that his Berkshire Hathaway investment company had suffered a 12 per cent drop in operating profits and a 6 per cent fall in book value in the year's first quarter.

Amid hymns of praise for President Obama's handling of the US economy and grim warnings about the risk of inflation and the dire state of the American newspaper industry, Mr Buffett, 78, indicated yesterday that the recession still had a grip on Berkshire businesses. He said that most were down as a result of the recession. “We will continue to do quite well in our insurance and utility operations,” he said. “We won't do well in other operations.”

Berkshire last year reported net income of nearly $5 billion (£3.3 billion), but this was 62 per cent less than in 2007 and its worst result since Mr Buffett took over the textile maker in 1965 and turned it into a conglomerate made up of about 80 companies.

Berkshire is to release first-quarter figures on Friday, but Mr Buffett warned investors that that operating profit would be about $1.7 billion, after $1.9 billion in the same period last year. Berkshire's operating profit does not include gains or losses on 251 derivative contracts that it has sold, which damaged its performance last year. However, ahead of Friday's results announcement, Mr Buffett said that he expected losses on contracts against credit defaults maturing between this year and 2013.

Berkshire sells derivatives against credit losses on groups and individual companies and on the future level of various indices, including those using junk bonds. Although some contracts will not pay out for many years, if at all, and Mr Buffett does not intend to sell the contracts, Berkshire must account for rises and falls in their value. Berkshire is also exposed to the retail and property markets, which are being hammered by the downturn. Mr Buffett said that Berkshire was cutting jobs in some of its businesses.

There was something to savour, at least if you were Mr Obama. The thousands who had gathered in Omaha, Nebraska, to hear Mr Buffett, the world's second-richest man, opine on Berkshire, investment and the economy heard him praise the US Government's efforts to stimulate the economy. However, he also warned that rising inflation could be the price of the President's stimulus plan. “It's the right thing to do, but it won't be a free ride,” he said.

There were few clues about Mr Buffett's succession plan. The famed stockpicker told investors that choosing a single heir would be a waste of talent. “I don't really see any advantages in having some crown prince around,” he said. He has said previously that there are three internal candidates to become Berkshire's next chief executive and four internal and external candidates to be chief investment officer (CIO). Ajit Jain, who runs Berkshire's reinsurance business, is a favourite to become chief executive: Mr Buffett did not dispel that perception, telling investors that Mr Jain was irreplaceable. “We won't find a substitute for him,” he said. The four CIO candidates failed to beat the S&P 500 last year, Mr Buffett admitted, but all have beaten the index over the past ten years.

Howard Buffett, Mr Buffett's son, who is on Berkshire's board, will eventually become the company chairman.

Mr Buffett had harsh words for the US newspaper industry. Although he reportedly reads five newspapers a day, and owns one, the Buffalo News, he said: “For most newspapers in the United States, we wouldn't buy them at any price. They have the possibility of near-unending losses.”

But fans of folksy wisdom did not leave empty-handed. Mr Buffett said that he never used spreadsheets or formulae to decide whether a company was a good investment. “It should be so obvious that you don't have to carry it out to tenths of a per cent,” he said.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6216496.ece

Buffett attacks buyback strategy as 'foolish'

Buffett attacks buyback strategy as 'foolish'

Legendary investor Warren Buffett has attacked the strategy of companies buying back their own shares, arguing that it almost always destroys value.

By Garry White
Last Updated: 9:09PM BST 03 May 2009

Warren Buffett thinks most buybacks do not create value
Speaking at Berkshire Hathaway's annual meeting in Omaha, Nebraska, Mr Buffett said: "Most of the repurchasing in recent years was foolish." He added that companies invariably paid too much.

Mr Buffett said that only once in the last decade had he considered buying back Berkshire stock as its shares were trading "demonstrably lower than intrinsic value".

However, he stressed: "I don't think that situation exists now."

Many companies that bought back shares over the last two years are licking their wounds, particularly in the financial sector.

RBS launched a £1bn share buyback in 2006, paying an average of £18.38 for the shares, which now stand at just 44p. In January 2008, Lehman Brothers unveiled plans to buy back 19pc of its equity – just nine months before the investment bank went bust.

When a company has spare cash on its balance sheet that it does not need to invest in its business, it can use share buybacks to boost its earnings per share – in expectation that it receives a higher stock market rating.

Mr Buffett is not alone in having doubts over the practice. The UK Shareholders' Association (UKSA) has also argued that buybacks are often contrary to shareholders' interests, especially private investors. UKSA prefers the dividend route as a way of returning cash.

Buybacks have also come under criticism because they are regarded as a way to improve management benefits under share option or other remuneration schemes that relate to an improvement in earnings per share.

Mr Buffett also dismissed the US government's stress tests on bank balance sheets.

"I think I know their future, frankly, better than somebody that comes in to take a look," Mr Buffett said. "They may be using more of a checklist-type approach." He said he had applied his own stress test to Wells Fargo and it had passed with flying colours.

When Mr Buffett retires his role will be split, with his son Howard becoming chairman and a new chief executive appointed from within the group. However, he said all the internal candidates failed to beat the S&P 500 in 2008.

Following the biggest annual drop in profits since Mr Buffett began running the company in 1965, Berkshire Hathaway will report its first-quarter results on Friday. Mr Buffett said that operating profits would fall by around 10pc year-on-year to $1.7bn (£1.1bn). Operating profits do not include the changes in valuation of the company's investments and derivatives.

Book value per share, a key measure of investment companies, will be down another 6pc from the end of 2008, as the value of Berkshire's share investments fell and losses on derivatives contracts mounted. This is added to book value losses of 9.6pc in 2008.

Berkshire Hathaway lost around $7.5bn in the value of its investments and derivatives last year, the majority of which were unrealised. Profits last year slid by 62pc to $3,224 per Class A share.

Berkshire Hathaway shares have fallen from a peak of $147,000 in September 2008 to $92,005 now.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5269092/Buffett-attacks-buyback-strategy-as-foolish.html

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Time for Buffett to answer some tough questions

Time for Buffett to answer some tough questions

Berkshire Hathaway shareholders are heading for the "Woodstock for capitalists" – the company's annual gathering in Omaha. Warren Buffett, the Berkshire boss, has changed the format to encourage more questions about the business. Investors should take him up on that.

By Richard Beales
Last Updated: 6:20PM BST 01 May 2009

The legendary investor is 78 and his long-time sidekick, Charlie Munger, is 85. With his track record and public profile, Buffett is the epitome of the corporate "key man", as Fitch Ratings pointed out in knocking Berkshire's triple-A rating down a notch in March. He has, he says, chosen his successors. While their identities are undisclosed, it's a safe bet they know what they are doing. But the culture that brings 30,000-odd shareholders to Omaha every year will unavoidably change.

Another important Buffett decision of late has been to expose Berkshire to big derivatives bets – $67bn of potential exposure at the end of 2008. This is in spite of once calling such instruments "financial weapons of mass destruction".

Buffett recognises the apparent double standard, and brings to derivatives much of the common sense he applies to other investments. The contracts he has written, so far, are relatively straightforward and he has limited expected losses to an amount Berkshire could easily handle.

Berkshire shares have lost a third of their value in the past year. It is suddenly looking like what it is – a largely unhedged equity investment vehicle with a focus on the financial sector.

Its giant insurance businesses don't look so special at the moment. Large stakes in American Express, Wells Fargo and rating agency Moody's underline the finance focus. Along with the succession question, that may help to explain why Berkshire's shares appear to be trading at a discount to the market value of its holdings.

But another development should generate optimism among the Berkshire faithful: opportunities to invest on the cheap ought now to be plentiful. Buffett picked up some good deals last year, Berkshire still has strong credit and plenty of cash – and the Sage is still around.

After years in which few bargains were available and Berkshire's size made meaningful deals hard to come by, he has the chance to redeem himself.

http://www.telegraph.co.uk/finance/breakingviewscom/5258851/Time-for-Buffett-to-answer-some-tough-questions.html

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Stock market: 'Eventually shares will have the mother of all rallies'

Stock market: 'Eventually shares will have the mother of all rallies'

The stock market has jumped by about 500 points in the past couple of weeks, but investors thinking of putting their Isa money into shares want to know one thing: is this the start of a sustained recovery or a dead cat bounce?

By Richard Evans
Last Updated: 1:06PM BST 02 Apr 2009

Stock markets have shown signs of life in the past few weeks. Since London's benchmark FTSE100 touched a six-year low earlier this month, falling below 3,500 at one stage, it has rallied strongly, closing at 3,912 on Tuesday.

America's Dow Jones index has also put in a good performance, posting one of its largest ever one-day rises following the announcement of a bail-out for banks' toxic assets.

£50,000 to be won in our Fantasy Fund Manager game

But British investors wondering whether to use this year's Isa allowance before the deadline of April 5 have reason to be cautious: the markets have staged several apparent recoveries during the economic crisis, only to fall back again.

So is it different this time – is this a long-term recovery or just a dead cat bounce? Should you forget taking out a stocks and shares Isa this year, or dip a toe in the market? We asked the experts where they thought the market was heading and which equity investments, if any, Isa buyers should consider buying.

MARK HARRIS, FUND OF FUNDS MANAGER AT NEW STAR

"The direct answer is that there is no way of knowing for sure whether the recent rallies are a blip or something more sustainable, but in my view the March lows were significant.

"In early March we saw markets deeply oversold and widespread investor pessimism. Conditions were ripe for a bounce. Interestingly, a number of markets such as Brazil and China did not make new lows – they did not fall below their levels of November 2008.

"We have seen a marked increase in the determination of the US Federal Reserve to combat the various issues plaguing the financial system. This has resulted in a 20pc-plus bounce in most equity markets, which is the extent of the rallies in 2008 to January 2009.

"Valuations are supportive at lower index levels, but we have little visibility on earnings. In fact the earnings season through April is likely to be extremely difficult and may result in the markets retracing some of this rally's gains.

"I think the lows in March may prove to be significant, but that a 'test' may occur in April. If we can make a higher low for equities in April, it will be positive for further gains. But I should reiterate that I still believe that we are in a very challenging environment, and that it will be a couple of years before we can say that this bear market is truly over.

"So, put simply, we will see the rally which is just unfolding, then a correction of about 15pc, and then a further rally to take the market up in total by about 40pc from the lows."

JUSTIN URQUHART STEWART OF SEVEN INVESTMENT MANAGEMENT

"Shares on a five-year view may be OK, although prices could be highly erratic.

"I think it's too risky putting all my money into one asset class so I've diversified my investments into a mix of commodities, property, international shares and fixed interest securities such as bonds.

"You can do this yourself in a self-select Isa but it could be expensive and time consuming. An easier way is to buy a multi-asset fund, which you can hold within an Isa.

"Multi-asset funds can be actively or passively managed. I favour the passive type because costs – which can make a big difference over 10 years – are lower. Active funds can have total expense ratios of 2pc.

"Passive funds track the performance of the various asset types using exchange traded funds (ETFs). Examples include Seven's own and products from Evercore Pan Asset.

"Among the managers to offer active funds are Jupiter, Merlin, Seven, Midas, Credit Suisse, M&G, Fidelity and Jupiter. Fidelity's Wealthbuilder has a good record while Jupiter's fund is higher risk but well managed."

MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN

"Come what may, do buy an Isa – use your whole allowance (£7,200, of which £3,600 can be cash).

"Unless you trust politicians – and I don't – they are going to try to get more money out of you by raising taxes. So shelter as much as possible from tax while you can.

"Some people think the Isa allowance is so small that it's not worth bothering. But the yearly sums accumulate: a couple who had used their full allowances for every year that Isas and their predecessors, Peps and Tessas, have existed could have built up £190,000 by now – and that's discounting investment growth.

"If you are nervous about the markets you can keep your money in cash, even in a stocks and shares Isa (although without the tax breaks), to drip feed into the market. This prevents you from putting it all in just before a fall.

"I suspect this rally is more of a dead cat bounce; it comes from a very low position. There seems to be a base at about 3,500. Let's be a bit careful but with the market about 50pc below its peak it has to be an interesting time to think about investing.

"I don't believe, as some do, that corporate bonds are a bubble. If you buy through a fund such as M&G Strategic, Jupiter or Investec Sterling Bond, you will get a yield of 5pc to 6pc. If equity markets do eventually improve, bonds will have risen first.

"If you do want to buy equities, I would always go for a fund manager with a long-term track record such as Neil Woodford of Invesco Perpetual. But at the other end of the spectrum I also back emerging market funds such as Aberdeen's – that's where real long-term growth will be found, although prices will be volatile.

"With inflation of over 3pc on the CPI you would normally have interest rates at 5pc, not 0.5pc. So given the risk of inflation taking off I'd consider gold, via a fund such as BlackRock Gold & General.

"This rally is still more hope than anything else, the kind that has a habit of disappointing. I wouldn't push a load of money in; I'd wait for bad days and drip-feed it in then. The markets are not about to race away but one of these days they will, so don't wait for ever.

"Eventually, there will be the mother of all rallies."

ANDREW WILSON, HEAD OF INVESTMENTS AT TOWRY LAW

"All investors should aim to hold a diversified investment portfolio incorporating a wide range of different asset classes. The actual blend of assets should be determined by their objectives and attitude to risk.

"Given how far markets have fallen over the last year, it might make sense for some people to top up their equity exposure. This has the added benefit of averaging down on the 'book cost' of their shares, and at a time when valuations appear quite attractive over any sensible time horizon.

"However, it is not appropriate to add equity exposure to an already predominantly equity based portfolio. In this case one might consider other assets such as high quality corporate bonds or commercial property instead.

"The MSCI World index bottomed on the March 6 and we have seen a significant rally since then. What is fascinating is that absolutely nobody called it in advance and in fact none of the so-called experts have subsequently described it as anything other than a 'dead cat bounce'.

"We may not know for some time as to whether it actually was the bottom. There was certainly a washout of private investors in the week running up to March 6, with an extraordinary $30bn being sold out of US equity mutual funds, which is the kind of capitulation that can mark market lows."

JEREMY BATSTONE-CARR, CHARLES STANLEY

"I'm not convinced that the recent rally is the real thing. Plenty of imponderables remain regarding the latest TARP extension [US toxic assets bail-out]. Also, we're closing in on the end of the quarter so some window dressing from deeply oversold levels also taking place.

"Essentially, the blizzard of daily macroeconomic data releases will gradually tell us when we're past the worst and things are convincingly less bad. We suspect that that time will be confirmed in the second quarter and investors will start to buy risk assets again as the trough in corporate earnings becomes more clearly visible (probably in the final quarter of 2009 or the first quarter of 2010).

"The history of previous earnings recessions is that investors typically buy equities about six months from the trough and do well over the ensuing six-month period. Typically they buy cyclicals over defensives and mid caps do well. Only at the trough can the investment case for financials be made convincingly, although they have bounced encouragingly off multiyear lows so far.

"Thereafter we see clouds looming again. The huge fiscal stimulus leaves us all with a huge debt burden while the monetary authorities will be looking to take some earlier easing off the table.

"Our best guess is that the cross section over the next three years will look like recession-revival-recession, not an obviously propitious environment for equity investing although, as ever, the skill will be to get the timing right and the thematic call right."


Telegraph Invest Direct

Make the most of this years ISA allowance through Telegraph Invest Direct, provided by Skipton Financial Services Limited. To find out more, please call 0800 085 5337 or for 0% initial commission and great savings, invest online at www.telegraph.co.uk/investdirect.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/5047837/Stock-market-Eventually-shares-will-have-the-mother-of-all-rallies.html

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Bulls sniff the air as signs of a turnaround emerge

Comment: bulls sniff the air as signs of a turnaround emerge

Take a glance at the most popular funds sold this year and you quickly get an idea of the mindset of investors – it is one of caution. Cash and corporate bonds have been the order of the day.

By Paul Farrow
Last Updated: 8:22PM BST 01 May 2009

It always takes a brave soul to go against the crowd. It takes an even braver soul to take a punt on riskier assets in today's grim climate.

But you begin to wonder whether investors have got their timing wrong – again. I say this because the first month of our Fantasy Fund Manager competition has shown some staggering results from equity-based funds.

More than 98pc of the thousands of players who signed up at the beginning of April to play the year-long portfolio game and a chance to win £50,000 have delivered a positive return so far. The average gain is 4pc. The portfolios of more than a dozen are up by more than 15pc, with the leader of the pack up by 24pc.

The performance of some of the actual funds during the first month may also surprise you. The F&C Private Equity trust returned a staggering 68pc, while the second best performer, Gartmore Fledgling, climbed 39pc. Believe it or not, a commercial property trust rose by 30pc.

One of the reasons for the bumper gains is that these leading funds are investment trusts, whose share prices have been trading on large discounts to net asset value because confidence had hit rock bottom.

When such a trust has a reversal in fortunes, it gives an added boost to the share price as the discount narrows on the good news.

But the past month's numbers also go to show that there is money to be made, despite the severe recession, and that not every company is a busted flush.

Confidence is often the overriding factor when it comes to share price movements, rather than company fundamentals.

The outbreak of swine flu gave stock markets the jitters before the first person in the UK had been diagnosed. The initial volatility, which subsided, had nothing to do with profits and losses.

There have been gloomy forecasts since the financial crisis first reared its head more than a year ago, but the stock market optimists are slowly beginning to be bolder and more open in their thoughts. For some, the worst may be over.

Certainly, Gervais Williams could hardly contain his excitement when I spoke to him last week about his fund, Gartmore Fledging Trust (which invests in the smallest companies in the FTSE All-Share). "It is an astonishing portfolio of unloved companies. Many are trading at 20pc to book value, huge discounts with yields of 9pc."

Mr Williams is seeing opportunities in well known businesses that have been relegated to the bottom of the FTSE in terms of size, but could return to former glories. He cites JJB Sports, the recession-hit sports retailer, as an example. Its share price was around 3p but it is now trading at 23p after it announced an agreement that could secure the company's future. That the FTSE100 closed the week at an 11-week high has also led to expectations that we are about to enter a bull market.

Anthony Bolton reckons that we may already be in the first days of a bull market. He is worth listening to. Mr Bolton, you may recall, is as close as you will get to a fund manager having the Midas touch, turning £1,000 into £147,000 over 28 years.

He says that "all the things are in place for the bear market to have ended". And "when there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that".

Mr Bolton correctly called the end of the commodity bull run last summer and anyone who heeded his advice then will have been saved from a mauling.

The majority of fund managers and equity analysts have, until know, been reluctant to call an end to the bear market. Many still won't and there continues to be far more stock market bears than bulls out there. But it gives us reason to hope.

Lies, damned lies and statistics
Last month, Nationwide said that house prices rose by 0.9pc. As I have said before, house price indices can be unreliable. Nationwide, for instance, uses its own mortgage-offer data and takes figures used in the previous month.

That's not all. The Nationwide index is seasonally adjusted, rather than showing actual price changes. If you look at the real price change, prices actually rose by 2.2pc in March, not 0.9pc, according to Ray Boulger, the mortgage expert from John Charcol.

Mr Boulger admits the housing market is seasonal but says that there are so many other factors, such as the availability of credit, confidence and interest rates, to consider too. And given the current conditions, they are extremely relevant factors in determining whether prices have fallen and by how much.

Nationwide said last week that its seasonally adjusted figures show that prices fell by 0.4pc in April. But if you want to enjoy the Bank holiday on a more positive note, look at the "real figures". They show house prices rose by 0.6pc.

http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/5258390/Comment-bulls-sniff-the-air-as-signs-of-a-turnaround-emerge.html


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FTSE 100 enjoys biggest monthly gain in six years

FTSE 100 enjoys biggest monthly gain in six years

UK stocks posted their biggest monthly gain in six years, as banks and commodity producers rallied on optimism the worst of the recession may be over.

Royal Bank of Scotland and Barclays jumped 13.6pc and 9.7pc respectively as Anthony Bolton, Fidelity International's veteran equity investor, said financial shares are set to rally and ignite an equity bull market.

Kazakhmys, the mining company, rose 4.7pc after reporting an increase in production and as copper climbed. BG Group. the oil explorer, advanced after reporting better-than-expected results.

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The FTSE 100 climbed 54.12, or 1.3pc, to 4,243.71 in London. The index of leading shares has risen 8.1pc this month, the biggest advance since 2003. The FTSE All-Share Index rose 1.4 percent today.

The market is “positive for an economic turnaround”, said Joshua Raymond, a London-based market strategist at City Index.

“All major sectors are higher today so the buying we have seen has been broad and this is indicative of investor sentiment at the moment.”

The UK benchmark has rebounded 21pc from its low this year on March 3, trimming this year decline to 4.3pc, as investors speculate the pace of the economic slowdown is easing. UK consumer confidence climbed to the highest level in a year in April while a separate report today showed house prices fell 0.4pc this month, less than economists had forecast.

Bolton, president of investments at Fidelity, said that low valuations indicate recent gains that began in March are the start of a bull market. He favors financials, consumer cyclical, technology and “value stocks,” such as retailers, automakers and construction-related shares.

“All the things are in place for the bear market to have ended,” Mr Bolton said in a Bloomberg Television interview.

http://www.telegraph.co.uk/finance/markets/5252022/FTSE-100-enjoys-biggest-monthly-gain-in-six-years.html

Housing market to recover quicker than economists first feared

Housing market to recover quicker than economists first feared

The end is in sight for the housing market downturn, according to a leading economic think tank, which has upgraded its previously more pessimistic forecast.

By Harry Wallop, Consumer Affairs Editor
Last Updated: 9:57AM BST 04 May 2009

The housing market is predicted to bottom out later this year Photo: Chris Radburn/PA Wire

House prices only have a little further to fall, and should slowly start to pick up next year, according to the Centre for Economics and Business Research.

The think tank earlier this year predicted that house prices could tumble by as much as 40 per cent from their £196,000 peak in the summer of 2007. But it now thinks it is more likely they will decline by 28 per cent "peak to trough" by the time the housing market finally hits the bottom later this year.


By the end of 2013 house prices should have increased by 23 per cent to £170,000 from their predicted nadir this year of £144,000.

The improved forecast comes on the back of a series of more positive figures to emerge from the housing market.

The Royal Institution of Chartered Surveyors said last month that the number of potential buyers asking estate agents to look around properties had increased for five consecutive months.

RICS said the number of new buyer enquiries increased at the fastest pace since September 2003. Moreover, the number of properties being sold by estate agents during March increased for the first time since November 2007.

Meanwhile, the Land Registry said house prices dropped by just 0.4 per cent during March, the lowest monthly fall for 11 months.

But the CEBR cautioned home owners not to get carried away by the positive data, warning that house prices have a further 8 per cent to fall, as rising unemployment will cause increased number of people to sell their homes in a hurry.

However, it is forecasting a relatively robust recovery by 2012.

Ben Read, managing economist at cebr, added: "Going forward, house prices are likely to remain in the doldrums for some time, as what is likely to be a slow recovery in the real economy translates into weak wage growth and stubbornly high unemployment – factors that will put a fairly heavy lid on house price inflation.

"We may start to see stronger house price growth towards 2012 or 2013 as the huge downturn in new housebuilding over the past 12 to 18 months leads to significant under-supply over the medium term."

The think tank predicts the average cost of a home will increase by just 3.1 per cent between the fourth quarter of this year and the final three months of 2010, followed by a further 2.5 per cent rise the following year.

But the house price growth is expected to pick up again during 2012 or 2013, with the average cost of a property recovering to £170,000 by the final quarter of 2013, up from a predicted £144,000 at the end of this year.

This will still be below the peak price of £196,000 that was hit during 2007.

http://www.telegraph.co.uk/finance/economics/houseprices/5268360/Housing-market-to-recover-quicker-than-economists-first-feared.html

Asia establishes $120bn crisis fund

Asia establishes $120bn crisis fund

Thirteen Asian countries have agreed to set up a $120bn (£80.5bn) crisis fund to boost liquidity and overcome the economic crisis.

By Garry White Last Updated: 9:41PM BST 03 May 2009

Finance ministers of the 10-member Association of Southeast Asian Nations (ASEAN), alongside China, Japan and South Korea, unveiled the deal in Indonesia, where they were attending the annual meeting of the Asian Development Bank (ADB). The scheme is known as the Chiang Mai Initiative, or CMIM.

"We are pleased to announce that we have reached agreement on all the main components of the CMIM and decided to implement the scheme before the end of the year," the ministers said in a joint statement.

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The two largest donors will be Japan and China, with a $38.4bn contribution. Hong Kong will give $4.2bn as part of China's share. The next largest contributor is South Korea, at $19.2bn.
Indonesia, Singapore, Malaysia and Thailand will each provide $4.77bn.

The ministers tried to deflect speculation that the fund's aim was to circumvent the International Monetary Fund (IMF) so countries would not be forced to make unpopular economic reforms, as happened in the late 1990s. Rajat Nag, managing director general of the ADB, denied this was "a substitute for the IMF".

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5269076/Asia-establishes-120bn-crisis-fund.html

Is there a bull market around the corner?

Is there a bull market around the corner?
The FTSE100, made of up Britain's biggest companies closed last week at an 11-week high at 4,243.

By Paul Farrow
Last Updated: 8:19AM BST 04 May 2009

The stockmarket bulls have been very quiet of late, but that might be about to change. The FTSE100, made of up Britain's biggest companies closed last week at an 11-week high at 4,243 and some fund managers are beginning to talk up a bull market.

One such bull is Anthony Bolton, who is worth listening to. Mr Bolton recently stepped down from running one of the UK's most popular unit trusts, Fidelity Special Situations. The reason for its popularity was simple. Under Bolton's stewardship the fund turned an outlay £1,000 into £147,000 over a 28 year period.

Mr Bolton says that "all the things are in place for the bear market to have ended". And "when there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that".

There has been evidence of a recovery already - and not just because of the performance of the FTSE100. Ten funds delivered a return of more than 20pc in April alone. The top performer, F&C Private Equity trust returned a staggering 68pc, while the second best performer, Gartmore Fledgling, climbed 39pc.

But you need to tread carefully with some of these funds. They are niche, volatile and are unlikely to be suitable investments for most people.

F&C Private Equity Trust, is a fund of funds – investing funds that invest in private equity companies.

Hamish Mair, manager of F&C Private Equity Trust, said that the entire private equity sector has bounced from the unprecedented lows of late March and is confident that it will continue its recovery.

"At those levels, the market was implying that just about every listed private equity fund had problems and a good number of them were going to go bust," Mr Mair said. "Even if we are facing a severe recession, I think the collapse of the entire capitalist system – which this scenario implies – is still fairly unlikely.''

Despite the stunning performance numbers many analysts are cautious on the F&C trusts's ability to maintain its performance. The private equity sector, as a whole, is still fragile and many companies could struggle to repay bank borrowings, they said.

Gartmore Fledgling invests in the smallest companies in the FTSE All-Share – typically companies that have fallen from grace. Gervais Williams, manager of Gartmore Fledgling remains upbeat and said: "It is an astonishing portfolio of unloved, cheap companies with high yields."

The Gartmore fund holds JJB Sports, for example. Its share price was about 3p but it is now trading at 23p after it was announced its landlords and creditors had voted for a company voluntary agreement (CVA) that could secure the company's future. It also holds Pendragon, the car dealer, which has seen its share price rise from 2p to 14p in recent weeks.

Nick Sketch, an investment director at Rensburg Sheppards, the investment management company, is confident that stock markets will continue to rise and that they will be higher by the end of the year. "I do not know any of my colleagues who do not believe that markets will not be higher in two years either," he added.

Mr Sketch says the time to buy shares are when they are cheap (as they are now), but warns that it may not be an easy ride as it 'will not work out every time. "There are certain to be some hiccups along the way because of the economic uncertainty. They will be write-downs and increasing unemployment," Mr Sketch added.

Among his favourite funds for those investors in it for the long-term are SVM Global and Impax Environmental Trust (which invests in wind farms, water recycling plants and solar energy companies).

The SVM fund is a diversified fund investing in just about every asset from equities, to property to hedge funds – and has a bias towards emerging markets at the moment. "Its two fund managers have a good long-term track record. They are more cynical than most managers, which we also like," said Mr Sketch."The Impax fund has risen by 50pc over the past five years."

Steve Forbes, managing director at Alan Steel Asset Management is convinced that we are at the start of a bull market.

"Many people are doubting that the recovery in share prices is the start of the bull run – and we take that as a huge positive because the last thing we want is a consensus. The markets are shrugging off bad news, while people have few places left to put their money. Returns on cash are so poor that shares are looking an attractive alternative."

Forbes recommends overseas equity income funds because he believes that high yielding shares will do well and suggests M&G Global Dividend is worth a look. "We also like Psigma Equity Income, managed by Bill Mott, for those wanting a UK fund," he added.

But not everyone is confident shares will continue to go up and up.

Mark Dampier at Hargreaves Lansdown is unconvinced that stock markets have seen the worse. "I wouldn't rush to buy shares right now," he said. "There's plenty of talk of green shoots of recovery but the trouble is I'm not convinced there are any roots."

However, he continues to invest on the dips and says that if investors are in it for the long-term, then emerging market funds are a decent place to be. He cites Aberdeen Emerging Markets, managed by Hugh Young and JM Finn Global Opportunities, as among his favourites.

Mr Dampier will also be investing his own money in a fund launched today – the Artemis Strategic Assets managed by former 1990s star fund manager, William Littlewood.

The Artemis fund will offer a multi-asset mix, investing in equities, bonds, commodities and currencies in long and short positions, as well as cash. The fund's objective is to beat cash and the FTSE All-Share index over a three year cycle.

Mr Littlewood was a hugely popular fund manager in the 1990s until he stunned the investment fraternity when he walked away from Jupiter in 2000 suffering from burnout. His popular £1.6bn Jupiter Income Trust had returned 607pc over the previous nine years versus the average income fund which returned 270pc.

But Mr Littlewood returns to the fray in a cautious mood. He told the Telegraph: "If I am right in saying this is not an ordinary recession then investors in the short run need to be careful about equities, particularly cyclical ones. To me we are in a binary world where it is deflation today and inflation tomorrow. Unfortunately as with all investments, timing is difficult. While we stay in deflationary times shares are likely to disappoint, and a fall below the stock market lows in March should not be ruled out."

http://www.telegraph.co.uk/finance/personalfinance/investing/5271431/Is-there-a-bull-market-around-the-corner.html

Investment Pyramid

Investment Philosophy

It's Not What You Win That Counts

It's What You Don't Lose

http://www.honestmoneyreport.com/investIntro.php

Introduction

We suggest reading the beginner's section and the glossary of terms for starters. There is a lot of information available in these two areas – take advantage of them.

We feature three (3) model portfolios. The following overview covers the basic ideology behind the three portfolios and our investment philosophy. The portfolios are:

Conservative
Moderate
Aggressive

Conservative
The conservative portfolio emphasizes safety and risk control. It is for the investor who wants the least amount of risk exposure while still maintaining a solid rate of return. The emphasis is on the return of one’s money, as compared to the return on one’s money.

Moderate
The moderate portfolio's focus is on both the return of one's investment and the return on investment. Safety is still of prime importance. So too is the preservation of wealth. The goal is larger profit margins as compared to the conservative portfolio.

Aggressive
The aggressive portfolio is for investors who have experience in trading and who know the ropes so to speak. They understand their overall financial situation in detail. Aggressive investors have made the conscious decision to take on more risk than the average investor does – in order to gain the opportunity to make larger profits.

A well-defined plan is in place to control and manage the risks. Reassessment of the plan is essential so that the portfolio adjusts to changes in the market accordingly. Hence the aggressive portfolio is much more active than the conservative and moderate portfolios.

Money Management & Asset Allocation
Money management and asset allocation are two key building blocks of any serious portfolio – be it conservative, moderate, or aggressive. Constant reassessment and adjustment of the portfolios with market changes is key as well.

Investment Pyramid
We use an inverted pyramid to illustrate the structure and foundation of our investment philosophy. At the base of the pyramid are the safest asset classes. They are also the soundest of all available investment vehicles. Various investment categories sit on top of the foundation forming a hierarchical scale from the safest assets at the bottom – to the riskiest assets at the top.

Psychology
The market thrives on two basic emotions: Fear and Greed

However, there are many subsets to these as well. For instance, one can have the fear that he is going to miss the next rally. Is really fear - or a form of greed?

One can keep holding a stock after significant increases in price, never selling or booking profits, always hoping for additional profits. Suddenly the stock starts falling precipitously. Half of the profits that were on paper vanish. Did greed keep us from selling or was it the fear of giving up possible gains?

The market will teach us much about ourselves if we listen to it. It is hard to listen to the market as opposed to what our mind thinks about the market. This is true in all things. Listening is an art form.

Do Not Take the Big Hit
The main reason investors take a big hit is generally due to emotional and psychological reasons. We all have our own unique personality that we bring to the table.

Whatever emotional and psychological weaknesses we have, the market will quickly search them out, and bring them into play – usually quite fast.

Most often then not the market does not have to beat us – we beat ourselves. To be successful we need to know our weaknesses. We should to try to correct our weaknesses as we become aware of them. We must know our strengths – and use them to our advantage.

This is done by first recognizing them and then having a plan to keep them under control – just as we keep the other types of risk under control: market risk, timing risk, currency risk, etc.

Discipline and money management will allow us to cut our losses quickly – and to let our winners run freely. There is nothing wrong with being wrong – only in staying wrong.

Summary

The above is a general outline of our investment philosophy. The following points are most important:

Assessment of our financial situation and investment goals is key.

Assess our psychological make-up – including strengths and weaknesses.

Define the primary market trends in the market.

Choose a portfolio to meet our own specific goals.

Have a well-defined plan including asset allocation and money management.

Use a combination of the various types of analyses available.

Utilize the inverted pyramid to define safety versus risk

Do not take the big hit

Remember the slogan:

It's Not What You Win That Counts

It's What You Don't Lose

What is the most important lesson from financial crisis?

Updated: Monday May 4, 2009 MYT 11:32:51 AM

What is the most important lesson from financial crisis?

OMAHA, Nebraska: Billionaires Warren Buffett and Charlie Munger said Sunday the most important lessons of the recent financial turmoil are that companies should borrow less and build a system of severe disincentives for failure.
Berkshire Hathaway Inc.'s top two executives offered that frank assessment of businesses' role in the current recession at a news conference held a day after 35,000 attended the company's annual meeting in Omaha.
The two men also said most of the nation's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of the protections built into the system.
Buffett said having severe disincentives for failure and proper incentives for success is key to ensuring large financial institutions are run well.
He said people didn't become more greedy in the last decade, but the system allowed people to take advantage of it.
"I think the most important lesson is the world needs a whole lot less leverage," said Buffett, who is Berkshire's 78-year-old chief executive and chairman.
In speaking of disincentives, Buffett suggested that if an executive would be shot if the company fails, then the company would definitely borrow more carefully.
Buffett said Fannie Mae and Freddie Mac show that intense regulation can't prevent problems because those mortgage finance firms were some of the most regulated companies before government seized control of them amid mounting mortgage losses.
But Buffett said assigning blame for the economic mess doesn't make a ton of sense because so many people made mistakes.
"I think that virtually everyone associated with the financial world contributed to it," Buffett said.
Munger, Berkshire's 85-year-old vice chairman, said a combination of factors caused the financial mess.
He said the nation tolerated way too much debt, immorality and stupidity, and now it's paying the price.
"We have failed big-time on multiple fronts," Munger said.
He said gross immorality persisted in the consumer credit and derivatives businesses, and many people were taken advantage of.
Then the accounting profession failed to catch problems and tolerated too much foolishness, Munger said.
He said accounting rules that allow companies to report huge profit just before failing doesn't make sense.
"We do not need insane accounting that rewards people that can't handle the temptation," Munger said.
But it still might be hard to get Congress to pass sensible rules for investment banks and derivatives, Munger said, because of the amount of lobbying investment banks have done.
"We're going to have a hell of a time getting this fixed the way it should be fixed," Munger said.
Buffett said he's not sure how the government will handle the results of the stress tests officials are conducting on the 19 largest U.S. banks, but he doesn't think the government should rule out the failure of most of the banks.
"These 19 banks are not too big to fail," Buffett said.
"You can make a deal for any but the top four on the list."
To prove his point Buffett pointed to the examples of Wachovia and Washington Mutual banks, which both failed in the past year and were sold to competitors.
The stress tests are supposed to determine which banks would need more cash if the economy weakens further.
Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, which means some banks would be forced to raise money.
Buffett said consumers should not worry about bank failures because the Federal Deposit Insurance Corp. is there to protect them with the resources it collects by charging banks fees, so taxpayers don't pay when the FDIC rescues banks.
"I'm not worried at all about a run on the banks," said Buffett, whose company holds large stakes in Wells Fargo & Co., US Bancorp, M&T Bank, Bank of America and Sun Trusts Banks
Given the age of Buffett and Munger, there is always speculation on who might replace them.
Buffett said Sunday that investors would know if either had health problems.
"If I know of anything serious - or anything that might be interpreted as serious - health problems, Berkshire would disclose it," Buffett said.
"We don't want rumors flying around."
But Munger joked there might be a high threshold for disclosing anything about his health: "In my case, I'm so nearly dead anyway that it's a minor detail."
Both Munger and Buffett said they feel great.
Berkshire's Class A stock lost 32 percent in 2008, and Berkshire's book value - assets minus liabilities - declined 9.6 percent, to $70,530 per share.
That was the biggest drop in book value under Buffett and only the second time its book value has declined.
But Buffett always measure's the company's book value performance in relation to the S&P 500, which fell 37 percent in 2008, so he's not bothered by stock price fluctuations.
"We don't consider it our worst year by miles," Buffett said Sunday.
Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms.
Berkshire also has major investments in such companies as Coca-Cola Co. and Burlington Northern Santa Fe Corp.

On the Net: Berkshire Hathaway Inc.: www.berkshirehathaway.com
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