Buffett Is Right Again on the Markets

 | Sep 23, 2013 | 1:00 PM EDT  | Comments
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Perhaps no other sentiment had the same warm, fuzzy feeling of telling people to "Buy American. I Am" At the time, nothing could sound better during a state of chaos. But for months it seemed that anyone who bought "American" was trying to catch a falling knife.

The reference above pertains to an op-ed piece that appeared in the New York Times back in October 2008. The author of the article was Warren Buffett (disclosure: Buffett did not choose the aforementioned title; that was the choice of NYT editorial board). But the message from Buffett was clear: Stocks were trading at bargain levels not seen in decades. You could count on one hand the times that Buffett, in the span of 65-year career as an investor, had publicly come out and expressed a definitive opinion on the stock market.

As we all know, for following five months, Buffett's tome seemed way too early. But we all know the yardstick by which Buffett and other value investors measure stock returns: several years, not months. Ahh, the power of hindsight today. Looking back, Buffett's assessment was spot on and I'm sure every single one of us wishes we would have bet bigger five years ago.

We all know Saks Incorporated (SKS), the owner of the iconic Saks Fifth Avenue Brand. Did you know that in early 2009 shares traded as low as $1.55? You could have picked up one of the most recognized fashion retailing brands for a market cap less than $200 million. On top of that, you were also getting prime real estate worth billions. Today, Saks trades for $16. But I digress.

Buffett came out last week and said that he's having a hard time finding things to buy in the stock market. Notably, he has stated that stocks are now fairly valued if not getting close to overvalued. Value investors, by definition, prefer to show up early to a party and also leave early. In other words, they buy undervalued stocks, sell fairly valued stocks, and avoid overvalued stocks. This process seems to be what's at work right now.

It could be months, or even a year, before Buffett is deemed to have made a timely call. Even Carl Icahn has said he's not finding many fertile ideas. Keep in mind that Buffett is not saying that the market is heading for a prolonged decline. What he is saying is that the risk-adjusted future return for equities from this point forward is no longer attractive to his standards.

Berkshire will surely buy and sell stocks with each quarter, but you will see that its appetite has diminished significantly until the market has a healthy pullback.

Be mindful that both Buffett and Icahn are working with billions of dollars, so they have a smaller pond to fish from than the guy working with tens of millions of dollars. But even most small-cap ideas have run their course and have handily outperformed their much larger cousins -- another signal that markets are warming up.

Five years ago, the message was to load up the truck on American equities. Today, and a 150% market advance later, the message is not to dump stocks, but rather to tread carefully as you allocate capital.

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