I Hope You Were Smarter Than Warren Buffett

Most investors were totally floored to hear that Berkshire Hathaway , was a net seller of stocks during this year's first quarter market collapse. At Berkshire's recent (virtual) annual meeting Warren Buffett said he sold all his airline holdings and bought almost nothing, as he couldn't find any particular bargains, even at the March lows. By definition, saying there were no good values back then made absolutely no sense. From the March 23 nadir through Monday the S&P 500 exchange-traded fund SPY gained just over 34%. The Nasdaq Composite is now positive year-to-date. The graphic below details Berkshire's top 10 holdings after jettisoning (pun intended) its four large airline holdings. Simply allocating those funds into existing positions would have been a great use of capital near the March lows. Throwing darts to pick stocks back on March 23 would have yielded great results. According to Value Line the seven best performing industry groups were spectacular winners through May 4. The worst seven industry groups, for those with absolutely horrible stock picking skills, also posted respectable gains. In short, Mr. Buffett's decision to raise cash and sit on it, was the only bad choice. Again, by definition, we have already entered a new bull market. Data from FactSet says that, since 1932, 100% of new bull markets showed positive returns over the first three and 12 months of their durations. Average gains were 17.4% and 39% respectively. People who say that we won't see a V-shaped market recovery must have forgotten the experience from the March 9, 2009, bottom. We were still deep in the throes of recession back then stocks rallied hard on the coming economic rebound which was still months away. Equities always bottom during, not after, the end of recessions. Today's highly automated trading has compressed cycles like never before. We experienced a brutal sell-off predicated on the horrendous lock-down of American businesses. Many stocks were hit much harder this time around than at their worst moments in 2008 to 2009. That's why the question about, How can stocks be up since March when the economy has become so much worse? is so misguided. It ignores the fact that many stocks had already declined by 30%, 50% or even 80% to 90% from their recent peaks. Of course they have climbed from those crazy panic lows which priced many companies for bankruptcy, rather than eventual recoveries. This week's Barron's showed how accurate two contrary psychological indicators were shouting we were right at the bottom. The Volatility Index, also known as the fear gauge, spiked radically in late March. The equity-only put/call ratio also peaked just as the stocks hit their final lows. When everybody feels the most pain, and doesn't even want to look at stocks, is when smart traders get busy buying. Mr. Buffett and many other people missed getting in when things were at panic-selling levels. That doesn't mean there are no bargains left. By request from a Real Money Pro subscriber here is my current Dirty Dozen picks, which continue to be well below their trailing 12-month highs. Many could rise by 50% to few hundred percent from here if things play out as I expect. Some of these continue to pay secure and generous dividends while you wait.

I Hope You Were Smarter Than Warren Buffett

Buffett and many other people missed getting in when things were at panic-selling levels, but that doesn't mean there are no bargains left.

Columnist Conversation

Fibocall: The INDU and Our LT View

Fibocall: WORK -- Buy, Sell or Hold?

Fibocall: Key Support Levels to Know

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.