Warren Buffett Just Said “Buy!”

Warren Buffett Just Said “Buy!”

by Alexander Green, Investment U Chief Investment Strategist
Monday, November 21, 2011: Issue #1647

If you needed heart surgery, you’d try to find the most talented heart surgeon around.

If you were about to be subjected to a full audit by the IRS, you’d hire the most capable tax advisor you could find.

And if you needed investment advice? I hope you’re not one of them, but I know some folks who would read financial blogs by complete unknowns, take hot tips from friends and colleagues, or listen to a sales pitch from someone selling insurance or other financial products.

Big mistake. It makes a lot more sense to listen to the world’s smartest investors, instead. And one of the very best – if not the best – is Berkshire Hathaway Chairman Warren Buffett. (Ten thousand dollars invested in Berkshire Hathaway when Buffett took the helm in 1965 is worth well over $65 million today.)

And thanks to disclosures last week, we now know what Buffett has been doing during the last few months of crazy market activity. He’s been buying.

Specifically, Buffett has plowed $10.7 billion into IBM. He has increased his stake in Wells Fargo from 361.4 million shares to 352.3 million shares. He has boosted his Dollar General stake to 4.5 million shares from 1.5 million. And he has increased his holdings in insurer Torchmark to 4.2 million shares from 2.8 million.

There are a few interesting things to note here. The first is that while most investors have been either running to cash or nervously sitting on their hands lately, Buffett has been actively capitalizing on fresh opportunities. You should be doing the same.

Second, it’s worth mentioning that Buffett has generally avoided technology stocks like IBM. But upon reading not some super-secret briefing but rather the firm’s annual report, he learned that IBM enjoys an entrenched position providing technology services to major businesses.

Buffett likes companies with a “moat” like this and has famously said that his favorite holding period is “forever.” Indeed, he recently told The Washington Post that “IBM fits all my principles … it’s something we’d like to own indefinitely.”

Then there’s the price he paid for IBM. I often get emails from readers who are baffled that I sometimes recommend companies trading at or near their highs. Buffett bought IBM as it hit new highs – even as the broad market was cratering. Indeed, the stock has more than doubled since the depth of the 2008 recession.

Buffett’s response? He says the fact that IBM has doubled doesn’t bother him. Indeed, over the years he could have bought the firm at a tiny fraction of its current price. “What matters is what the company does in the future,” says Buffett.

There are a number of important lessons here:

1. As Buffett often points out, you should be greedy when other investors are fearful.

2. You shouldn’t be reluctant to modify your investment approach a bit (as Buffett has with one of his first significant forays into technology).

3. You shouldn’t fret about how much cheaper a stock was in the past if the business is sound and growing today.

And when it comes to investment advice, history shows it pays to listen to the best of the best. That’s one reason we’ve owned Berkshire Hathaway in our Oxford All-Star Portfolio for well over a decade.

Good investing,

Alexander Green

Why Things Are Looking “UUP” for the Dollar

Why Things Are Looking “UUP” for the Dollar

by Alexander Green, Investment U Chief Investment Strategist
Monday, September 19, 2011: Issue #1603

On July 28, I wrote a column recommending Market Vectors Double Short Euro ETN (NYSE: DRR) as a way to take advantage of growing problems in the Eurozone.

Since then, that ETF has jumped 7 percent. I see more upside in that fund.

However, today I’m going to recommend another way to take advantage of an oversold dollar: PowerShares DB US Dollar Index Bullish (NYSE: UUP). It’s likely to rally in the months ahead.

Here’s why…

Two weeks ago, I was in France and the U.K. on personal business. As anyone who travels to this part of the world knows, every time you change a Ben Franklin, you get back a couple of bills and a smattering of coins. The almighty dollar doesn’t go far in this part of the world.

My cab ride from Heathrow to Notting Hill cost $120. A pizza and a coke was $35. And you can forget about finding any bargains at Harrods these days.

The Top Reasons For a Weak Dollar

We all know the reasons why the dollar has been weak:

• The persistently high U.S. budget deficit,
• Huge unfunded entitlement liabilities
• And ultra-low interest rates.

Yet Europe is hardly a model of financial strength, economic growth, or fiscal propriety. What too many analysts fail to appreciate is that, in many respects, matters are worse in the Eurozone and Great Britain than they are here.

I’ve already covered the extensive problems and lack of viable solutions in the Eurozone. But take a look at Britain.

Two weeks ago, the Bank of International Settlements reported that – following a 10-year binge under the last Labour government – debt in the U.K. grew faster than in any other country. It now amounts to $284,000 per household.

The near doubling of government, corporate and household debt in Britain over the last decade was the biggest increase of any Western economy. And the Bank of International Settlements reports that this debt is further set to “explode” in the years ahead.

This is no small problem. In 2010, Britain had government debt of nearly 90 percent of GDP, corporate debt of 126 percent and household debt of 106 percent. Of the G7 economies, only Britain and Canada are in the danger zone for all three types of debt.

Why Now is Time to Be Long the Dollar

So the question remains. Why the heck should the pound sterling be so strong against the dollar? I’m not arguing that the United States is doing everything right. Clearly, it isn’t.

But there are good reasons to believe that America is in better shape than our friends across the pond.

Where, for instance, is the grassroots movement in Europe – like our Tea Party – that’s crying out for fiscal responsibility and limited government? Our politicians are at least getting the message that a large bloc of voters won’t accept out-of-control spending from either party anymore.

This looks like the inflection point for a higher dollar. Take advantage of it with UUP. PowerShares DB US Dollar Index Bullish is designed to replicate the performance of being long the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

It’s almost a shame that the Swiss franc – a genuine reflection of fiscal responsibility – is included in the group. On the other hand, the Swiss are sick and tired of their surging currency and are intervening heavily in currency markets to stem its rise.

In short, this is a good time to be long the dollar. And UUP is a great way to play it.

Good investing,

Alexander Green

Why the Sun is Setting on Gold

Why the Sun is Setting on Gold

by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, February 22, 2011

Six weeks ago, I wrote a column advising short-term speculators to sell their gold.

Since that time, the metal has drifted lower. But the brunt of the decline is likely still ahead.

As I’ve said before, gold is difficult to value under the best of circumstances. It pays no interest, has no earnings, provides no rent. What gold will be worth next week or next month is whatever buyers will pay for it at the time. And that, in technical terms, is a guess.

I’ve heard gold bugs make their case. Some are based on emotion. Others are based on political fantasies about the Federal Reserve turning us into the Weimar Republic circa 1923, or modern-day Zimbabwe.

What I rarely hear them talking about is pedestrian stuff like supply and demand…

When Buyers Become Sellers, Look Out Below

Billions of dollars have been spent building gold mines over the last few years, so it’s not inconceivable that supply could begin to outstrip demand.

Of course, demand itself is fickle.

In 2005, investors made up just 16% of total demand for gold. Today, it’s more than 40%. Gold ETFs have taken in more than $50 billion since 2004.

What will happen to the price of gold when these buyers become net sellers, as many will when it becomes clear that the party is over? Paulson & Co., a hedge fund, now holds more than $4 billion in the SPDR Gold Trust ETF (NYSE: GLD). I wouldn’t want to be standing in front of his eventual liquidation. And, like most hedge fund managers, Paulson is not a “buy-and-hold” investor.

Some bulls justify buying gold at these levels because it briefly traded at more than $800 an ounce in 1980. And they say if you simply adjust for inflation, gold should be trading at $2,300 today.

That’s weak. Here’s why…

Don’t Be Blinded by the Gold Light

Gold badly underperformed inflation – not to mention stocks, bonds, real estate and burying your money in a hole – for 20 years after 1980. Why is it suddenly destined to catch up now?

Or look at it another way: On August 25, 1999, gold traded at $252.55 an ounce. Adjusting for inflation, gold should be trading at $339.65 an ounce today.

Granted, my starting point is the 30-year-low. But then, a calculation based on the 1980 high is just as arbitrary.

It’s understandable that gold spiked during the 2007-2009 financial crisis. Gold is an excellent barometer of investor anxiety. But that crisis is over. The recession – defined as two straight quarters of negative GDP growth – ended in June 2009. And inflation is running at just 1.2%.

So why is gold still in the stratosphere?

What to Do With Your Gold Holdings Now

Yes, I know the price of food, gasoline, health care and college tuition are all going up much faster than the official inflation rate. But let’s also concede that the price of cars, computers, appliances, electronics, furniture and, not insignificantly, homes – the biggest asset most consumers will ever buy – is coming decidedly down.

Experienced investors know that after an asset has made a huge run, the little guy – forever a day late and a dollar short – starts clamoring for a piece of the action. At that point, the bloom is off the rose. It’s too late to buy and generally high time to sell.

Take my old neighbors, Sam and Brian. They lost their shirts in Internet stocks in 2000-2002. Now they’re stuck with huge negative equity in Florida condos that they bought pre-construction – a “no-brainer” in 2005.

So what are they doing with their rapidly vanishing capital today?

You guessed it. Now that gold is up five-fold in the last 10 years and three-fold in the last five years, they’re convinced that a big move lies just ahead.

Maybe. But what’s certain is that one lies just behind.

My advice? Keep your gold bullion and blue-chip mining stocks that you own as an inflation-hedge or part of your long-term asset allocation.

But if you’re counting on gold to dash higher, note that the last time investors bought into a gold mania it took more than 25 years for them to break even – not counting inflation.

As Mark Twain famously said, “History may not repeat itself. But it rhymes.”

Good investing,

Alexander Green