What would Buffett do?

Founder and Publisher of the Switzer Report
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At the depths of the global financial crisis (GFC) when the odds that it would turn into the Great Depression Mark II shortened, Warren Buffett made a US$10 billion bet on investment bank Goldman Sachs. It proved to be a big contributor to the turnaround in sentiment and it made the world’s most famous investor a nice return on his investment.

Over the years when I’ve been a victim of my daily preoccupation with the market for media purposes or for the sake of my daily communication with my financial planning clients, I’ve often been brought back to one of the most fundamental questions that all DIY investors have to be fixed on: “What’s my investment strategy?”

If you run an SMSF, you should have this written down so all of your members know what the game plan is and every key investment should be made in relation to this document. It means that if you decide you’re no longer a growth investor and have become very conservative and committed to cash, then you should have rewritten your investment strategy.

Another self-reminding mechanism I use to keep on track with my strategy is to go back to the fundamental maxims that have driven the likes of successful investors such as Buffett.

The one Buffettism I’ve used to great effect in recent years – and I’m sure I will one day pop champagne over this – is his admission that goes something like: “When everyone is greedy, I am fearful but when everyone is fearful, I am greedy”.

However, there’s another Buffettism I like, which on the other hand makes me a little hesitant to invest in these challenging times dominated by the European debt drama and the oh-so-hard to comprehend European Union officials and politicians.

He says: “If you don’t understand it, don’t invest in it”.

You see, I don’t understand the full implications of what a Greek default could do to the global financial system. I don’t know what is happening in Portugal, Ireland and Spain. I don’t know how vulnerable French banks are to the debt debacle, but I do know Moody’s has downgraded their credit ratings and that this didn’t appear to impact the French stock market, with the CAC 40 up 1.87% and the German Dax up 3.36%.

Bloomberg explained the rise this way: “German stocks rose for a second day as carmakers rallied and investors bought shares trading near their lowest valuations in five years.”

Two of the star performers were carmakers BMW and Volkswagen – quality companies beaten up by confidence slides, confusion, poor leadership and panic.

Germany’s index has fallen 30% since its 2011 high on 2 May, and the cause has been the speculation that Greece will default and the unknown implications of it all.

One of the big drivers for the market’s positive move on Thursday was when China’s premier, Wen Jiabao, told the world his country was willing to help Europe through its current debt crisis and that they were willing to invest in the region.

This guy is smart because it’s in his interest to keep his customers alive and it’s this end-of-the-day realism that will eventually come through worldwide and prove that the current sell-offs on global stock markets have been excessive.

Interestingly, Meredith Whitney, president of the New York-based Meredith Whitney Advisory Group and a big bear against US banks and municipal bonds, said this at a recent US conference: “Fundamentals are not playing into valuations now at all. You’ve got great companies that are trading horribly, you’ve got pretty junky companies that are way overvalued. For the first time in three-and-a-half years, I think you can begin to invest fundamentally and make money.”

Provided your investment strategy has a long-term horizon, and targets quality companies at low valuations, then why go to cash excessively?

Even if you go into stocks too early and 2012 is a shocker, I bet in 2013 you’ll be laughing all the way to the bank. There’s a lot of fear now and so it could be time for greed, but make sure you buy great companies.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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