Skip to main content

Buffet says buy stocks, what should you do?

Friday, Warren Buffet wrote an op-ed piece in the Wall Street Journal saying he was buying stocks for his personal portfolio. Some say this was a major reason why markets rose on Friday though they fell back to a modest loss by the end of the day.

Buffet made the point that stocks are now cheap and that he likes to buy when everyone else is fearful. The Wall Street Journal followed up with an article that looked at several measures that are commonly used to divine whether stocks are over-valued, fair-valued or under-valued. They provided the following graphic titled "The World is Cheap".

WSJ charts showing stocks are under-valuedAs can be seen in the three charts above, these indicators have fallen to levels not seen since the 1980's. In all three charts, the lower the reading, the more stocks can be considered to be under-valued. The article referenced at the bottom of this post provides a bit more detail on each chart.

And a few more charts won't hurt --

Well, there is plenty of evidence that stocks are getting cheap, depending where you look. Here are a few more charts, courtesy of InvestmentTools.com, that make the same point.

First up we have a sentiment indicator, Bullish and Bearish sentiment charts from the American Association of Individual Investors. According to many contrarians, when the AAII is most bearish, it generally corresponds to a bottom. Note that the bearish sentiment (in red) is reaching a 15-year maximum.

AAI Bullish-Bearish Sentiment
This next chart shows the price-to-book ratio for the Dow Jones Industrials. Where the first set of charts from the Wall Street Journal showed the same measure for world stocks, this chart makes the point that U.S. stocks are in exactly the same state: cheap.

Dow 30 Price-to-Book
This last chart addresses a question that has been endlessly debated for the last year or two; ie, when will the housing market bottom? Here we see real estate prices adjusted by Consumer Price Index (CPI). This chart indicates that based on prices in general, housing has more or less returned to its long term trend line. The interpretation is that we are probably closer to the bottom in housing than we are to the top.

Real Estate Prices vs. CPI
Conclusion --

The set of charts reviewed here certainly give the impression that we are in the range where stocks are cheap and even real estate is getting back to somewhere around fair value. With stocks getting the thumbs up from an investor like Warren Buffet, it makes sense to consider strategies that allow us individual investors to follow in Buffet's footsteps.

The easiest approach is to begin investing in a couple of ETFs or mutual funds that provide exposure to a major market index like the S&P 500 or the Wilshire 5000. Easing into the investment by spreading one's buying out over several months or a year reduces the impact of not identifying the absolute bottom yet assures that an investor gets in somewhere around the bottom.

This, of course, assumes that the current financial crisis and worldwide recession won't spin out of control and cause stocks to lose another 30%. Warren Buffet seems to think things won't get too much worse. How about you?


Sources: Before You Rush Into Cash…

Comments

Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional