Straight From the Mouth of the Oracle of Omaha

You may be the kind of person who automatically genuflects when the name Warren Buffett is mentioned, or not.  My opinion of him has varied over the years.  In my youth, I just couldn’t understand why someone who obviously doesn’t care about money would devote his life to making more of it.  These days, knowing how little he is leaving to his family members and how little he even cares about which philanthropies will benefit from his wealth, I think I understand him a little better.

Not that you asked, but here’s what I think is behind Warren Buffett’s dedicated life of investment: 

  • He’s good at it and he enjoys it.
  • The recent biography analyzing the Oracle of Omaha does a lot of “psychologizing,” but I don’t have much use for that.  Warren does what he wants to do, lives how he wants to live and says what he wants to say. 
  • If he thinks that the rich shouldn’t object to paying more taxes (and he does), that’s what he says. 
  • If he thinks the U.S. dollar is going to tank (as he did several years ago), he says that, too.

I’m particularly interested in what he had to say in a New York Times op-ed piece last Friday.  He said it’s time to buy U.S. equities. 

It’s interesting because, even though Buffett is the ultimate value investor and I’m devoted to the growth style, our thinking is pretty close.  I’m going to go over what he said pretty closely, including lots of quotations, because what he says makes so much sense.

Buffett’s advice that it’s time to buy U.S. equities is a natural result of his oft-repeated simple rule: “Be fearful when others are greedy, and be greedy when others are fearful.”  While emphasizing that he hasn’t “the faintest idea as to whether stocks will be higher or lower a month–or a year–from now,” he says that the markets will turn higher “well before either sentiment or the economy turns up.”  Then, he warns, “if you wait for the robins, spring will be over.”

Buffett sketches a history of the wars and disasters of the 20th century, pointing out that the Dow rose from 66 to 11,497 during the period despite these shocks.  Yet people managed to lose money during this amazing long-term bull market by buying stocks “only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.” 

He’s also not keen on the people who are now feeling comfortable about being in cash; As he says, they have an asset that “pays virtually nothing and is certain to depreciate in value.”

Even though Cabot’s growth letters, Cabot Market Letter, Cabot Green Investor and Cabot China & Emerging Markets Report, are extremely heavy in cash right now, we’ve been advising subscribers to be on the lookout for an investable rally.

Where Cabot’s growth strategy finally differs from Buffett’s value strategy is in its investing style.  Warren will be putting money into solid companies with healthy balance sheets, good prospects and attractive valuations, then planning to hold them for years until they achieve a price that’s in line with their value.  This value system is similar to the one found in Cabot Benjamin Graham Value Letter.

Cabot’s growth letters will look for stocks that are already in strong uptrends, which have a history of accelerating revenue and earnings growth and appealing stories.  We will advise our subscribers to hold them until their momentum deteriorates.  

In either the value style or the growth style, the idea is to ignore the panic in the streets and the alarming headlines to concentrate on time-tested principles of investing success.  Your style–which should conform to your risk tolerance and investing personality–is much less important than your determination to listen closely to what the market is actually doing.  Buffett says it’s getting cheaper, and he likes that.  The Cabot growth letters say it’s putting in a bottom, and we like that.

Do we see any conflict between his contention that cash is a terrible investment and our contention that cash is your friend in troubled times?  Absolutely not.  He may be moving into stocks at the market’s bottom, but we won’t be far behind him … and the cash allowed us to avoid the market’s crash, too. Cash is a necessity for both of us, and only useful when the risk level of being in the market is just too high.

It’s good to have Warren Buffett on the bull side.  I doubt that he thinks about us in the same way, but then he has bigger things on his mind.

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No matter how bad things get, there’s always someone who’s even worse off than you.  And because we’re all human, we can’t help but take a little comfort in that.

I just read a story that may make you feel a little better about the losses that the stock market has handed you in the last year or so.  It concerns the giant Chinese aluminum company called (appropriately enough) Aluminum Corporation of China (ACH), although its friends just call it Chinalco.

Lots of Chinese companies, especially the state-owned ones, have been working hard to get control of the resources they need to expand.  Chinese oil companies like CNOOC and China Petroleum have been aggressively pursuing equity stakes in oil ventures around the world.

China would like to avoid dealing with another hard-bargaining resource giant like the Brazilian miner Vale, which has been holding China’s feet to the fire over iron ore prices.  So, back in February, in a bid to gain more direct control of the mineral resources it needs to serve the growing Chinese economy, Chinalco (together with Alcoa) took a 9% equity stake in Rio Tinto.  Rio Tinto is an international mining colossus based in Great Britain, so Chinalco and Alcoa engaged the London office of an international bank to buy and hold the shares for them.

Unfortunately, that bank was Lehman Brothers … which is now bankrupt.

With about $14 billion of Rio stock sitting in an account in a bankrupt bank, China is understandably vexed about the situation.  China holds that the equity was held in a separate custodial account, and can in no way be considered an asset of the bank.

Despite that reasonable contention, the Chinalco/Alcoa stake in Rio is frozen while the officials in charge of liquidating Lehman’s assets decide what to do.  Anyone who thinks that China will just sit twiddling its thumbs while the largest foreign investments ever made by one of its companies goes down the drain is just fooling themselves.  Speculation is running wild that international diplomacy, as much as U.S. and U.K. bankruptcy law, will determine whether Chinalco will be made whole.

No investing moral here, just a chance for a little schadenfreude, or even a little actual sympathy if you’re inclined that way.  Needless to say, China will think twice about how its big overseas investments are handled in the future, with some justifiable skepticism about engaging the services of an investment bank.

And if you’re just dying for a moral, it would be this:  Unsettled times can sometimes bite you on the … uh … ankle, even when you’ve done everything right.

My investing idea is one that was featured in Cabot Wealth Advisory back in July.  It has fallen hard since-it made a new low just two weeks ago–but it has some compelling features that will make it a prime candidate for investment when the market turns up.

The company is ReneSola (SOL), a Chinese maker of solar wafers for photovoltaic arrays.  ReneSola used to make complete solar arrays, but decided to specialize in silicon production and slicing, a skill that will serve the company well when the world gets off its back and renews its conversion to solar power.

Sure oil is cheaper now and some of the excess funds that nations used to throw toward solar subsidies have dried up.  But burning oil is still a major pollutant, and global warming doesn’t care whether world economies are in a recession or not.  The momentum toward blue-sky initiatives will get back in gear; you can count on it. 

My favorite data about ReneSola is its last five quarterly earnings results, which showed a year-over-year increase in earnings of 25% (Q2 2007), then 40%, 80%, 155%, and, most recently, 280%.  Sales percentage changes have been at least in triple figures for 10 quarters, which is since Q1 2006.

It’s not yet time to buy SOL.  You need to watch the chart for a surge in investor support.  Look for a gap up above 10 on big volume, while keeping an eye on the health of the broader market.  With just 18 institutional investors on board, there’s lots of room for growth. 


Paul Goodwin
For Cabot Wealth Advisory

Editor’s Note: Do you want to safeguard your investments over the long term with a method that has brought 20% returns for more than 80 years? Then Cabot Benjamin Graham Value Letter is right for you. It uses the value investing system created by Benjamin Graham and used by Warren Buffett to select undervalued stocks and patiently wait until they climb higher in price. Click the link below to learn more.


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