Marc Faber spoke to Bloomberg Television by phone earlier today and had the following to say:

Obviously, the economy is already in recession. Corporate profits will disappoint. In particular, the consensus earnings for 2009 are still far too high. And after jobs creep downward, obviously valuations look less compelling.

Well, I would say, what we are in, is kind of a water-torture bear market. A lot of stocks peaked out already in 2005, like to homebuilders. And in 2006, the subprime lenders. Then in 2007, all financial stocks… And I think the cyclicals, and the energy, and the materials stocks, like steel and iron ore companies, they will now all come under pressure… but I think other sectors of the market that have held up well are now vulnerable.

On what investors should be buying, Dr. Faber, who is known for advising clients to get out of the U.S. stock market one week before the October 1987 crash, said:

I think the question should be, what sector should you sell… I don’t see any compelling value in equities. I also don’t see any compelling value, in say, real estate, or in the commodity market. I think asset markets are still inflated. And we are in an environment, contrary to the last 25 years, during which leverage increased. We are in a period of deleveraging.

Responding to the question of whether or not investors should park their money in cash, the editor of the Gloom Boom & Doom Report said:

Well, cash is not desirable in the sense that it loses its purchasing power because you have a money printer at the Fed, Mr. Bernanke… His monetary policy inevitably is inflationary, and as a result, leads to a lower dollar.

When Bloomberg asked if high oil prices were unjustified, the Swiss-born investment adviser said:

My view would be that commodities will rather ease, as some have already done…

(On oil) The big upside is now gone. And so I would be a little bit careful about blindly buying commodities. I think they’re on the high side, the way real estate was on the high side, the way stocks were on the high side. I would not short commodities, but I would be careful about buying them here.The dollar has some upside potential here. But of course, if Mr. Bernanke continues to print money and push down the Fed funds rate to zero, then the dollar won’t go anywhere. As of today, I believe the dollar is relatively undervalued with the euro. I still like gold (transmission garbled)…

Finally, Dr. Faber had this to say when asked to pick one investment for next 6 to 12 months:

Well, I would take a holiday and forget about the speeches of Fed governors, because their economic knowledge, is in my opinion, is extremely limited. And each time they speak, they actually confuse the issues. And so, there is very little sincerity, at the present time.

You can listen to the 8 minute 21 second Bloomberg interview here.

Source:

Marc Faber Interview
Bloomberg, June 9, 2008

Last night, Mark Mobius, executive chairman of Templeton Asset Management Ltd., told reporters at a function in Kuwait that he was buying into Persian Gulf stock markets. According to Reuters’ Ulf Laessing, he was investing in stocks related to banking, real estate, and specialized businesses such as oil service companies. Mobius said:

We’re investing now here (in Kuwait) and that goes for the rest of the region… there are very attractive opportunities.

Laessing wrote about Mobius’ investment outlook for the region, as well as some of his targets:

Mobius said valuations of Gulf stocks looked attractive compared with other emerging markets after a correction on some markets. The Dubai and Saudi stock markets have both fallen this year, while Kuwait, Abu Dhabi, Qatar and Oman are up.

He declined to discuss individual stocks, saying only the asset management arm of Franklin Resources Inc had bought into NBK, Kuwait’s biggest bank by assets. Kuwait, the United Arab Emirates, Qatar, Oman, Egypt and Tunisia were among markets where Templeton was investing, he said. “We’d love to do more in Saudi Arabia.”

Riyadh, Saudi Arabia

The emerging markets veteran, who oversees more than $40 billion in emerging markets assets, is focusing on “regional players.” According to the Reuters reporter:

Templeton favoured Gulf companies which were spending windfall oil revenues to expand in the Middle East over those sticking to domestic markets, he said.

“We like regional players,” he said of companies expanding in markets such as Egypt where large infrastructure projects were being undertaken…

Source:

“FUND VIEW-Mobius buying into Gulf, eyes banks, real estate”
Ulf Laessing
Reuters (India), June 4, 2008

This morning I came across an interesting article on the USA Today website where David J. Lynch talked about billionaire investor and philanthropist George Soros. While the article focused on Soros’ “reflexivity” theory, the piece also shed light on his latest economic outlook for the United States. Lynch wrote:

The credit crunch that erupted last year prompted Soros to return to investing, to protect his portfolio from the gathering financial catastrophe. Several months later, Soros says the U.S. has weathered the “acute phase” of the markets crisis. “But the impact on the real economy is yet to be felt,” he says.

Soros makes no bones about his judgment that the current financial crisis is the “worst since the 1930s.” He sees the subprime mortgage debacle as the signal event that unhinged both this decade’s housing bubble and a 25-year-long “super-bubble” that originated in the debt-laden policies of the Reagan administration.

But despite Soros’ apocalyptic rhetoric, the Dow is hovering near 13,000 and unemployment is a relatively low 5%. Soros explains the disconnect with the tale of the man who falls off the Empire State building and thinks to himself halfway down: “So far, so good.”

“That’s where we are right now,” Soros laughs.

Sobering, to say the least. The co-founder of the Quantum Fund with Jim Rogers blamed the failure of regulators, including former Fed Chair Alan Greenspan, for cultivating the crisis. On housing, Soros is predicting more declines in U.S. home prices, and that Americans will suffer a noticeable decline in their standard of living. He said:

I’m afraid that will be the case, and it will be hard to take. And it will be politically unpalatable, and it will probably give rise to all kinds of populist political appeals (for) a way out that will also be very dangerous.

The Hungarian-born investor also believes that efforts by the Federal Reserve to pump cash into the banking system and the U.S. government to provide $168 billion in economic stimulus will be ineffective. Lynch wrote:

Talk — from Bush administration officials and Wall Street optimists — of an economic recovery later this year “is totally without foundation,” he says.

Source:

“Soros sees ‘reflexivity’ theory of economics as life’s work”
David J. Lynch
USA Today, May 13, 2008

It’s great to be back after several days away from Investorazzi.com. However, I expected a little bit more from my “leads” than a story about pop star Michael Jackson and his Neverland Ranch. Nevertheless, I decided to address this because legendary real estate investor Tom Barrack, Jr., somehow got involved with a last-minute deal to save the 49-year-old American entertainer’s property in Santa Barbara, California, from foreclosure. Barrack is famous for calling the top of the U.S real estate market in 2005.

E!Online’s Gina Serpe wrote this morning:

The seemingly perpetually indebted Michael Jackson narrowly escaped a foreclosure auction on his Neverland Ranch Sunday after the real-estate investment firm Colony Capital bought the loan to the property in a last-minute deal to save the estate.

The purchase of the 2,700-acre ranch was said to have set Colony back $23.5 million, and the company has wasted no time getting into discussions about possible repayment terms with the onetime king of pop, with founder Tom Barrack Jr. saying they were already speaking “with regard to the ranch and other matters.”

“Blame it on Tito”

Barrack’s Colony Capital, one of the largest private-equity firms devoted solely to real estate, has achieved a 24% annualized internal rate of return (IRR) over the last 17 years.

Source:

“Neverland Saved From Auction Block”
Gina Serpe
E!Online, May 12, 2008

Gita Dhungana of The Standard (Hong Kong) wrote a piece earlier today on legendary investor Jim Rogers. In the article, Rogers, author of A Bull In China, spoke about his China-related investments. According to Dhungana, Rogers said he holds yuan (the Chinese currency) and plans to buy more, which he predicts will rise “several hundred percent” over the next few decades. The CEO of Rogers Holdings said the yuan “is one of the safest investments in the world right now versus the US dollar and the Hong Kong dollar,” and added that the renminbi, or “people’s currency,” would one day replace the greenback as the world’s reserve currency.

The Singapore-based investor also talked about Chinese stocks, which have been beaten up as of late. Dhungana wrote:

Rogers, who has been bullish on China and mainland-related assets for some time, also said he has started buying Chinese shares, taking advantage of the recent correction in the market.

He said there may or may not be a further correction, but if there is one it would create more opportunities…

Rogers recommends investing in mainland firms that would benefit from whatever happens to the global economy or domestic growth. His list includes the water treatment, power generation and agricultural sectors.

While the co-founder of the Quantum Fund may be warming up to Chinese shares, he is cool on Chinese real estate, and recommended investors stay away from the overheated market.

Despite the growing number of headlines here in the United States declaring the death of the commodities bull market, Rogers remained firm in his prediction of the current bull market continuing for the next 15 to 20 years as supply remains low and demand soars. As a matter of fact, he believes the price of crude oil could possibly reach $180 a barrel or higher over the course of this run.

Source:

“Rogers thumbs up to split from greenback”
Gita Dhungana
The Standard(Hong Kong), April 8, 2008

This morning I read an interview about investor Jim Rogers in the Sunday Times (UK). Niall Brady does a fantastic job getting Rogers to talk about not only his economic outlook and investment strategy, but his personal life as well. Here are some excerpts from the exchange:

TIMES: What property do you own?
ROGERS: None. I sold my home in New York when I moved to Singapore last year and, for now, I’m renting. I’ll probably buy when I find the right place. I’m of the view that property prices will come down in many parts of the world, including Singapore, so I’m not in a hurry. I don’t like property as an investment – it’s too illiquid and sometimes you can’t sell it at any price.

TIMES: Where are you investing these days?
ROGERS: I expect the bull market in commodities to run until at least 2020. I’m buying cotton, sugar, coffee and precious metals such as silver and palladium, because their prices haven’t moved as much as other commodities. The Chinese renminbi is one of the best investments I know. I’m also buying the Japanese yen and the Swiss franc because these currencies have to appreciate in value. I expect to get out of all of my American assets before the end of the year as I believe the dollar will remain under serious attack. I’m short-selling US investment banks. All the great excesses of the past 10 years have been in financial services.

TIMES: Do you invest in shares?
ROGERS: I still buy shares periodically – I’ve owned some for more than 30 years – but I’m not optimistic about stock markets. I prefer commodities and currencies. I recently bought an exchange-traded fund on the Taiwanese stock market, though. It has traded at a big discount because of the constant threat of war with China. Now it looks like peace for the first time in 60 years.

Rogers also noted that moving to Asia was his “best investment.” He said:

Ensuring my daughter grows up speaking Chinese – it’s the main reason I moved to Asia. Asia is the future. America and Europe are the past.

Source:

“Fame and fortune: Jim Beeland Rogers”
Niall Brady
Sunday Times (UK), March 23, 2008

Yesterday, Vijay Gurav and Rajesh Unnikrishnan of The Economic Times (India) reported that legendary investor George Soros purchased a 2.5% stake in Indianbulls Real Estate on Tuesday. They wrote:

The signs of a softening in property prices are unmistakable but veteran global investor George Soros does not seem to be worried as the real estate-savvy billionaire businessman has picked up a 2.5% stake in Indiabulls Real Estate (IRE) in a deal worth Rs 276 crore.

The investment has come at the time when many of Soros’ US-based counterparts have been on a selling spree amid concerns over acute financial crisis in the world’s largest economy. Soros’ hedge fund Quantum acquired over six million IRE shares in the open market on Tuesday. The deal was struck at Rs 455.8 on the day when the shares closed 4.2% down at Rs 449.4.

Gurav and Unnikrishnan added:

The IRE scrip had scaled its peak of Rs 816 on January 7 ‘08 but lost sharply in the subsequent period, before closing at Rs 441 on the NSE on Wednesday.

The company’s valuation, according to analysts, appears to have come down to reasonable levels as its price/earnings ratio (P/E) plunged from as high as 1,150 times to 24 times currently.

Mumbai (formerly Bombay) Downtown

It appears that the Hungarian-born investor has been quite active in the South Asian country as of late. Gurav and Unnikrishnan noted:

George Soros has invested in quite a few Indian companies, mostly from real estate and infrastructure industry. Unitech, GMR Infrastructure, Anant Raj and Shree Precoated Steels are some companies in which the investor had bought stakes in the past. Quantum Fund is also believed to have recently picked up some stake in Future Capital Holdings.

Source:

“George Soros buys 2.5% in Indiabulls realty arm”
Vijay Gurav and Rajesh Unnikrishnan
The Economic Times (India), March 20, 2008

Writing in the Financial Times (UK) Wednesday, Bill Gross of PIMCO said that even though the U.S. economy “is far from a depression,” the warning signs are there. Gross wrote:

Still, there are developments that remind observers of the days of Hoovervilles - shantytown 1930s communities of homeless citizens nestled out of sight near the railroad tracks instead of on Main Street USA.

The developments he was referring to include:

• Growing foreclosures, as 153,000 initial foreclosure notices were sent out in January, according to RealtyTrac. When annualized, Gross warned that “nearly 1½ per cent of America’s homeowners in 2008 may at some point be headed for the tracks or some other destination most of us don’t care to think about.” Foreclosures, he wrote, “are at the forefront of a recessionary saga that will cause considerable damage to many US citizens, communities and corporations alike.”
• Repercussions in the auction rate preferred (ARP) market, which according to PIMCO’s founder, “apparently caused last week’s unwinding of billions of dollars of high-quality municipal bonds encased within levered hedge fund structures, raising A and AA yields spreads to levels not seen since - well - since the Depression.”
• The potential failure of a number of banks. The FDIC is rehiring retired bank examiners who experienced the last banking crisis of the early ninties.

Taking a page from FDR, Gross declared:

And so it appears we may have something to fear besides fear itself. The American economy, so dependent on asset inflation of one sort or another, is now experiencing price deflation in all three major categories - real estate, stocks, and yes, bonds.

The investor, who earlier this week Warren Buffett called “one of the smartest minds in finance today,” said that policymakers are aware of this asset deflation, yet have been slow to react. Gross cautioned:

Something needs to be done quickly… to halt a destructive asset deflation which, if allowed to proceed, will move our economy in the direction of those Bushville railroad tracks - although still a far distance from them…

Whatever the decision…it has to be studied and acted on with urgency.

Source:

“Urgent action is needed to stave off the rise of Bushville”
Bill Gross
Financial Times (UK), March 5, 2008

On Monday, Warren Buffet, “The Oracle of Omaha,” appeared on CNBC’s Squawk Box. Joe Kernen, Steve Liesman, and Carl Quintanilla spoke to Becky Quick and Buffett, who were broadcasting from the Nebraska Furniture Mart in Omaha. Here are some notable topics discussed by the Berkshire Hathaway chairman:

Stocks

BUFFETT: Yeah, Joe, I don’t know the answer. It’s always a possibility. And–but, you know, I’ve never really been able to predict the stock market. I–when things get very cheap, I know it. When they get very high, I know it. And in between, I really don’t know much about what’s going to happen.
KERNEN: And—we’re in between, I guess.
BUFFETT: I will–I will recognize it…
QUICK: Does that mean we’re in between right now?
BUFFETT: Well, yeah. Thirteen hundred-plus on the S&P, you know. Stocks are not cheap. As it–as a group they’re not in some bubble price. But they go to extremes every now and then, and when they do go to extremes you have to be prepared to act.

LIESMAN: So let me ask you what this means from a stock market perspective when we find such tremendously widespread negative attitudes. Does that signal a buying opportunity to you?
BUFFETT: Well, at some point it will. I–but I don’t buy based on what I really think the market will do in the next, you know, month, six months or a year. If things–if I buy something at an attractive price, I don’t care what the stock does. You know, if I buy a farm, I don’t get a quote on it every day. If I buy an apartment house, I don’t get a quote on it every day. And if I buy a stock, I want it to be a stock that I’m happy owning. If they close the stock market for a couple of years–they–back in 1914 they did close the stock market for many months and, you know, it’s what the business does over time that’s going to determine how I do. So I don’t really–I don’t try and time stock prices, I try to price stock prices. And it is true–and there’s a lot of negative sentiment around—I’m more likely to find good things to buy than if everybody’s in a very bullish mood.

LIESMAN: No, I was going to say, is that one of those times right now? Are you finding more things to buy in the stock market, and are those negative attitudes helping depress prices and creating buying opportunities for you?
BUFFETT: I’m–certainly I find more things to look at now than I did six months or a year ago. But I would say that it’s changed more dramatically in the fixed income market than it has in the equity market, so that I may–that may be where I find the opportunities.

QUICK: Mm-hmm. And Warren, just thoughts for anyone who’s watching the market today, the futures have been under pressure. What would you tell somebody? Do we need to worry about this?
BUFFETT: I would tell people if they worry what the market does on any given day, they shouldn’t be buying stocks.

Municipal Bonds

QUINTANILLA: Warren, it’s Carl. You talk about munis. The…
BUFFETT: Hi, Carl.
QUINTANILLA: Good morning. The Journal this morning tries to interview a few muni bond fund managers, saying this is the kind of market they’ve been waiting for, where something goes from paying 5 percent to nearly 6 in a couple of weeks. You just said you will buy some. Are you champing at the bit, or are you going to wait for everything to come to you?
BUFFETT: I never try to–I try to avoid getting excited, you know. But there’s no question that I salivate a bit more as the rates get higher. We made a bid on a $3 1/2 billion portfolio on Friday; we didn’t get it. I don’t think it sold either. So–and, you know, I may go to the office this morning, and if there’s a large portfolio–and it can be five billion, it could be one billion, could be 10 billion–we would make a bid on it. But we try to have it reflect what’s really going on in the market. And it’s been pretty chaotic.

Hedge Funds

BUFFETT: Well, the answer is an aggregate no. When there were very few of them and a lot of talent, but not a lot of competition with each other, it’s very likely that they did. But in Wall Street you have this progression from the innovators to the imitators to the swarming incompetents. And what happens is that the results achieved by the innovators enable the product to be sold by a lot of people simply because the record of a few people was good. So the idea that billions–well, trillions of dollars can be managed to get above average results while charging fees that are way higher than normal just defies the–just defies the logic. So, in aggregate, people are going to be disappointed with the results you get from hedge funds. But there will be ones that do terrifically, but it’s–I would not want to buy them across the board.

KERNEN: Warren, real quickly on–I wanted to follow up, a long time ago, on your comments about hedge funds. I don’t know the exact numbers, but let’s say 10, 12 years ago there were X hedge funds, now let’s say that there’s 50 X, or whatever it is. And you’re not a big fan, obviously. How do you foresee the scenario where we go back to something between X and 50 X? Does the market–does a bad market take us there? Does bad performance across the board take us there? How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be—there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.

Recession

BUFFETT: Beyond that, I would say by any common sense definition, we are in a recession. And…
QUICK: You would?
BUFFETT: Yeah, we wouldn’t–we haven’t had two consecutive quarters of GDP growth, but I will tell you that, on balance, most people’s situation, certainly their net worth has been heading south now for a considerable period of time. And if you owned a house, and you had an 80 percent mortgage on it, and so you had 20 percent equity a year ago, you might not have any equity now. And millions of people are in positions somewhat similar to that, and people would–people that own municipal bonds feel poorer today than they did a few months ago.
QUICK: Mm-hmm.
BUFFETT: So business is slowing down. We have–we have retail stores in candy and home furnishings and jewelry; across the board I’m seeing a significant slowdown and, of course…
QUICK: That’s the first time I’ve heard you say you think we’re actually in a recession right now.
BUFFETT: Yeah, well, I think, when we talked earlier, I said we might be.
QUICK: Right.
BUFFETT: But it–no, I would–I would say that–but when I say we’re in a recession, it doesn’t meet the technical definition. We aren’t in the second quarter of–we can’t be because we don’t know what the fourth quarter of last year was. But I think that, from a commonsense standpoint, we’re in a recession now.

QUICK: OK. We’ve been talking an awful lot about the economy today, and in the last half-hour, you mentioned that you think we very well might be in a recession. That’s the first time I’ve heard you say that. What gets you to that point?
BUFFETT: Well, I see the figures coming in on all our retail operations, I see what’s going on in terms of the wealth of Americans and how they feel about their houses. I see–I see purchasing power declining–obviously, when somebody forecloses on a home, the purchasing power of that family is not going to be very much. I see unemployment increasing a little bit although it’s still relatively low. So I just–I think it’s clear. What isn’t clear is how far it goes.

Investing Tax Rebate Money

QUICK: OK. Another question from a viewer. This comes from Tony in Springfield, New Jersey. He says, “I’m getting a tax rebate and I would like to invest it. Which of these do you think is the better bet? Number one, bet it all on the hard eight,” straight at Atlantic City, I guess. “Number two, buy a lottery ticket. Or number three, invest in Ambac.”
BUFFETT: Well, OK, I’ll give him the answer. The answer’s number four. Buy a no-load neutral fund with very low costs.

Dollar

QUICK: Yeah, that’s perfect, Joe. It’s a—it’s a great stepping off point for this, because when you see this kind of chaos and turmoil in the markets, well, who better to ask than probably the world’s most watched investor, Warren Buffett, who’s here with us today. And, Mr. Buffett, let’s go over some of these exact things. Joe uses this as a perfect jumping off spot. You’ve made some negative comments about the dollar in the past. You see where it trades right now. What do you think?
BUFFETT: Well, for five years we’ve talked about it. It–we were following policies which were, in my view, five years ago, were certain to produce a weaker dollar over time. I never know what it’s going to do in a month or a year, and maybe I don’t know what it’s going to do in five years, but I think I know what it’s going to do in five years. And we–as long as we force-feed a couple of billion dollars a day to the rest of the world–they take it whether they like it or not, because we buy goods–buy two billion a day more than we well goods to the rest of the world…
QUICK: Mm-hmm.
BUFFETT: …the dollar’s going to get weaker over time. And the government can talk about how it’s in our interest to have a strong dollar, but we’re not following policies that lead to that, and it’s just a consequence and it’ll just continue to be. If you do the same thing over and over again, you’re going to get the same result…
QUICK: Mm-hmm.
BUFFETT: …and we are doing the same thing now that we were doing two, three, five years ago, and the dollar will weaken in an irregular basis, in my view, for some time to come.

QUICK: You know, very quickly, you mentioned that they are less excited about getting those little pieces of paper.
BUFFETT: Sure.
QUICK: Our dollars. Right now, everything trades in dollars, from gold to oil, anything else out there. You think that that will change in the next five to 10 years?
BUFFETT: I don’t think so. I think–I think people will keep using it. The dollar will become somewhat less important over time, but it’s a very, very, very important currency so people will think in dollars for a long time.

Housing

LIESMAN: One of the most striking things in this poll is for the first time—we’ve done this for four quarters now–Americans now look for a decline in their home values. What’s the significance of that from an economic point of view, Mr. Buffett?
BUFFETT: Well, it has a huge effect because, you know, with 60 percent-plus of the American people being homeowners, as being a huge asset–and in many cases it’s a leverage asset–it obviously is going to be on their mind big time. And I get the figures every month. We have a number of real estate brokerage operations around the country, and I get the–I get the figures from many markets on listings and sales, and I’ve seen something like Dade and Broward County go from 6,000 listings and 3600 sales a month to where they’re now, I think, 82,000 listings and about 1500 sales a month. So unless there’s some major intervention by the government in some way, or something of the sort, home prices have not stopped going down. Now, they will at some point.
QUICK: Any of the intervention plans we’ve seen from the government strike you as being a good idea?
BUFFETT: Well, that–I haven’t seen the details on many of them, but I think it’s very hard to start interfering with markets without having a whole lot of unintended consequences.

Ethanol

JIM CRAMER (ON TAPE): Asking the icon. Sir, isn’t it true that we have an energy policy backing ethanol that is creating so much inflation that perhaps it would be better to stop the emphasis on ethanol, allowing inflation to come down and the Federal Reserve to cut more? Am I wrong that mankind is being crucified upon a cross of ethanol right now, and it’s killing the poorer nations and the people in our country who can’t afford anymore to eat chicken or beef?
QUICK: Warren, what do you think?
BUFFETT: I wouldn’t put it exactly in those terms, but I would say that ethanol is a relatively inefficient way of creating gasoline–gasoline equivalent, and it uses a lot of energy in the process of raising the corn that does it. And, as correctly pointed out, it has a by-product of raising agricultural products elsewhere. In economics you can never do one thing. Anytime anybody tells you they’re doing something in economics, then you have to say, ‘And then what?’ And the ‘and then what’ in the case of ethanol is A, if you use it to plant more corn, you’re going to use–in terms of fertilizer and everything, you’re going to use a lot of energy. And secondly, you’re going to raise the prices, on balance, you’ll raise the prices of other agricultural products. So there’s no question that that–that’s a fairly correct statement of the problem.

Most Important Investing Lesson

BUFFETT: Yeah. People have themselves to blame for crazy markets. You know, we’re talking–if you talk about apartment houses, you talk about farms, normally or something like that. Prices move very gently and people don’t get quotes on them every day. You don’t have to look at the price of the stock market. I don’t even look at–I don’t look at the price of Berkshire’s…
QUICK: You don’t look at Berkshire share every day?
BUFFETT: No. What difference does it make? I haven’t bought or sold a share in, you know, 25 or 30 years. I mean, it’s the business that counts.
QUICK: Wait a second, come on. You have to have a rough idea for where you stock is trading.
BUFFETT: Oh sure, I’ve got a rough idea and some days I look at it, but I don’t feel like it’s a necessity to look at it. It doesn’t tell me anything. The market is there to serve you and not to instruct you. That’s the most important lesson in investing. And when it gives you the chance to do something because it’s doing something silly, you do it and otherwise you ignore it.

Derivatives

QUICK: But we’re going to start off with a question about derivatives, because Joe, you brought this up earlier. You were talking about those comments that Mr. Buffett’s made in the past about these being weapons of financial mass destruction. And Warren, you said you had a couple other thoughts on derivatives.
BUFFETT: Well, you know, the ways you get into trouble in markets is doing things you don’t understand, and then doing them with a lot of borrowed money. And derivatives combine those things…

Ideal Portfolio

QUICK: OK. Another viewer e-mail here, a gentleman named Bo Mann writes in. He says, ‘You usually advise the younger crowd. But what would an ideal portfolio consist of for a 55-year-old man with two kids entering college and $1 million to invest? Should it be 100 percent Berkshire?’ That’s what he asks, not me.
BUFFETT: I’m only 99 percent Berkshire myself, so I never go 100 percent. Well, I think if you buy equities across the board, which means an index fund, and if you do it over time so that you don’t put all your money at the wrong time, and it’s a low cost index fund, that’s probably the best investment that most people could make. Mm-hmm.

Drug Companies

KERNEN: Want to just try to get some insight into how he decides to do certain things. Warren, you recently bought some Glaxo, some Sanofi. I don’t know whether the–whether you make that decision, but I’m trying to–OK, you got Merck or you’ve got Schering or Lilly, you got some domestic company. You bought Sanofi and Glaxo. Is it the pipeline? Do you–do you look into what the pipeline of upcoming drugs is? How do you make that decision? Or is it you that makes the decision to go with the Glaxo, Sanofi vs. somebody else?
BUFFETT: Yeah, it’s me that makes the decision. And I would say this: with drug companies, I feel I know less specifically about a given company’s future than I might if I were buying a candy company or whatever it might be, because it’s very difficult to say who will have the winners five or six years from now. I think–I think if you buy drug companies that you probably want to buy those with–that–you probably want to buy them somewhat across the board. You know, it would be hard for me to make a bet on any specific company based on something that was in the pipeline that might come out in two or three years. You know the ones that are coming off protection, so you’ll see–in a Sanofi, you’ll see certain things that are going to cause the earnings to go down, and what’s going–what will cause the earnings to go up is in the pipeline, you’re sort of guessing at. If you have a group of them, I think you’ll probably do OK if you buy in at sort of a multiple for the group. And actually, the drug companies have gotten in some cases quite a bit cheaper in recent years.
KERNEN: So we shouldn’t be surprised to see you–then it wasn’t that you were picking nondomestic drug companies, you might end up with a stake in one of the domestics at some point.
BUFFETT: Yeah, very easily. And, of course, the domestics have a lot of earnings coming from abroad, too. I do like earnings coming from abroad better than earnings coming from the United States. So if they’re doing business–but most of them are doing business all over the world, so there’s not a huge difference in that. We own some Johnson & Johnson and, you know, half the earnings, roughly, will come from abroad. And we think we probably have some currency play. We’ve already had some, but it hasn’t been reflected that much in the stock. But there will be a J&J, a Sanofi, you name it, they will earn a lot of money abroad and they’ll come up with some drugs that surprise you and they’ll have plenty of them that are earning a lot of money now that’ll—won’t be earning any money for them or anything to speak of 10 years from now.

Alternative Energy

KERNEN: I had a theoretical question. Alternative energy, Warren; I mean, you seem to buy things you know. Utilities. Obviously, utilities are going to deliver energy to communities all around the globe. It seems like there’s a huge potential in alternative energy. Is that just too out there, or maybe the fundamentals get ahead–or the stock price gets ahead of the fundamentals? It seems–are there any earth-changing areas that you’re considering right now or do the stocks just get ahead of themselves?
BUFFETT: Well, I don’t–I don’t try to–I usually don’t try to make money by guessing that something will be doing enormously well 10 years from now, that is sort of a dream…
KERNEN: Yeah.
BUFFETT: …at the present time. I look for things I can understand. I mean, here’s our own See’s candy, I might add. And See’s candy will be–will be popular 10 years from now or 20 years from now. People will keep eating it. They’ll keep chewing gum, they’ll keep doing all kinds of things that are obvious.
KERNEN: See’s.
BUFFETT: They’ll shave with Gillette razors and, you know, they’ll use Tide in the washing machines and so on. And I can’t pick–I can’t pick the winners. There were 2,000 auto companies started in the United States and you’ve got three of them hanging on by their fingernails now. So it was a tremendous industry, it changed the world, but 2,000 of them disappeared.

QUINTANILLA: Well, with that in mind, some of the biggest bets, Warren, that get talked about on this show are from the likes of Boone Pickens, who says that he likes wind. Or it’s the tar sands or it’s a play on water here at GE. When it comes to energy, is there a next generation play, an alternative play that at least has caught your eye?
BUFFETT: Well, we’re using more and more wind. We have a big energy company and–for example, in Iowa, we have a lot of wind farms and we’re going to have more. So sure, the world is going to attempt to do that, but that is–that is not a big answer to the kind of energy demand that—that’s coming along. So I think we’ve got to do everything we can in alternative areas, but I don’t–I do not see that as a cure-all at all.

Investing Overseas

QUINTANILLA: Warren, with that in mind–and we talk about, you know, Berkshire’s exposure to housing here in the states—we’ve seen you buy Iscar in Israel, we’ve seen you now get into the real in Brazil. You’ve gone to China with Becky. Would you guess that your next big purchase would be overseas or domestic?
BUFFETT: Well, it’ll be whatever I get the call on. I hope I get it from overseas, but, you know, I just go down to the office in the morning and wait for the phone to ring and hope it isn’t a wrong number, you know. So…
QUINTANILLA: Why would you hope for an overseas offer?
BUFFETT: I…
QUINTANILLA: Because of–because of the currency?
BUFFETT: Well, yeah. I would–that would be a factor in some–in some situations…

Commodities

KERNEN: I have to. And it just has to do–Warren, over the years you see commodity cycles and supercycles. I’m just wondering, this time around–and not worried about the dollar. The dollar notwithstanding, because that’s the excuse everyone uses. But have we now passed the point of no return in terms of what we have on this planet and what we’re using as–is the Malthusian nightmare finally here, or will we go back to where wheat doesn’t cost, you know, $50 a bushel?
BUFFETT: Well, ag commodities are a little tough. You know, if I had to on–where ag commodities would be three years from now, up or down, I wouldn’t know which way to bet. But they look like they’ve had quite a run. But if you take something like oil, I mean, we have been sticking straws in the ground now since, what, Titusville in 1850-something with Colonel Drake. And we have–we have–we have found a lot of the oil that’s to be found. And if we’re going to produce–or use 85 million barrels a day now and the rest of the world probably is going to increase its demand in the–in the–in the next five or 10 years, we’re going to have—we’re going to have a tough time maintaining production that satisfies those at this price, even. So I think something like oil, six and a half million humans–or six and a half billion humans are going to use a lot more oil than a lot fewer used 20 years ago or 30 years ago.
KERNEN: So that goes for metals, too? You’re saying things that we can grow, we can grow more of. But things that are in the ground are…
BUFFETT: Well, we–yeah, we’re using–my son is turning out considerably more bushels of corn or soybeans per acre than 20 or 30 or 40 years ago. So land can get more productive. But oil is finite. There’s actually some school that says it isn’t, but I think it’s pretty finite. And, you know, we have 500,000 producing oil wells in the United States. The average production is 11 barrels a day. Five hundred thousand times we’ve actually hit. But if you look at our production vs. 30 years ago, it’s way down. And most, you know, most fields are depleting at a pretty good rate. And with demand–if demand grows a million or a million and a half barrels a day from year to year and the present fields deplete and we don’t find the elephants in the future…
KERNEN: Right.
BUFFETT: …you know, who knows what the equilibrium price will be.

Source:
“Warren Buffett Answers Your Emails on Squawk Box: Transcript (Parts 1-11)”
CNBC, March 3, 2008