Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.Sound reasonable? I don't know if any of you have been reading the Elliott Wave articles to the right of my Blogs, but in case you missed this one table that turns WB on his behind faster then a Gordie Howe elbow, here it is:
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
Cash is what Buffett calls, "a terrible long term asset, one that pays virtually nothing and is certain to depreciate in value."Except for the past eight years? Except in Bear Markets? Except in Grand Supercycle Bear Markets? Then he insults The Great One by suggesting that buying falling stocks blindly is akin to prescience on the ice.
Prices are coming down across all markets. A comment in the previous blog asked me, "if I was nibbling on anything long here." I don't nibble. Nor do I buy stocks, gold, oil, corn, or anything in free fall. Triangle Trading from Market Club is holding Short here. Elliott Wave structure requires a new low in the DJI (for this move) before any tradable rally can be identified.
As for the slandered Gretsky, I shall apologize to Wayne personally, or at least through his actress wife, Janet Jones:
That is as soon as I spot where she sits at the games. These are some clues, if anyone catches a Phoenix game locally.
A
(Looking at these photos I realized I was wrong, yes, sometimes I do nibble.)
24 comments:
Allan, I respect you...but I think you are manipulating the data just a bit. I don't think that comparing the top of the tech bubble in 1999 to the bottom (perhaps?)of the current mortgage backed security bubble today is a fair approximation of the performance of American equities and economy over time.
If you look at the performance of the DJIA for the last 38 years from 1970 to the present (maximum history available with google finance) stocks have significantly outperformed cash more often than not during almost any 5-10-20 year periods as Buffet describes.
This holds true with the S&P, Nasdaq and other indexes as well.
Does Elliot Wave theory identify the new low in the DJI that needs to be reached for this move?
Does Elliot Wave Theory target a level that the DJI must achieve to complete this move down?
Great Chart Allan. JK in C
violinbf - 12/30/99 was the date of a MAJOR SELL SIGNAL based on Elliott Wave analysis of Prechter, thus it is fair game for measuring relative performance of cash versus stocks;
DJI targets: under 1000 according to Prechter
What Warren Buffett Didn’t Tell Us About His Trading
By Robert Wiercinski
October 19, 2008
My respect for Mr. Buffett aside, did he use his larger-than-life reputation to manipulate the markets in an attempt to avoid having to report further gigantic losses for his flagship company, Berkshire Hathaway?
On Thursday, October 16, Warren Buffett’s Op-Ed article ran in the New York Times where he told the investing world that he was buying stocks for his personal account and that they should too. His recommendation was trumpeted throughout the news industry and investors blindly followed his advice because, well, he’s the Oracle of Omaha, right? As Mr. Buffett wrote, “Be fearful when others are greedy, and be greedy when others are fearful.” But what would you do if maybe Mr. Buffett was being more fearful than greedy in writing the Op-Ed?
In all the news reports that I read, heard and saw, not one reporter raised the questions of why he wrote the Op-Ed or why he published it when he did. We all want to see the craziness in the markets subside, but by not questioning the motives of the timing and the content of Mr. Buffett’s letter, reporters and journalists failed to do their job. Whether you agree with his advice or not, or cheer the impact that his letter had on the markets or not, it’s a news professional’s job to consider why he wrote the Op-Ed if only so that the people he was trying to influence, including the small investor worried about his or her retirement, could make an informed decision about their life savings.
As reported in an article earlier this year on Forbes.com by Pablo Triana Portela, a Madrid-based derivatives consultant and author of “Corporate Derivatives,” Mr. Buffett sold $7.7 billion worth of put contracts, a form of financial derivative, that would have left him exposed to gigantic losses if the markets were to tumble. Derivatives are not easy for the layman to understand and they can be very dangerous even to the financial expert. In fact, in 2003 Mr. Buffett himself called them “financial weapons of mass destruction,” “potentially lethal” and “a fool’s game.”
According to Wikipedia, “A put option (sometimes simply called a "put") is a financial contract between two parties, the seller (writer) and the buyer of the option. The put allows its buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.” Wikipedia further explains that “the put buyer either believes it's likely the price of the underlying asset will fall by the exercise date, or hopes to protect a long position in the asset. The put writer (in this case Mr. Buffett) does not believe the price of the underlying security is likely to fall. The writer sells the put to collect the premium.”
Mr. Triana Portela wrote that Mr. Buffett, by selling $7.7 billion in puts, was betting “that both the high-yield credit markets and mainstream equity markets would not nosedive and/or become crazy.” Unfortunately for Mr. Buffett, they have done just that, and dramatically so. He characterizes Mr. Buffett’s about face on playing the derivatives game by selling puts as playing it “in one of the most simplistic and historically dangerous, indeed devastating, ways.”
During the life of the investment, Mr. Buffett and Berkshire Hathaway are required to mark to market the investments in their financial reports, which means that they must reflect the current unrealized loss. In the first quarter of this year Berkshire Hathaway reported a loss on derivatives contracts to the tune of $1.64 billion, wiping out more than half of Berkshire Hathaway’s first quarter pre-tax profits.
Mr. Triana Portela also reported that these investments have the potential to become “monstrously large” and wipe out the investor if the “unexpected or rare event” were to materialize. Hmmm, can you imagine what the impact on Berkshire Hathaway’s profits will be with the recent market meltdown of historic proportions? These are the same class of investments that wiped out Long Term Capital Management as a result of the Asian Financial Crisis of 1997. Remember the spectacular demise of the mega hedge fund Long Term Capital Management? Do you think Mr. Buffett had this in mind while writing his “call to buy”?
Mr. Triana Portela does point out that one saving grace for Mr. Buffett may be that these contracts are long term and will give him time to put the put sales proceeds to work which might offset potential losses. Unfortunately for Mr. Buffett, though, Berkshire Hathaway stock was down as much as 25% from its 52 week high prior to the publishing of the Op-Ed and is not likely to save him in a down market. The day after the Op-Ed ran, Berkshire Hathaway stock jumped almost 6%.
Now let’s look at the timing of his letter, published on October 16. As reported on Bloomberg.com, almost 80 million options, about a quarter of existing options, expired the day after Mr. Buffett’s Op-Ed was published. Bloomberg.com reported that the most widely owned S&P 500 options expiring on October 17 were the October 1,150 puts. The S&P 500's 18 percent retreat from that strike price profited buyers of those (put) contracts, which increased almost six fold in value this month.
``There could be significant volatility as market makers who are short the options try to hedge that risk,'' said Scott Nations, president of Fortress Trading Inc., a Chicago-based firm that trades options and futures. ``If you're short (meaning you sold) puts as the market goes down, you have to sell more of the underlying, and if it goes up, you have to buy more back.'' Well, according to Mr. Nations’ explanation of how these put contracts work, October 17 was liable to have been a huge selling day prior to Mr. Buffett’s letter, further pushing his put wager into the “rare event” category. Do you think Mr. Buffett had this in mind while writing his “call to buy”? And it is interesting to note that Mr. Buffett specifically referenced that he was buying for his personal account and not for Berkshire Hathaway’s account, which by Mr. Nations’ reckoning would be inclined to sell the underlying assets and not buy them to hedge its put bets.
Now that you have a better understanding of the context in which Mr. Buffett wrote his letter, do you think he was being transparent with us about his investment decisions as the Op-Ed leads one to believe? These are scary times for sure, but it behooves us all to think before we leap regardless of where the investment advice is coming from.
Good stuff on WB's motives, moves up a bit on my respect-o-meter, but he's starting out pretty damn low, always over-hyped, over-rated and having one of those CNBC bimbos in tow in his entourage. Why the respect for manipulation? Cause he ain't no mr clean after all.
I went to a Motley Fool message board seeking counterpoints to Robert's post, and got this. You and he would most likely "agree to disagree" on the merits of Mr. Buffet (at least during bear markets), but I do think he countered Robert pretty well.
Mr. Triana Portela wrote that Mr. Buffett, by selling $7.7 billion in puts, was betting that both the high-yield credit markets and mainstream equity markets would not nosedive and/or become crazy. Unfortunately for Mr. Buffett, they have done just that, and dramatically so. He characterizes Mr. Buffett's about face on playing the derivatives game by selling puts as playing it in one of the most simplistic and historically dangerous, indeed devastating, ways.
During the life of the investment, Mr. Buffett and Berkshire Hathaway are required to mark to market the investments in their financial reports, which means that they must reflect the current unrealized loss. In the first quarter of this year Berkshire Hathaway reported a loss on derivatives contracts to the tune of $1.64 billion, wiping out more than half of Berkshire Hathaway's first quarter pre-tax profits.
The author is an idiot. He clearly hasn't read any recent Berkshire annual reports, does not know the details of the transactions, nor does he understand the Buffett cares not one whit about quarterly market quotations (except where they let him buy cheaply).
Let's take these two paragraphs point by point.
1) No about face at all. Buffett sold puts that are European style options -- they cannot be exercised until expiration -- on a broad market index, expiring in something like 20 years from now. Buffett is betting on one and only one simple thing: that broad market indexes will be higher 20 years form now than they are today. That's an easy bet to take.
2) "Playing the derivatives game" -- without specifying what is meant here, it's hard to counter this, but I'm going to guess that the author is wondering why Buffett is using derivatives at all after coming out strongly against them in 2002/3. Again, reading the annual reports shows why: Berkshire has *zero* counterparty risk on these derivatives, and all derivative contracts Berkshire has entered into.
3) Reporting mark-to-market losses. Of course, and Buffett said this the very first time he made these contracts public. The $7 billion cash received by selling these options is investable money today and none will have to repaid for 20 years, if ever (the more likely outcome by far).
There is even an extensively researched biography about Buffett available now which the author clearly hasn't read either. It would seem to me that behavior that has been consistent over 50 years, and is still being shown today, should not cause people to ask if he's somehow acting nefariously. From that biography (quite eye-opening, and very well written), Buffett is intensely driven by wanting to be liked and admired. He has certainly achieved that in spades. He is deeply programmed not to fail peoples' respect for him. He is also very much driven by wanting to educate people. (Read the book, these are very, very consistent long-term personality traits.)
Now, it is actually an interesting question why Buffett wrote that article now, but this author has gone totally off the deep end in making reasons up. I think (personal opinion) that he is simply seeing amazing bargains at the same time he feels panic is overdone and would like to make that dichotomy a little more public, and in doing so, educate at least a few people on how to invest better.
Wayne, he lost me with, "the author is an idiot." Apparently that is consistent with the theory that all those that do not worship His Majesty Warren are by definition, idiots. Whenever I see anyone so blindly defended, i.e. Cramer, McCain, Bush, Palin, Vogle, Brinker, and the Yankees or Red Sox, I give immediate credence to opposing views. More often then not, that is where the truth is found.
Since political actions effect the markets and the economy, and since Allan is the nbest trader around, why don't we put him in office?
Allan, any interest in politics?
Allan, four words:
Where is the bottom?
Am I wrong ... I thought Buffet held a big chunk of AIG.
Re: politics - Judging my what happens to otherwise decent citizens once they are given political power over others, it's not for me. Would I be any different? Doubtful. Who sticks to their convictions once elected? Ron Paul, Dennis Kocinich, geez, can't even name a third. Sad.
Wayne, thanks for the compliment. I take it you were one of the hordes that took Buffett’s recommendation on face value, that is until you read my comments.
Hey Robert,
Actually no, My personal approach for several months has been to play the Ultrashort ETF's.
I read to learn, and I never just listen to one side. I saw your argument (the anti-Buffet side), and decided to elicit a pro-Buffet response and share it. That's it. I will say that I have plenty of respect for the author of that response, he's a quite knowledgeable (and successful) micro/small-cap investor on the Motley Fool boards.
For me, it's all about education. For instance Allan's Elliot Wave posts triggered a new round of reading (just got Elliot Wave Principle and Conquer the Crash from the public library).
Wayne
Allan:
Four words"
"WHERE IS THE BOTTOM?"
Allan:
Word on Wall Street is that despite the massive losses this month in the SPX, your privately managed hedge fund is up DOUBLE DIGIT PERCENTAGE GAINS for October alone.
Is this true?
Phil, YC
alan, I hope people have been reading what you have been writing. today opening looks ominous!!
we have been short since september 10, never wavering, thanks to triangles and wave structure, when one or both of those flip, so will this blog.
Allan,
I wish I would have had the conviction to stick to your advice the last month...I would be a rich man...fortunately I used enough of your advice to stay close to even...
Cruise Guy...
BTW, The Great One's name is spelled:
Wayne Gretzky
NOT Wayne Gretsky.
As a hockey fan, I would think you would know that.
Go PITTSBURGH PENGUINS.
It makes me wonder if the "real" Allan Harris wote this blog entry.
Alan,
I like your site but I'm not sure if you are aware how badly you screw your loyal audience by posting blogs with pictures of naked women. If they log in at work, the automated software their employer uses will trigger, getting them into big trouble, perhaps even fired. I know the federal government uses this kind of software, and they are not known for their understanding or sense of humor. Please reconsider.
On a more positive side, I have followed your blog for a year and am quite a fan. I found Elliot Wave on my own and also agreed with their opinions so I was very proud of myself that you gave them your stamp of approval. This stroke of fortune led me to cash out on 11/30/2008, for a total loss since the peak of 3%. You guys saved me over a quarter of a million dollars. Thanks!!!!!
- Brian
Brain, Let's see, that's one provocative blog out of thousands over the course of almost five years now, hey man, cut me a little slack.
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