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Written by José D. Roncal
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Monday, 15 February 2010 00:55 |
We find it interesting that recent headlines about Warren Buffet include words of a more cautious tone. Just six months ago today we saw an article entitled, "Buffet: Rock Star of American Capitalism." Buffet has long been seen as the darling of Wall Street, so that headline was nothing unusual.
But this week the headlines included phrases like "Betting on Buffet" and "Buy or Bust?" Betting? Bust? Those are not words one typically associates with Buffet. Could it be that financial experts are finally accepting what we've been saying all along—that there is no such thing as an "investment," that it's all speculation, or in the worst case, gambling? Do they now agree that we are always just placing bets with our money and hoping that we won't go bust? Or has something changed? The answer possibly is: both.
Until recently, buying a single share of Buffet's company, Berkshire Hathaway (BRKA, Fortune 500), would set you back more than $100,000. These were the A class stocks. There were also the Baby Berkshire B class that sold for somewhere in the neighborhood of $3500. But now ladies and gentlemen, after a 50-1 stock split on January 21, meet the new and improved Baby Berkshires, available on the S&P 500 at around $74 a share.
Now that these B shares are more affordable, it's flung the doors open to a whole new class of potentially loyal followers, or as the new tagline suggests: "Buying Berkshire Hathaway is now so easy, even a caveman can do it."
But is it still a good time to bet on Buffet? Granted, the B shares have risen 7 percent since the split while the broader market has been shaking in its boots over the European debt crisis and the ongoing unemployment situation in the U.S. The S&P 500 has been down more than 5 percent during the same period.
Before we rush out to buy, it's important to remember that a stock split doesn't do a thing to change a company's fundamentals. This recent price boost is really a psychological one. Sure, you could suddenly pick up shares for a lot less money, but the value of Berkshire remained the same. Let's not lose perspective and get caught up in herd mentality. (You can read some colorful and tragic examples of herd mentality in our bookThe Big Gamble: Are You Investing or Speculating? for background.)
Over the years Buffet has made a lot of good decisions and wise moves with other people's money—and his own. He doles out great advice in his shareholder letters—what makes one company better than another, how to spot accounting tricks that fool the masses, etc. He was an early whistle blower on the dangers of derivatives, calling them "weapons of mass financial destruction." And he tries to live by a philosophy that's fair to those that are not in the upper income bracket. He's done well for his shareholders, but like the obligatory fine print says, "Past performance is no guarantee of future results."
Maybe these new Baby Berkshire Bs will turn out to be a good bet, but "bet" is the keyword here. Just keep in mind that regardless of where you put your money on Wall Street, you are NOT investing! You are still just speculating. |
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Written by José D. Roncal
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Monday, 01 February 2010 05:45 |
There was a time when making money in real estate was thought to be a no-brainer. You know that old meme: "Invest in real estate because they aren't making any more of it. Therefore, property will always increase in value." Or so it seemed.
But in our book, The Big Gamble, Are You Investing or Speculating? we gave you plenty of examples of how those sure-fire real estate deals turned out to be nothing more than speculation and tanked right along with a huge percentage of the nation's Wall Street holdings. And we wrote it before the real mortgage crisis had kicked in.
A mere decade ago, we couldn't have written a book with a title like that and expected anyone to accept our premise that there is no such thing as an investment because it's all speculation—especially when applied to real estate. That's all changed now as the economy struggles toward recovery amidst the 1.9 million home foreclosure filings reported on U.S. properties in the first half of 2009 alone.
Nearly 11 million U.S. homeowners (that's one in four!) are underwater on their mortgages – meaning the value of their homes has sunk below the amount they still owe the bank. In some parts of the country – California, Nevada, Florida, Arizona and Michigan – the underwater percentage is over 40 percent! Ask some of those unfortunate buyers if they still feel like they made a good "investment."
What can they do now? What should they do? Some say that it's logical for people to want to walk away if they're too far underwater. They could find comparable rental housing for less than what they pay in mortgage payments and learn to live with a bad mark on their credit for the next seven years. But if the idea of walking away from their debt becomes too widespread, it will leave even more havoc in the wake. Banks will have to carry an increasing number of bad loans on their books, which means they'll be less likely to make new loans, and that tends to push home prices even lower if no new buyers can get financing.
In spite of this grim picture, some economists and business groups are preaching that the worst is over and that it's time to start cherry picking again. What they are really saying is, if you have enough capital to play with, it's time to go speculating again.
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