Time to Buy? Buffett vs Cramer

October 24, 2008

We have been riding this wave of volatility long enough that 7%-9% market swings do not have the same shock and awe impact they had a few weeks ago.  This acceptance of the wild swings has provided me with an opportunity to step away from the initial emotional feelings that came from this roller coaster…. anger at the politicians in Washington, anger with the SEC (remember I had a visit paid to my firm last year by the SEC, and now looking back I can not help but wonder if they should have been using their resources on Wall Street instead of Fiduciary Planning firms like mine), amazement at how people claim to be victims when they purchased $300,000 homes making $60,000, and of course the big fish at the investment banks that packaged up the oh so appealing poo poo mortgage backed securities.  However, I am past all of that, and now focusing on where we are with this market and economy.

I want to discuss two quick points:

* Are you a Buyer or a Seller?
* How much risk and volatility can you handle?

Buyer / Seller?

The one thing that has been missing from the nightly news is the other side of the story. The only investors that should be panicking right now are older investors that are Sellers in this marketplace.  Younger investors that are in their 20s, 30s, and 40s should be excited to a degree that they have many more years to buy and get incredible deals right now. Based upon this statement are you a Buyer or a Seller?  If you are a buyer make sure that you are looking at the situation from the right angle.  A quick suggestion that I have been sharing with my clients is that they need to turn off the TV.  Being informed is one thing, but do not confuse that with a 24/7 attack on your mental health that you receive from your favorite TV news source.

Now if you are a seller than you need to have a different perspective.  Jim Cramer made the following statement on the 10/6/2008 Today Show, Whatever money you may need for the next five years, please take it out of the stock market right this week. Now somehow this is considered big news.  I would have thought that this was common sense because anything less than 5-7 years is considered Short-Term Money, and Stock Investments are only for Long-Term investors.


I wanted to provide links to a few charts that I have been using for years that are published by Crandall, Pierce & Co.  However, I could not find any public sites that had the charts displayed and I do not want to violate the Copyright protection.  However, a few key points to consider:

  • From January 1950 to June 2008 the largest One Year Loss of a portfolio that is invested 90% S&P 500 and 10% cash was -34.3%
  • Same period, the largest annual Three Year Loss with a 90% Stocks and 10% Cash Allocation was -14.2%
  • Same period, the largest annual Five Year Loss with a 90%/10% Allocation was -3.2%
  • Change the allocation to 60% Stocks, 30% Bond, and 10% Cash and the largest One Year Loss of a portfolio decreases -22.2%
  • Largest annual Three Year Loss with the 60%/30%/10% allocation was -6.2%
  • Stay in the simple 60/30/10 Allocation for 5 years and there has not been a time in the last 55+ years that you would have lost money.

This data ties directly into the advice that Warren Buffett provided Friday in the New York Times editoral titled Buy American. I Am. (click here to read)

In short I have realized that this is a good time to buy especially when you get perma-bears such as Dr. John Hussman agreeing with Warren Buffett.  Don’t take my word for it read John’s incredible commentary titled, Why Warren Buffett is Right (and Why Nobody Cares)



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