It's over-- according the world's most successful
investor. Yesterday,
Berkshire Hathaway (NYSE: BRK-A) (NYSE:
BRK-B) CEO Warren Buffett effectively called the
end of the U.S. recession, saying the economy has "sort
of plateaued at the bottom." Only the day before, Fed
chairman Ben Bernanke said the recession "was very likely
over." How should investors position themselves?
On Tuesday, Buffett said that Berkshire is buying stocks
"because I am getting a lot for my money." That sounds
encouraging enough, but does it mean that stocks are, in
aggregate, undervalued? Unfortunately not.
Buying ... selectively
Buffett isn't an index investor -- he purchases
individual securities that he believes are undervalued.
Meanwhile, with the S&P 500
rallying 58%from the March 9 market low, the stock market
has lived up to its reputation as a leading indicator of the
economy and then some, with current valuations suggestive of
a robust recovery.
Indeed, the S&P 500 index is currently priced at 19.1
times its cyclically adjusted earnings (average
inflation-adjusted earnings over the prior 10 years) -- the
long-term historical average is 16.3.
The ol' animal spirits are back
Rising stock prices fuel confidence -- the resurrection
of the M&A market is another by-product of that process.
On Tuesday, for example, software firm
Adobe (Nasdaq: ADBE) announced that it is
acquiring
Omniture (Nasdaq: OMTR) for $1.8 billion.
Buffett himself highlighted an example of the "animal
spirits" returning to the market. Calling
Kraft 's (NYSE: KFT) bid price for
Cadbury (NYSE: CSG) "a full price," he added
"I've got a lot of confidence in (CEO) Irene Rosenfeld, but
they have to do a lot of things right to justify this price."
Berkshire Hathaway is Kraft's largest shareholder.
If you want to own equities, focus on individual
stocks
The recession may well be over, but that is no reason
to buy stocks indiscriminately --
in toto, the market isn't cheap. If you wish to
ratchet up your exposure to equities, the best course of
action is to focus on individual stocks that meet Buffett's
standard -- i.e., make sure you're "getting a lot for your
money."
Morgan Housel has identified high-quality businesses
that are still cheap. Berkshire Hathaway is one of them;
find out what the
two other namesare.
This article was originally published as
Buffett Says It's Overon
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