Why Buffett Loves This Market Turmoil

Sorry Malcolm is the same Berkshire Hathaway that has been recently downgraded by S&P?

Stop being an equities cheerleader for a few moments and have a long hard look at the macro-economic picture.

Look at the squeeze on natural resources, the unwinding of the largest credit bubble in history and the absence of any real term growth in the world.

Only QE and synthetic stimulus will prop up the zombie economy and equity markets, but it won't last.

Deflation, then depression.

Why all the talk of deflation and depression? Rather inflation as the easier way out and one far more palatable for politicians. Whichever way, it seems that companies are better than countries, shares better than bonds( longer term) and gold the best of all.

I can't understand why people prefer the bonds of a debt ridden country such as the US, yet shuns well managed companies like Shell, Microsoft et al. One of life's mysteries!!

Just grabbed some Tesco. Not sure they're at the bottom, but either way, you can't argue with the value, looking at a five year view.

Defensive as well!

The only slight doubt I have, is this may just be the beginning of a total collapse and if it is, my timing will prove to be appalling. But if you can't take the knocks, don't play with the big boys!

I'm convinced the EU will disintegrate, it's just a question of when and to what degree.

LastChip

The world will probably not end and we won't care how much we've lost on paper if it does end. Maybe some gold would be helpful, but even gold is looking stretched.

A deflationary depression is unlikely now that the ECB is leading the way with a variant of QE. Most likely seems to be a period of stagflation or inflation and erratic economic growth, similar to the late 1970's.
In the late 1970's (and also immediately after the 1987 crash), despite the relatively high inflation, P/E ratios around 10x were common, which is not far from where we find the FTSE today.
I outlined a summary of the 1970's on a recent post on the HYP Practical boards.

From the similarly-low 10x (-ish) P/E ratios in the late 1970's as we have today, the markets delivered annual average returns for the next two decades of about 13% on capital, plus dividends which started at about 5% and increased in most years.
Over the long term and over a large group of shares, the reciprocal of the P/E ratio (i.e. the earnings yield) is quite a close approximator of the inflation-adjusted returns in future years (e.g. P/E of 11 = 9% expected long-term return after inflation).

I'm a keen buyer of selected high-quality companies - mostly non-cyclicals - at these prices. Such non-cyclicals are not likely to rise as fast once the markets hit bottom, but they should be excellent as long-term-buy-and-forget "cash cows".

I'm not looking for a quick profit, but I am looking for steady long-term performers which I can tuck away, enjoy the yields and not have to worry much about the companies.
As Buffett says: buy shares in companies which can be run by an idiot because sooner or later, they will be.

...........

On the subject of quality though....
AV, RSA, EMG, ESSR or GLEN do not meet my "quality" criteria because they are not dependable through good times and bad.
Just when you might come to need their dividends to supplement income in bad times, they often suspend dividend payments and the shares often languish at low levels (remember 2003 and 2009?) and it can be difficult to sell for a profit to bring in some cash in a time of need.

But, as I said: those that fell the hardest are likely to see the greatest bounce when we find the bottom.

I don't see why a depression is a bad thing, from an investing point of view. You only have to look back at the previous depression in the 30's or the near depression in the 70's to see that they were the best times to be buying.

As long as investors are buying things that will almost certainly be around in 10 or 20 year's time then a depression is a good thing.

Or perhaps it was better to be buying when everybody thought the streets were paved with gold back in 1999, or 2007?

Personally I have recently loaded up with AZN, BP, BAE, BBY. With those yields I don't care if the price goes down. The question will always be - where is this company going to be in 5 or 10 years time?

That's what I care about.

John @ ukvalueinvestor.com