Did Warren Buffet know ahead of time that banks would fail? Do you remember the 5 billion he invested in Goldman Sacs on Sept 23,2008? That was in the midst of the bank collapses in 2008. Granted Mr. Buffet is very rich, but did any bank have 5 billion to lend him? Did he have it set aside in cash?
The markets were growing in 2006 and 2007. A shrewd investor could reduce his exposure by selling a portion of his shares periodically and still grow his assets by letting other stocks run with the bulls on wall street. That could leave him with $5,000,000,000 cash to jump back in with when the opportunity arose.
Making a newsworthy investment like that would help slow the panic and subdue the fears of jittery investors. This would help convince the clients of his investment firm to not jump ship. In fact it would have an impact across the board. It was the correct thing to do at that time as it calmed fears a little. Perhaps it only helped turn panic back into fear but any show of hope and investment savvy was assuring to smaller investors. Mr Buffet's noteworthy investment was also a wise decision as it would quiet fears of clients of his company, Berkshire Investments.
So if Mr. Buffet did know this crash was coming ahead of time why then didn't he warn us? The answer is obvious. He couldn't.
Why couldn't he? Because if the most esteemed investor in the western hemisphere was to say I'm selling my investments because some banks may go bust soon, couldn't you just hear people running down the sidewalks to withdraw money and cash in stocks?
No, it's not up to Warren Buffet to look after your investments. That's your investment adviser's job.
Warren Buffet did exactly the right thing and he did it at the right time.
So does your adviser just mimic what the super wealthy do? That's not what she/he should be doing. If they were watching behind the scenes they would have forseen that the crash in 2008 was inevitable. I staked my reputation on it in 2007. My procedure of operation during 2007 and early 2008 was advising my clients they would see at least a 40% or 50% drop in the markets sometime in 2008 or 2009. Each one who was invested with me was contacted several times unless they believed me the first time. They needed to move their money out of equity investments and into interest bearing products. At this point we need a clarification. No matter how sure I am that a shift is needed I never recommend 100% shift. In this case I recommended moving from 50% of their funds to 80% to low risk products.
There isn't a one size fits all investment program. What works for Warren Buffet isn't good enough for you unless you also have billions to work with. Every good plan is individual.
One key issue is to watch out for systemic failures. The dot.com fiasco of 2000 and the mortgage melt down of 2008 were both predictable. Both events had some things in common. These things to watch for are rapid or extended growth period in the markets coupled with an abandonment of sound business norms in favor of paper wealth.
The sound business norm in 1999 and 2000 that was tossed aside was 'price to earnings ratio' in evaluating stocks. Investment bankers sold those that would believe them that we no longer needed to use time tested guidelines. They said that in the 'new economy' where dot-com companies could grow so fast that we could guess what they might make down the road instead of looking at what they were earning today. The P/E ratios were multiples of sensible norms and well beyond common sense.
The disruptive business practice that affected markets in 2008 was lending money without doing due diligence. That was a no brainer, especially when we were warned by reliable media reports that these risky mortgages amounted to trillions of dollars.
Greedy, incompetent CEO's who sell the public that they are increasing company values to benefit their shareholders, meanwhile reaping extremely huge bonuses in spite of that incompetence is a further factor. When you have these indicators showing up together watch out. Who knows where the next wave of falsified profits may show up? Could it be pharmaceuticals? Flu vaccines? What we need to do is to not worry. Excessive wealth in Dubai or other places around the world could pose problems in the future. Watch your step. If problems arise they will be kept hidden by big business if possible for a few years, the next drop of over 25% should be a few years out. But who knows for sure?
Gordon has over 30 years experience in banking and financial services industry. He shares his awareness of behind the scenes practices that work to the advantage of banks, investment houses, and big business in general but seldom benefit consumers. He also shares insights into how to improve your financial health and wealth without worry and stress.
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