Has Warren Buffett got it completely wrong?

Jan 21, 2010

In this issue:
» Warren Buffett's perplexing act
» What do Indian fund managers think of the Sensex in 2010?
» Auto companies to hike their R&D spends
» Bond yields all set to rise in the US
» ...and more!!

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Regular readers of this column are perhaps well aware of our admiration for Warren Buffett. It is also a fact that we are not big fans of the current US Fed Chairman Ben Bernanke. Thus, we were left puzzled when Buffett became quite generous in his praise for Bernanke in a recent interview. It is not that Buffett has not praised Bernanke before. But this one surely took the cake.

This is what Buffett said of Bernanke, "He did a magnificent job over this period, when I look back at September, October 2008, he took action. Maybe he extended his authority, but he did what he should have done in response to the economic Pearl Harbor."

We disagree. We believe all that the US Fed has done is just paper over the problems. It has tried to solve a problem of excessive money supply and leverage with still more money supply. Currently, injecting more money is looking like a great step what with asset prices enjoying a great deal of recovery. But we believe that we have set ourselves up for an even bigger blow up in the future.

So, what explains Buffett's fascination with Bernanke? Maybe self-interest? His net worth is so inextricably linked to the fortunes of the US economy that he is forced to take Bernanke's side. Alternatively, it could also be due to his affinity for an entirely different school of economics. Whatever be the reason, for once, we tend to disagree with Warren Buffett.Do you think Buffett is right in his assessment of Ben Bernanke? Please share your views with us.

The Indian stock market outlook for 2010 is locked. The intelligentsia has given its verdict. If you are looking to invest in stock markets from a one year perspective, expect your returns to be in the region of 10%-20%. No, we are not saying it. This conclusion was drawn from a survey among India's top fund managers who manage a whopping Rs 1.7 trillion collectively between them. The survey that was published in one of India's leading dailies has fund managers believing that insurance money could be a big driver during the next stage of rally and the same could help the Sensex move in a narrow band in 2010 with an upward target of 18,000 on the Sensex.

We would however refrain from giving such exact numbers. But even we would want to side with the majority of the fund managers in the survey. Our research is not throwing up as many fundamentally good stories available at attractive valuations as it used to do say about a year back.

 Chart of the day
Taking the finding of the survey forward, today's chart of the day also tries to depict something along similar lines. The chart shows the yearly returns for the stock market index for emerging markets since 1994. It clearly highlights that whenever the index has tended to rise in the region of 45%-50% in any particular year, the return for the next year has been far less and has even gone into the negative. The index returned 63% in 2009 and thus if history is any indication, the returns for the current year i.e. 2010 are likely to be far less than 2009. Some sort of vindication for the fund managers in the survey we should say.

Source: Morgan Stanley

The impact of economic stimulus is being seen nowhere better than China. The dragon nation has just recorded the quickest pace of economic growth since 2007 in the fourth quarter of 2009. Its GDP grew by 10.7% during the quarter.

Data Source: IMF, Bloomberg report

In normal times, such a growth will bring cheer for any country's policymakers. But if times are bad and if such a growth is built upon nothing but cheap money, it's a fearful feeling. Such strong growth in fact must add to the pressure on Chinese central bankers to rein in surging credit. Otherwise, it threatens to destabilize the world's fastest-growing major economy. And with it the entire global economy.

Keep aside stocks, real estate and gold. This time the speculation about bubble-like symptoms is being associated to the bond markets as well. Typically known to be a haven for risk-averse investors, even the bond markets are no more the place to be for the long term. This is particularly in reference to the US bond markets. With budget deficit hovering at 10% of GDP, the treasury yield curve is showing record steepness. The biggest bond fund manager in the US, Mr Bill Gross believes that US Treasury bond yields could go above 4%. The same would mean correction in bond prices. At the same time, with short term interest rates at 0.5%, investors would have to wait for 1,000 years for their money to double. Indeed a difficult situation for investors looking for safe and reasonable returns. No wonder emerging markets are luring them in hoards.

Rising inflation has cropped up as a serious concern; one that the Indian government will have to address on an urgent basis. And the first chief statistician of India Pronab Sen seconds this view in an interview with Mint. Sen is of the opinion that given the poor monsoons and the subsequent adverse impact on food production, prices were bound to rise. Further, the devaluation of the rupee meant that imports would also be expensive. But he has pointed out two interesting facts. One is that there does not seem to be a vociferous protest against inflation. Does that then mean that nominal income has risen so much that the price rise is not hitting hard as it would have otherwise? The second point to be noted is that inflation has manifested itself strongly in retail prices but not as much as in wholesale prices. The other worrying factor is that signs of inflation are beginning to appear in non food items as well. Indeed, it will be interesting to see how the government chooses to tackle this problem in the months ahead particularly when it does not want to compromise India's GDP growth.

As per a leading business daily, Indian automakers are expected to increase their expenditure on Research and Development (R&D) by 25% to 30%. The move is expected on the back of fierce competition from global auto giants. They are keen on India, which is among the most promising auto markets. In fact, they have designed compact cars specifically for the Indian market. Toyota's Etios, Volkswagen's Polo, General Motors' Beat and Ford's Figo are prominent examples.

It may be noted that the international giants have much higher R&D expenses as a percentage of sales than their Indian counterparts. As a result, barring Tata Motors' Nano, few Indian models have managed to grab headlines. However, Maruti Suzuki will soon launch its first fully India configured small car. In our view, advertising and R&D are examples of the expenses that actually aren't. Actually, they are more like assets. In fact in many cases, they hold the key to the competitive advantage of companies. Even nations. Hence, it is not surprising that India's and China's total R&D spending as a percentage of GDP is at 0.8% and 1%. Compare that to 2.7% and 3.3% for the US and Japan and that too on a higher GDP base of these two countries.

Meanwhile, key market indices plunged in the afternoon session today, reportedly on the back of both global as well as domestic economic concerns. At the time of writing, BSE-Sensex was down about 380 points whereas NSE-Nifty was trading lower by around 110 points. Weakness in engineering and power heavyweights were weighing heavy on the indices. While Asian markets closed mixed today, European markets have opened the day on a strong note.

 Today's investing mantra
"I don't want a lot of good investments; I want a few outstanding ones." - Philip Fisher

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89 Responses to "Has Warren Buffett got it completely wrong?"

P. V. Veeraraghavan

Mar 20, 2010

I believe the US FED Chairman Bernanke got it all completely wrong. In general there is no point in propping up fialing businesses just because it is big. The Corporate Inc will never bother to rework their wrong prioririties and policies as the US Govt is there to bail them out! If "Market economy (Laissez faire)" is followed there can be no half hearted approachres, the well run ones should proceed with heads and collars high and the failinf ones should be left for themselves to struggle and come up or close out as per the US bankruptcy laws and regulations. The very fact that a large number of US Congressmen do not want Bernanke to continue for a second term underlines the fact that his policies that were designed and worked in favour of Wall Street Inc did not find favour with good part US public! This is in addition to the vastly reduced favourable poll % on President Obama policicies!! 20 March 2010


Vijay s

Jan 28, 2010

First try to achieve just 0.0001% of what W.Buffet has achieved before making such grandoise statements about Buffets well thought out remarks. WB, Bernanke and whoever wrote this article are all in different leagues. The first two people of global stature, the third, some armchair blogger paid two bits to write stupid stuff like this.



Jan 27, 2010

I donno much about Macro Economics. When U donno the jewelry, know the jeweler and who else we can trust today. When we look even people like Paul Krugman who normally criticize Ben, wrote a column recently said that what Ben did in Sep2008 to now has been good which avreted an economic pearl harbor. But, what Ben did before Sep 2008 or now - to prevent such disaster is something debatable.

Buffett praised Paulson too and infact asked new Govt. to keep Paulson though Obama replaced him later. The actions both Paulson and Ben took seem to be unprecedented(The book Too Big TO Fail explains lot of interesting things) and in such situation, some of the actions may be wrong - but overall it all did good I guess.



Jan 26, 2010

Well..Current economic crisis is a witness of WalStreet's selfishness.They twist facts to mobilise their own intersest. Reason, they are so called 'epicentre' of the finanacial world.No one can stand against them.Current recession has been generated by none other than WallStreet. All knows it. But still "too big-to fail" were bailed out.It is sad that rest of the world moved in tandem. Actually they were not bailed out but "Inflation, soaring food prices, bubbling asset prices" across the word were bailed out by printing 'papers' that has led "common-man's" misery to an unprecedented levels.

Now it is high time to rethink this monetory strategy otherwise , chances are that whole world can reach to the point of "No Return".

And to say about Warren Buffet, afterall he is a businessman not a saint. MAy be his investing strategy is unique and appreciable, but he is not barred against bending human nature- that is selfishness. His recent statement praising Benarke point out the same.



Jan 24, 2010

Ajit -- you are left holding the baby as well as the bath water -- decide which will you let go now?! Knowing that you and me are no fans of helicopter Ben , it may be worth giving poor old chap warren a bit of leeway and consider that feezing cold wave over new year had something to do with it !


Atul Kamat

Jan 23, 2010

The drivers for any decision is an actual crises, so history will repeat & a corrective decision instead of being taken proactively will be taken only when the next crises makes it necessary to reverse the previous decision. :-)



Jan 22, 2010

how do you solve a prolbem of too much debt with yet more debt. Bernarke's remarks on countering deflation come what may are alarming. It's been a blinkered linear approach to the problem. The careless transplanting of phenomenon from one scenario to another is going to wreak havoc. The extended run of the great depression due to early hikes of interest rates is cited as the principal reason for keeping them low currently for an extended period. Finally it was the World War only which led to the factories running at full throttle. The consumption of the future has been carried out today by means of reckless debt taking. And Bernake has sought to amplify that trend to cure the problem. Yes, what he did at the time of the crisis was needed. But today its continued, misdirected application has completely unraveled it. On Bernake, yes, Warren Buffet, of whom i am a die hard fan, has got it wrong



Jan 22, 2010

Any decision is right / wrong in relation to the time frame, Ben decision were correct in relative to short time frame ie saving our immediate job and industry in but how severe the consequence to be in the long term? will we hyper inflation compounded with deflationary market? with debasing of national currency will we evolve some international currency may be a e- currency for international and national market? will we privatize currency and do away with national currency? do we have the tools and acumen to resolve these issues?
only time will say but some generation is bound to pay for these greed and crass accumulation of wealth in the name of development.Each one of is responsible for the consequence and i hope its not some innocent future generation who has to pay for our deeds!!


Prakash Basrur

Jan 22, 2010

No ! Mr.Buffet has not got it wrong. Taking immediate action , especially amidst a collossal crisis , is great ! Not like our Indian leaders who sit on national political/economic problems for days on end and allow the wound to heal by itself ! Look at Obama taking decesions and look at Sharad Pawar on rising Food Prices and SMS ( Sardar Manmohan Singh ) on the Fiscal Defecit ! It is though easy to criticize post-facto Bernanke's decesion ! However , the bottom line is he did take a firm decesion while being at the centre of the vortex ! Kudos to him !


Manish Gupta

Jan 22, 2010

I think its all very well for someone to criticize Bernanke without offering an alternative solution of how they would have dealt with the crisis.

Allowing banks to fail sets off a chain reaction which causes more banks to fail and an erosion in consumer confidence. Flooding the market with liquidity may not have been a good decision. But it sure seems to beat taking no action at all and risking systemic collapse. As someone said, when the patient has a heart attack, you do what is required to save his life.

It is also too early to judge Bernanke. How he will take the excess liquidity out without risking a collapse of growth and unemployment will be the challenge.

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