You think you’ve had a bad year? Poor Warren Buffett has seen more than $25 billion evaporate from his net worth in the past year, as Berkshire Hathaway (NYSE: BRK-A) followed the market’s nosedive.
Adding insult to injury, he’s been criticized for the awful performance of investments in Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE). In addition to preferred shares that pay 10% dividends, he got warrants for common shares at prices that quickly fell off a cliff.
In response to the market panic, Buffett penned an op-ed in The New York Times last fall, saying he was buying U.S. stocks for his personal portfolio. Shortly afterward, stocks continued to disintegrate, and the economy has virtually imploded.
This has caused some to wonder: Has the Oracle of Omaha lost his touch?
You cannot be serious Simon Maierhofer thinks so. In fact, he took issue with Buffett’s claim that stocks will outperform cash in the coming years:
How did [Buffett’s] “cash is trash” philosophy fare over the past 10 years? $10,000 invested in the S&P 500 exactly 10 years ago would be worth $7,500 today. The safest cash equivalent, [Treasury bills] … would have returned about 30%, putting you at $13,000. We don’t encourage investing by looking in the rear view mirror but a look at the numbers shows that the only bull market right now is in cash.
Let’s set aside for a moment the question of inflation, which ensures that the $10,000 of 10 years ago is not, in fact, the equivalent of $10,000 today. What does the market’s performance over the past 10 years suggest for the future?
Up, up, and away Any 10-year retrospective has to contend with the fact that 1998 was smack in the middle of the dot-com boom, when tech companies such as Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO), and even old stalwarts like Coca-Cola (NYSE: KO) and AT&T (NYSE: T), traded like infinite growth was written in stone. Since then, we’ve seen not one, but two bubbles burst. The fact that trailing 10-year returns are pretty bad is hardly enlightening.
But if we look at 10-year returns for the Dow Jones Industrial Average over the past 100 years, a pattern emerges:
10-Year Period
Dow Jones Industrial Average Return
1998-2008
(9%)
1988-1998
331%
1978-1988
165%
1968-1978
(19%)
1958-1968
77%
1948-1958
226%
1938-1948
14%
1928-1938
(49%)
1918-1928
254%
1908-1918
60%
After booms come busts, after busts come booms. That’s how markets work. If we had chosen a different frame (i.e., ending in 2006, instead of 2008), the numbers would likely be different, but the overall pattern would be the same. Markets go up, markets go down. Typically right after one another.
This isn’t a short-term, cherry-picked set of data, after all. It’s 100 years of market returns, during which time the nation overcame two World Wars, four smaller wars, a flu epidemic, the Great Depression, civil uprisings, multiple recessions, oil shocks, and terrorist attacks — not to mention sideburns, Chia Pets, Carrot Top, and boy bands.
Anything can happen in the short term — and the short term right now is chaotic and volatile like never before. Yet over the long term — going back an entire century — the trend of the stock market is pretty clear.
It’s time to be brave Yes, stocks are scary right now. Yes, there will be boom times and bust times — and the busts are no fun, even when we’re resigned to their presence. But if you want your money to earn you adequate post-inflation returns over the long haul, cash isn’t going to get you there. Never has. Never will.
Not only that, but as fear, panic, and forced liquidation rules the market, companies with a history of proven long-term returns now trade near their lowest levels in years. Anyone who thinks holding cash or buying Treasuries at historic highs in lieu of stocks at historic lows is making a mistake they’ll almost certainly regret down the road.
None of this is to say we’ve reached a market bottom. Historical earnings multiples, for example, suggest that more pain could be in store for investors. Some periods of market lethargy have indeed lasted for longer than 10 years, too.
Nonetheless, the trend is as true today as it’s been for the past century: We’re at a point where bargain-hunting investors can be as assured as they’ve been in decades that stocks will perform well in the long term.
How we got into this mess (NY TIMES)
There are two basic truths about the enormous deficits that the federal government will run in the coming years.
The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.
The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.
Mr. Obama — responding to recent signs of skittishness among those lenders — met with 40 members of Congress at the White House on Tuesday and called for the re-enactment of pay-as-you-go rules, requiring Congress to pay for any new programs it passes.
The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.
You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.
The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.
About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.
Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.
About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.
If the analysis is extended further into the future, well beyond 2012, the Obama agenda accounts for only a slightly higher share of the projected deficits.
How can that be? Some of his proposals, like a plan to put a price on carbon emissions, don’t cost the government any money. Others would be partly offset by proposed tax increases on the affluent and spending cuts. Congressional and White House aides agree that no large new programs, like an expansion of health insurance, are likely to pass unless they are paid for.
Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study on the dangers of the current deficits, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.”
“And,” he added, “not fixing it is, in a sense, making it worse.”
When challenged about the deficit, Mr. Obama and his advisers generally start talking about health care. “There is no way you can put the nation on a sound fiscal course without wringing inefficiencies out of health care,” Peter Orszag, the White House budget director, told me.
Outside economists agree. The Medicare budget really is the linchpin of deficit reduction. But there are two problems with leaving the discussion there.
First, even if a health overhaul does pass, it may not include the tough measures needed to bring down spending. Ultimately, the only way to do so is to take money from doctors, drug makers and insurers, and it isn’t clear whether Mr. Obama and Congress have the stomach for that fight. So far, they have focused on ideas like preventive care that would do little to cut costs.
Second, even serious health care reform won’t be enough. Obama advisers acknowledge as much. They say that changes to the system would probably have a big effect on health spending starting in five or 10 years. The national debt, however, will grow dangerously large much sooner.
Mr. Orszag says the president is committed to a deficit equal to no more than 3 percent of gross domestic product within five to 10 years. The Congressional Budget Office projects a deficit of at least 4 percent for most of the next decade. Even that may turn out to be optimistic, since the government usually ends up spending more than it says it will. So Mr. Obama isn’t on course to meet his target.
But Congressional Republicans aren’t, either. Judd Gregg recently held up a chart on the Senate floor showing that Mr. Obama would increase the deficit — but failed to mention that much of the increase stemmed from extending Bush policies. In fact, unlike Mr. Obama, Republicans favor extending all the Bush tax cuts, which will send the deficit higher.
Republican leaders in the House, meanwhile, announced a plan last week to cut spending by $75 billion a year. But they made specific suggestions adding up to meager $5 billion. The remaining $70 billion was left vague. “The G.O.P. is not serious about cutting down spending,” the conservative Cato Institute concluded.
What, then, will happen?
“Things will get worse gradually,” Mr. Auerbach predicts, “unless they get worse quickly.” Either a solution will be put off, or foreign lenders, spooked by the rising debt, will send interest rates higher and create a crisis.
The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.
That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.
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7 ideas for Life
Advice from the Counterculture
by Dennis Prager
Following is the commencement address Dennis Prager gave to the 1997 graduating class of Pepperdine University.
would like to offer you seven ideas. That’s all I want to do. If you fall asleep during one of them, there are six remaining. If you fall asleep during five, maybe you’ll get two ideas.
But I want to just give you seven ideas culled from one human’s life that I think can be very powerful in the way you live your lives when you leave this institution.
In no order of importance:
One: The Greatest Struggle Is with Yourself
The greatest struggle in your life is not with society; it is with yourself. This idea is not taught in America today. We are taught that we are victims of a society that is sexist, racist, ageist, anti-Semitic, anti-Asian, anti-Hispanic, anti-woman, anti-old, anti-young — anti just about everyone. The temptation is therefore overwhelming to see your problems and challenges in life as being with America and not with yourself.
There is a man in Florida, a psychiatrist — he is, fortunately, not representative of his profession — who tells women, “Never take an anti-depressant, even if you are diagnosed with biological reasons for depression, because no woman is depressed for biological reasons. Any woman who is depressed is depressed because of sexism.” There are therefore thousands of women who do have biological origins of depression who will not take a medicine such as Prozac or some other psychopharmaceutical drug because they think their problems emanate from sexism.
Whatever you are, there is something to blame in today’s society: “I shot my parents, but it wasn’t my fault.” You yourselves have lived through this.
Please understand: In this society, my greatest challenge is Dennis, your greatest challenge is you. And if you can make you better, you will make this society better. Please don’t buy the rhetoric that the external is the problem. In a free and affluent country like this, we are the problem.
Two: Trust Your Common Sense
Mark Twain was right when he said, “Common sense isn’t common.” Nevertheless, please use this great gift of God, your common sense, when, outside of the natural sciences, you hear the words, “studies show,” and you find that the studies show the opposite of what common sense suggests.
As someone who is twice your age, who has been on radio fifteen years, and has debated these issues daily for fifteen years, may I tell you that I have never once come across a valid study that contravened common sense.
Nearly always studies either substantiate common sense or they are wrong. That is a general rule of life. That doesn’t mean, don’t take studies seriously. It means take common sense most seriously.
People call me up and tell me “studies show” that it doesn’t matter if a child has a mother and a father, that it is just as good to have one loving parent or two fathers or two mothers. “Studies show” this. That’s nonsense. Of course it matters if you don’t have a father or don’t have a mother. Does it mean you are doomed if you don’t have one — if one died or if one left? No, it doesn’t mean you’re doomed. The human spirit is powerfully resilient, thank God. Nevertheless, it’s a flawed “study” if it claims to show both parents aren’t necessary. A greater study — life in every civilization — leads to a different conclusion. The study of life shows that it is good for a child to have a mom and a dad.
This issue is a big battle in America today because of the powerful forces that say, “It’s just as wonderful for a single woman to be inseminated” or “It’s just as wonderful for two women or two men to raise a child,” as it is for a child to have a mother and father.
And know that this issue has nothing to do with women’s rights, and nothing to do with gay rights. It has to do with something too few people talk about — children’s rights. Children have a right to have a mother and a father. That’s common sense, simple common sense.
I was told when I was in your place, in college, in the heyday of certain ideas in the late ‘60s, that “studies show” that boys and girls are not inherently different, they differ only because parents give boys guns and give girls dolls. So the dummies who believed that “studies show” that boys and girls are essentially the same decided to raise their boys with dolls and their girls with trucks. And what happened? The boys broke the dolls’ arms, and the girls cuddled the trucks.
Of course, there are enormous differences between boys and girls — life and common sense show this, not necessarily “studies.” A woman professor at Stanford wrote an article in the New York Times about ten years ago. She wrote that she was one of those who believed that boys and girls are essentially the same, that all the differences (except the obvious biological) are all societally induced. Then she had a son, and then a daughter, and she saw how wrong she had been.
The greatest of the “studies” is the study of life, not some abstract study. Keep studying it, and trust your common sense.
Three: Race is Unimportant
Be guided by an idea of a Jew who went through a Nazi death camp. He miraculously survived, though his wife and his parents were gassed.
After the Holocaust, he was asked, “Do you hate all Germans?”
And he said, “No, I don’t.”
“Why not?”
“Because,” he said, “there are only two races, the decent and the indecent.”
Remember that, and you will never, ever, for one scintilla of a moment, have a racist belief. If you divide humanity between black and non-black, white and non-white, brown and non-brown, yellow and non-yellow, you are, by definition, racist. If you divide the world simply between decent people and indecent people, you can’t be a racist because every race has good and bad members. If you divide by moral rather than racial terms, you are liberated from even the possibility of ingesting the toxin of racism.
Remember that statement. His name is Viktor Frankl. I read his book Man’s Search for Meaning, when I was in high school, and it was one of the few books that changed my life.
Graduates, in this race-intoxicated society, please know that as countercultural, as politically incorrect as it is, race is trivial. Race means nothing. The color of a human’s skin is as trivial as the color of a human’s hair. That is not today’s politically correct belief. But it is the belief rooted in every sacred tradition from the East to the West — including my Judaism and your Christianity. God does not know the color of skin. God knows the character of a human heart. Period.
Four: Don’t Leave Your Values at Home
Whatever you do in your professional life, don’t leave your values at home when you go to work.
Most people in my profession are decent people — who leave their decent values at home when they go to work. At work, they produce a lot of garbage, garbage that many of them don’t want their own children to see. But they produce it because the gods of ratings — the god of Nielsen, the god of Arbitron — demand it.
The hardest of the Ten Commandments is not the commandment against adultery, nor the one against murder, nor the one against theft. It is the commandment against having false gods. Among most of those in my profession, the gods of Nielsen and Arbitron are worshipped far more than God.
You have to determine, when you walk out of your home, what god you will worship. And that is tough. It is tough to keep your integrity at work.
If you become a lawyer, it is tough. It is tough not to fool around with a courtroom in order to win a case. It is hard not to fiddle a little bit with the truth, though not really tell a lie, in order to win for your client. It is hard in business to be honest and not make a false claim for your product.
It will be tough for you. It is easy to succeed. It’s tough to succeed with your integrity intact.
Five: Beware of Bad Ideas
We are living in the last three years of the bloodiest, meanest, cruelest, most torturous and barbaric century in the history of human life. Please never assume that moral progress is inevitable. This century is the century of gas chambers and gulags. This is the century of totalitarianism, red and brown.
Do you know why most evil takes place? Not because people are bad, but because they have bad ideas. Be careful to avoid bad ideas.
I’ll give you a quick way to measure if an idea is good. Ask two questions: Does this make people kinder? Does this hold people morally accountable? Nazism could not answer that it makes people kinder. Communism could not answer that it holds people morally accountable; all you had to do was hasten the revolution.
I don’t know of an improvement over Leviticus 19:18. “Love your neighbor as yourself. I am God.” No new idea has supplanted that one.
Six: Behavior Matters More than Intentions
That you mean to do good or that you are sincere doesn’t mean a thing to the other six billion people on earth. The only thing that matters to all of us is how you act. God cares about your heart, but the rest of humanity cares about your behavior. Saying “I want good to be done” but not doing any good; crying for the poor, but not giving charity or hiring a poor person — none of your good intentions mean a thing.
And on the other side, having selfish intentions and doing good is okay. It’s better to have good intentions, but if good comes out of what’s selfish, that is what counts. The good that is done, not intended, is what matters.
Capitalism is rooted in selfishness much more than Communism, but communism murdered nearly one hundred million people this century, while capitalism has been the engine of democracy. So be very careful when you judge a system not to judge its intention or its rhetoric. Judge its results.
Seven: Religion is the True Counterculture
People think counterculture is dressing weird, or having every possible part of the body pierced. That’s not counterculture. If you do this, I’m not commenting on whether you should or not. But don’t think for a moment that this is taking a stand for some counterculture or that it takes guts.
I’ll tell you what takes guts in America today. The ultimate counterculture is to take God and religion seriously. Do you want to stand independent? When I turned down an extremely lucrative offer of having an afternoon drive-time radio show, the most lucrative part of radio except for the morning drive I said, “I can’t. I do not broadcast on my Sabbath. When the sun goes down on Friday, I stop working.”
That’s my counterculture. My religion says you have to observe the Sabbath, and somehow or other I have found this to be more important than even a better job in my profession. I have been amply rewarded by that decision: I have a Sabbath with my family; I don’t work seven days a week; I don’t live in front of my computer; my wife isn’t a computer widow and my kids see their father.
Yes, it takes guts and even sometimes the loss of a job, though that has never been involved, thank God, in my life. But that’s counterculture.
When you can say, “No, I’m sorry; as tempting as that is [whatever that may be], I cannot do it,” others respect you, and you will respect you. When you know to whom you are accountable and you ultimately march to the beat of a higher drummer, you lead a more peaceful life.
The temptation to do what everybody else does is enormous, yet it is a guarantor of unhappiness, not just a guarantor of doing the wrong thing. Be true to your faith. It will ultimately work. And it’s perhaps even more powerful that I, being of a different faith than you — I am a religious Jew — am saying this to Christians. It’s more powerful because I obviously have no theological ax to grind.
I need you. I, a fellow American, need you to be a good Christian. As the Supreme Court Justice Louis D. Brandeis said about Jews, “A good Jew will be a good American,” I am telling you that a good Christian will be a good American.
I interviewed those black heroes who saved the white trucker Reginald Denny during the riots. Three of the four of them were active Christians. But the media, my profession, doesn’t report that. It shows you only the bad, the nihilistic. They don’t report about the religious impulse that animated such people because it doesn’t serve their own interest. Media people are almost all radically secular. But it was very moving to me to meet these people.
I conclude, therefore, with a prayer from my own religion. I will say it to you in the original Hebrew, but I will, do not fear, translate it for you. And as we pray in Judaism with a kippah, a yarmulke. I will put mine on and offer it to you.
May God bless and guard over you. May God shine His countenance lovingly upon you. And may He give you a peaceful life.
FOOTNOTE 4 