Warren Buffett Turns Cautious

September 7, 2009
Closely Watched Buffett Recalculating His Bets

For the moment, however, Mr. Buffett seems to be retrenching a bit. Like so many people, he was blindsided by the blowup in the housing market and the recession that followed, which hammered his holdings of financial and consumer-related companies. He readily concedes he made his share of mistakes. Among his blunders: investing in an energy company around the time oil prices peaked, and in two Irish banks even as that country’s financial system trembled.

He should not have been blindsided since he was actually warning us of the bubbles (see below).

Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

Nearly my entire nest egg is in inflation protected government debt (TIPS and I-Bonds). His advice in 2004 has served me well and continues to serve me well.

May 3, 2004
Inflation Heating Up, Says Buffett

He suggested one way to protect oneself against inflation was investing in Treasury inflation protected securities.

Inflation did heat up. It then crashed. Since investors are once again enamored with commodities, we're going to give it one more chance I guess.

And now, back to the "blindsided" comment from above.

On May 1, 2005 Warren Buffett and Charles Munger warned of the real estate bubble.

On May 8, 2006 they both warned of the housing bubble again and also warned of the commodity bubble (oil in particular). Buffett said...

"I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.

Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice."

So how on earth did he get blindsided? Perhaps it was temporary insanity. The clock really did strike 12, and everything really did turn back to pumpkins and mice just as he predicted.