In an op-ed piece on October 16, Warren Buffett advised the American public to, “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.” Mr. Buffett went on to say that over the long-term equities were the right call and that he wasn’t going to call the bottom.
I did a quick analysis to impute the compound annual growth rate (CAGR) of an investment in the DJIA at various prices. In the table below, pick the number of years that you believe that it will take for the DJIA to return to it’s October 9, 2007 price of 14,164 and then pick the level at which you would invest in the DJIA. The result is the annual return you would get.
Today’s closing price of 8,691 is highlighted. If the DJIA returns to it’s previous high in anything less than 10 years, it’s not such a bad time to buy a DJIA index fund. As always, a copy of my file is here (it’s called buffett.xls).
4 Comments
October 24, 2008 at 3:00 pm
The Dow is being severely retested again this morning and we are still holding above 8k. Although it appears that thousands of hedge funds are in the process of imminent failure, so I’ll take 7,500 and 5 years for the win, Alex.
But in thinking about intrinsic values, when Cisco, IBM and HP are all trading at 7-9X EBITDA, that’s when I become very interested. Take privates work at a little under 5X. The real question is how far down do 2009 and 2010 estimates have to fall? However even including forward estimate deterioration, we’re getting very close to the point where investors can get world-class companies with significant prospects over a 5-10 year investment horizon at very good prices.
October 24, 2008 at 3:48 pm
If an investor believes it won’t take more than 3 years, is there still a good reason to be investing in startups rather than public corps (from a traditional risk vs. return perspective)?
October 24, 2008 at 7:55 pm
Unfortunately, you don’t know what the future holds. So if an investor believes that there is a good probability that the public markets will return ~20 % compound annual growth, she would likely *still* be well served to diversify her assets [in a way that fits her particular financial goals].
And to be clear, I have no idea where the bottom of this market will be and when it will recover. I did enjoy reading Mr. Buffett’s op-ed piece and will watch the market with interest from a personal investing perspective.
Finally, I would advise investors to seek financial guidance from their investment advisor.
October 25, 2008 at 1:41 am
Diversification is overrated in general. If it means keeping your risks uncorrelated, fine. But too often it means taking more correlated risks and regressing to the mean. But I suspect that startup growth is uncorrelated with public company growth — or anticorrelated. So in the end I agree that a big investor would be well-served to diversify into venture capital, even if the returns will be approximately on par. Besides startups are more fun.
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