Although the markets are going haywire, there’s one bright ray of hope for investors watching the “smart money.” Namely, Warren Buffett isn’t freaked out by the credit downgrade.
Berkshire Hathaway (NYSE:BRK.A) Chairman Warren Buffett told Fox Business Network the S&P credit downgrade of U.S. debt “doesn’t make sense.”
“I don’t get it,” Buffett said late Friday after the news of the S&P credit downgrade broke last week. He went on to say that not only is America’s debt still sound, it’s probably even stronger than ever. “In fact, if there were a quadruple-A rating, I’d give the U.S. that,” Buffett said.
Of course, Warren Buffett and his iconic company Berkshire Hathaway have a vested interest in such points of view. The company’s 10Q filing showed significant exposure to U.S. Treasury bonds. By Buffett’s own admission, Berkshire has “well over $40 billion” in short-term T-notes, and the S&P downgrade “doesn’t tempt me to sell.”
And to offer Buffett’s complete forecast, he also said the market won’t be affected much by the move — and in early trading, the market lurched down by as much as 3.5%. So much for that prediction.
Market slide aside, however, investors should take a tip from Mr. Buffett and resist overreacting to the credit downgrade. Yes, the Oracle of Omaha sees serious risks to the overall economy, including troubles in Europe, the risk of inflationary pressure and serious drag of high unemployment. But the credit downgrade by itself is not a game-changer for his strategy.
And neither should it be one for you.
Consider that over the weekend, Berkshire’s National Indemnity Co. threw out a $52-per-share cash offer for Transatlantic Holdings, Inc. (NYSE:TRH) to total $3.25 billion. This big move to buy even as the market is souring says a lot — but what says even more is that the offer actually was part of a bidding war with Allied World Assurance Co. (NYSE:AWH) for the reinsurance company.
Who engages in one-upsmanship to buy out a company when the stock market is moving quickly in the other direction? Only a long-term value guru like Buffett, whose buy-and-hold philosophy has served him well for decades. To him, the temporary gyration has nothing to do with the long-term value of Transatlantic. So his plan to acquire the reinsurer was unmoved.
Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric (NYSE:GE) truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors (NYSE:GM) to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs (NYSE:GS). Thanks to the 10% interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago. What’s more, the investment bank paid a hefty 10% premium to buy back those preferred shares.
Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008. But it was awfully profitable for Buffett.
You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds. But take a deep breath and remember that not everyone is screaming and running for the hills. Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues. But they are hardly new.
In short, you should have been paying attention to the cracks in America’s economic outlook for months now. And while the credit downgrade is another hairline fracture, it’s not in your best interest to place too much weight on this singular headline — no matter how dramatic it might seem.