Straight Talk from Buffett

One of the great things about listening to Warren Buffett speak, and I suspect one reason why thousands gather each year in Omaha for his company’s annual meeting, is that despite the fact that he is a brilliant man he speaks in plain, logical language that is easy to follow and usually hard to argue with. If you want the truth, without the media spin, and in as few simple words as possible, just ask Buffett.

Here are excerpts from a Buffett blurb on latimes.com from Thursday discussing current financial market conditions:

“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” he said.

“I wouldn’t quite call it a credit crunch,” he said. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.”

He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

He is so right on this. People in the media keep complaining that “banks aren’t lending money anymore” and the Fed has to help boost liquidity. Banks are still lending money, they are just doing so only to people who have good credit (and thus actually deserve to be given loans).

It’s funny that people complained that the banks were giving loans to anyone and everyone, and now they are upset because many people can’t get loans anymore. You can’t have it both ways.

The fact that “dumb money” is no longer available is a good thing. Perhaps retail sales drop a few percentage points and loan losses increase a few because of it, but overall our financial system will be less leveraged and healthier as a result.

If you can’t put any money down or verify your income, you can’t afford to buy a home. I’m glad the banks are finally realizing this. And for those who are credit worthy, the Fed is lowering borrowing rates so the banks can make money on the loans they are willing to extend.

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4 Thoughts on “Straight Talk from Buffett

  1. Anonymous on February 10, 2008 at 11:21 AM said:

    Buffett is wrong. If this is not a credit crunch, I don’t know what is. There are solid investment-grade companies borrowing at spreads of 250 bp over LIBOR, bank loans to good companies trading at 10-15% discounts to face value, the high-yield market shut down to many (risky) borrowers, etc. Buffett lives a different reality, one of a AAA borrower, and for him the all-in cost of debt is going down (because Treasuries and LIBOR have come down).

  2. Anonymous on February 10, 2008 at 8:33 PM said:

    I think it was in that same interview, Buffet mentioned that he is continuing to diversify out of the dollar. He has indicated that he continues to expect the US dollar to lose value over time, unless the trade deficit is corrected. As a primarily US investor, what is your take on the dollar and international investments?

  3. Chad Brand on February 11, 2008 at 6:43 AM said:

    I agree with the negative outlook on the dollar, but currency is not my forte by any means.

    Until the U.S. gets a handle on its deficit and debt, the dollar will struggle to strengthen for any prolonged period of time. A democratic win in November could bring us closer to that becoming a reality (moreso than the Republicans for sure), but I haven’t heard either candidate talk about balancing the budget on the campaign trail, so it might not even be important to them, unfortunately.

    As for the international markets, I like them though you are right that I am primarily a U.S. investor. I would stress, however, that investors need to focus on valuation, not just hype and growth potential. The way to combine limited downside and upside potential is to not overpay for international markets with solid growth. Too many times people just buy what is hot and in the news, which can often be quite expensive and thus due for a large fall. You can find growth at a reasonable price in the foreign markets. Singapore is an example, for instance.

  4. I know that you would never get an answer..

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