The third contribution to our VIDEO TOP 5 ON ASSET ALLOCATION is this short analysis of the US Bail-out Strategy by one of the world's best - if not the best - investors: Berkshire Hathaway Chairman Warren Buffett.
From his analysis we deduct the following...:
1) What happened in the Global Crisis was that things went out of control;
2) A system that was built on wrong assumptions and excess leverage collapsed when new economic developments were not as beneficial as what investors assumed;
3) This lead to a crash-like scenario in Q4 2008 and Q1 2009;
4) As always - market participants panicked and exaggerated their fears;
5) As always 2 - liquidity becomes an issue during market panics;
6) Investors who have liquidity available could use this panic by following a contrarian strategy;
7) Buffett: The US government saved the traditional liquidity providing investors (read: the big banks and other financial services firms)
7) Buffett 2: The US government could easily do so, because they - by nature - have ample liquidity available and the lowest interest costs in the market
8) Buffett 3: The government is NOT wasting tax payers money, since they are buying distressed assets at rock-bottom prices
9) What Buffett is doing here is basically making a plea for the incorporation of distressed, contrarian strategic components within a solid asset allocation policy.
'You wanna be greedy when others are fearful and fearful when others are greedy'
LMG: We agree with Buffett that governments could make nice profits in the longer term. However, Buffett - who also stated that he would love to be part of the deal as co-investor - should also take into account that governments do traditionally have other goal functions than the average investor. First, profit on this type of deals is ut one factor in their decision process. Employment and social considerations are examples of other factors. Also: the decision process of governments are to quite some extent influenced by day-to-day political turmoil and public opinion. As a result of that it is not unlikely that governments will sell-off their stakes in firms at the wrong moment when looking at it from an investor point of view. Maybe they should appoint some kind of board of investment advisers (e.g. people like Buffett) and give that board a say in the timing of the sell-off. Best thing to do is decide on some kind of sell-off mechanism upfront so that the government will be legally forced to take this advise into account.
All in all, we are not too worried about governments loosing trillions of tax payers' money. The growing importance and wealth in Emerging Markets will also ensure that Western governments did invest in assets with longer-term potential. Western financial services firms are definitely interesting investments for the largest investors from those countries.
Financial markets are currently - at the time of writing - torn between belief that Buffett is right and the potential risk of a W-shaped recovery in which we will first have to go through a second dip.
We liked this video, showing one of our industry's greats talking about one of our industry's most memorable negative events.
Our VIDEO TOP 5 ON ASSET ALLOCATION does now contain 3 contributions:
3) Warren Buffett on the Government Bail-out Plan and Investments in Distressed Securities