Is Warren Buffett Being Honest With Us?

This article was written with Steve Cordasco, of Cordasco Financial Network. It's part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Steve Cordasco, Winter, 2012

Just because Warren Buffett is the greatest investor whoever lived does not mean you should follow his advice.

Yep, thatzzs what I said. Do not do what Warren Buffett is doing.

If you read the Oracle of Omahazzs latest letter to shareholders — which I have to admit is darn good reading in parts — he offers the following words:
American business will do fine over time. Stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor.

He goes on to say:
Since the basic game is so favorable, Charlie [Munger] and I believe itzzs a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.

An important lesson for investors to take away from Buffettzzs remarks: If therezzs a market downturn, Buffett, along with the rest of the Berkshire Hathaway (BRK.B) shareholders can afford to weather it. More importantly, they can profit from it by deploying their capital when prices are low.

For the rest of us, a downturn in the stock market can have lasting and irreversible consequences for individual investors if they have all of their assets there. Just talk to anyone who retired in 2001 or 2008.

In my view, a more prudent portfolio for todayzzs pre-retirement or retirement investor should include not just stocks, but real estate, cash and bonds, across industries and across geographies.

I feel there are significant risks in the stock market that are not well understood, and as a result, can not be predicted with any degree of accuracy. Certainly, if you have confidence in Buffett, I would urge you to consider what he is not doing more than what he is doing.

Specifically, Buffett has some $42 billion of cash in his pocket, as of the end of 2012. Though his cash position has been fairly consistent over the years, hovering above and below 10% of total Berkshire Hathawayzzs total assets, keeping $42 billion on the sidelines is certainly not the mark of a man who is “all in.”

I believe that $42 billion in cash suggests a belief that prices in the future will be lower than prevailing prices today. The market has been on quite a tear, and itzzs tempting to jump in so as not to miss the boat.

But donzzt you dare do it. Just because some folksy, ukulele-playing and plain-spoken “Oracle” says the risks of being out of the market outweigh the risks of being in the market, remember, hezzs talking about himself and not you.

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