Do you want to know what the world’s second richest man and richest investor Warren Buffett has been investing in recently? Well, not very much by his standards. He has been doing what he always does when the US stock market’s value in relation to total GDP gets too high – sitting on an enormous pile of cash, about US$60 billion, give or take a few million.
Should you not be doing the same thing right now? Financial markets are no place to be when they start to fall or move into a major correction phase. October is the traditional month for such slides, and history does have a habit of repeating itself.
UAE stocks finally fell out of bed on Sunday with a 6.5 per cent slump in Dubai and a 3 per cent correction in Abu Dhabi. That followed the worst week for US stock markets in two years. European and Japanese equities are also not looking good, although China has not been hit as hard.
Precious metals did buck the trend, with gains of almost 3 per cent amid these torrid markets. My view is that we have just seen an important triple-bottom in the gold market and that precious metal prices could well get much better from here. Then again, in 2008 we saw gold and silver plunge too when the sell-off really got going.
The US dollar, on the other hand, has been strong recently. Did you notice how the buying power of the dollar-linked dirham grew by almost 10 per cent in Europe over the summer months? It was a nice time to be a UAE resident or citizen visiting Europe. The UK pound has also been weakening, along with the Japanese yen. And the Russian rouble has collapsed more than 35 per cent since the crisis in Ukraine began.
Short term we can all feel a little richer, but the effect on relative competitiveness is bad news. What about the tourists coming to the UAE this autumn? Can middle-class Russians now afford it? Still, the US dollar could rally a little further in the more turbulent global financial markets that we are seeing now.
It is a peculiar feature of global financial markets that as they liquidate the demand for dollars actually increases. If you think about it, what are those shares and commodities being turned into except dollars? That increased demand pushes the value of the greenback up.
As an investor, having a US dollar or dirham cash reserve serves two important functions. First, you can sleep soundly at night while financial markets are making a nasty crashing noise outside. Secondly, when everybody else has sold off and lost their shirt you will be there to quietly start buying up the bargains left on the shelf.
That’s what dear old Mr Buffett did in the global financial crisis. Remember the couple of billion he made by offering up a huge cash injection to none other than Goldman Sachs, whose ever-bullish market projections then brought the firm to the gates of bankruptcy?
Of course it is true that by holding on to many of his share positions as the markets crashed Mr Buffett was also one of the biggest losers in that crash. However, by increasing his cash allocation he was able to become one of the biggest winners on the way back out.
Is that not just common sense? If so it is strange that more investors don’t behave like this. They tend to buy when stocks are expensive and panic and sell when they are cheap. Yet everybody knows that to become rich as an investor you have to do the reverse. That’s all Mr Buffett is doing with his $60bn or so in cash reserves right now. He’s waiting for prices to drop so that he can buy.
It is always tempting to think: “Ah, but he should be in an old-folks’ home”. Maybe Warren has got it wrong. I perhaps know better. “This time is different” are the four most expensive words in the English language for investors.
Markets go up and markets come down, and only those with cash to buy at the bottom make it to the top. That’s why cash will be king again for investors this month.
Peter Cooper is the editor of arabianmoney.net
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