My Wife and Warren Buffett

Don’t worry, we’re not about to reveal something salacious.

But as you know, we’re always looking for signals to warn you that the stock market is about to change direction.

Yesterday on our Google+ page we noted that Geoff Wilson from Wilson Asset Management has slapped a 6,000 point target on the S&P/ASX 200.

That’s 17.7% above yesterday’s closing price.

Big calls like that always put us on edge.

But that isn’t the only sign that has us questioning our bullish outlook. The first was something your editor’s wife said to us as she balanced the books for our weekly budget…

For some months the share trading account of our self-managed super fund has appeared on the same login as our everyday bank account.

It means we can see the account balance without having to log in to the trading account.

But for most of that time the missus didn’t mention a thing…perhaps she hadn’t noticed. Then about three weeks ago she noticed…and every week since she’s noticed the value rising and gotten more excited.

Now, you have to understand something, she doesn’t pay much attention to financial markets. She’s just really not that interested in it.

And that’s fine by us. We like having some downtime at home where we don’t have to think about central bankers, PE ratios or dividend growth rates.

So when the missus asks if we should buy more shares, well, we almost fell off our chair. But that was just the first warning sign. The second? That’s where Warren Buffett enters the frame…

Since When is Paying a Record High Price Value Investing?

You may have seen the recent news about multi-billionaire investor Warren Buffett. His Berkshire Hathaway [NYSE: BRK-A] investment company has teamed up with a private equity firm to pay USD$28 billion for the HJ Heinz Company [NYSE: HNZ].

Warren Buffett is a ‘value investor’. That simply means he believes the market has undervalued a company’s current and future earnings potential and seeks to buy the stock at what he sees as a discount to the real value. (Our colleague Greg Canavan is also a value investor.)

To be honest, we haven’t crunched the numbers on Heinz. But we raised our eyebrows when Buffett agreed to pay USD$72 per share for a company that had closed the previous day at USD$60.48.

And which was already at an all-time high…higher than both the 1998 and 2008 peak:

Buffet Buys Heinz at Record Price
Click here to enlarge


Source: Google Finance

Now, buying above a record high price doesn’t mean it’s a bad deal. But it does mean that Mr Buffett thinks he can see some value in the stock that millions of other investors have missed.

Or it means that Mr Buffett has overpaid for the stock. And he wouldn’t be alone. The fact is you tend to see an increase in takeovers when the stock market is high. Why?

Because high market prices tend to coincide with the end of economic growth. So, when companies see growth slowing organically (i.e. they can’t increase sales to existing customers) they have to ‘buy’ sales from other companies.

But when a business buys another business at the top of a market cycle, it runs a big risk of overpaying. That’s the fate that could face Berkshire Hathaway and Warren Buffett. Buffett is paying double the price that Heinz traded at during the slump in 2009.

So isn’t it reasonable to say that the market has already priced in a fair amount of future growth? And isn’t it reasonable to say that after the entire US market has doubled since 2009 that Buffett feels pressure to get some of Berkshire Hathaway’s USD$47 billion cash stash working?

As we say, we don’t know for certain. But it’s a big reason to put you on high alert. And if those two signals weren’t enough, another one appeared on cue last night…

Gearing Up Before a Crash?

We saw the following note in the Eureka Report‘s free eletter:

‘Gearing up: It’s all in the timing – The stronger stockmarket raises the question of whether investors should reconsider gearing…here’s what you need to know.’

Margin lending now? Hmmm.

All this isn’t to say the market can’t go higher. As we’ve noted over the past few months, we still see a lot of value in the market…especially among beaten-down small-cap stocks.

But even so, the Australian stock market has torn through 5,000 points and now many folks (including your editor) are banking on prices going even higher.

It’s at times like this when you should pay attention to the warning signs and make the appropriate adjustments to your investments.

That doesn’t mean selling everything, it simply means arranging your portfolio to protect you from big falls while still allowing you to benefit if the market keeps going up.


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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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