Buffett's Point of View:
Warren Buffett used to be the King of Investing. Used to?
Well he hasn't been able to achieve his market beating returns for a while now so that's why I am using that terminology.
Anyways, he has an annual shareholder's meeting that is very popular. It was held over the past weekend. Here are some of his comments:
On the real estate bubbleBuffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.] The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."
On mortgage financingMunger: "There is a lot of ridiculous credit being extended in the U.S. housing sector."
Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."
On a commodities bubbleBuffett: "I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.
Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice."
On ethanolBuffett: "Charlie [Munger] and I do not know enough about the business to evaluate it. It depends on government policy and a lot of other variables we're not good at predicting. It's also a very hot area for investors right now, and we don't like looking at things that are hot and easy to raise money for. Generally speaking, agricultural processing businesses have not earned high returns on tangible capital. Ethanol could prove an exception, but I'm not sure how you gain a competitive advantage with any particular ethanol plant."
I find it interesting that Buffett already sees a bubble in commodities. I think we are still in the early stages of the bubble. Perhaps as Buffett has gotten older, he has decreased his risk threshold and therefore that keeps him out of the high growth markets.
Or maybe it's not Buffett, but the market itself that prevents Buffett from doing well. He made a ton of money investing in American companies while America was still industrializing at a torid pace. But the American economy is not an industrial economy anymore. It is more an information and technology economy with much of the industrial production being done in third world countries like China.
So I would argue that Buffett's methods work best in an industrializing country. Therefore, I bet that if Buffett began looking at Chinese and Indian companies, his returns would immediately increase because he would be looking at similar companies that were in the US 30-40+ years ago.
In my opinion, the way to make money in North America right now is "Bubble Surfing", that is to shift capital from bubble to bubble. In the 90's you should have been heavily invested in Technology stocks. When Tech went down, you should have went to Real Estate and Condo Flipping (in the US at least). Now that Real Estate is going down, people should be getting into commodities for some time. When the market begins to overheat, then you should begin to cash out and search for the next hot sector.
Of course, this philosophy depends on your trend predicting skills. If you get the wrong trend, you won't do as well. But if you do get into 2 or 3 trends in a row at the right time and cash out before the pop, you will be well on your way to becoming a millionaire!