Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Despite stocks' decline, the CBOE Volatility Index (VOLATILITYINDICES: ^VIX ) also fell, losing 3.2%, to close at 13.16. The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.
I find it scarcely conceivable that investors should sell volatility down to such depressed levels, given that lawmakers are set to butt heads over the federal budget and debt ceiling during that 30-day period. Still, the market has made a monkey of me more than once in the past; perhaps this will prove to be another such instance.
One day after the Fed announced that it will not begin to "taper" its bond-buying program (quantitative easing), the VIX's continued drop looks like more evidence of the extent of the central bank's influence on market sentiment.
Buffett on stock valuations
But, let's get back to the business of fundamental, long-term investing. On Monday, I wrote:
Here's a secret that the financial media has no incentive to reveal -- or doesn't understand: The parlor games of handicapping the next Fed chair or the path of quantitative easing has very little to do with the business of investing.
It doesn't really make any difference to me in terms our business or our investments whether [the tapering in the Fed's quantitative easing program] is zero, or $10 billion or $20 billion. Someday it'll stop, maybe it'll go in the other direction...
However, there is one thing that Buffett, the consummate value investor, is concerned with -- and that's stock valuations. On this topic, he made some very useful remarks.
[Stocks] have moved a long way. They were very cheap five years ago -- ridiculously cheap -- and that's been corrected.
Buffett famously urged investors to buy U.S. stocks in a New York Times opinion piece dated Oct. 16, 2008 -- a month and a day after Lehman Brothers filed for bankruptcy. That turned out to be a spectacular call; the next chart shows the total returns of the S&P 500 and the Dow from the day following the publication of his article:
So, if the discount at which stocks were trading five years ago has been corrected, can we conclude that stocks are now fairly valued? Yes, according to Mr. Buffett:
They're probably more or less fairly priced now. We don't find bargains around, but we don't think things are way overvalued, either. We're having a hard time finding things to buy.
That's consistent with the observation from Yahoo! Finance's Michael Santoli that I quoted this morning: "Disciplined value investors profess a dearth of good buying opportunities." (Incidentally, Berkshire board member Meryl Witmer, a distinguished value investor in her own right, also told CNBC today that "there aren't so many [really cheap, misperceived stocks] now.")
What are the implications for ordinary investors, if an investor of Buffett's caliber is finding bargains scarce? For stock pickers, keeping some cash on hand in order to take advantage of any downdraft isn't absurd. Furthermore, if you're part of that group, you should pay close attention to the price you're paying for any new investment. Finally, I think investors would do well to look overseas for opportunities, as Europe and multiple emerging markets look like they offer better value than the U.S.
One final point: Given the size of Berkshire's cash mountain, Buffett isn't looking at anything other than large-cap stocks (which largely set the valuation of the market capitalization-weighted S&P 500). Opportunities in the small-cap segment are almost certainly more numerous (although, as a group, small-cap stocks don't look cheap, either!)
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