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Buffett shows Kiwis the way to go

By Peter V O'Brien

Friday 28th March 2003

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A solid improvement in the New Zealand dollar's relationship to its US counterpart was the saviour of local investors who bought US stocks in the past year.

The tables show movements in the main US stockmarket since the end of 2001 and changes in the New Zealand dollar-US dollar exchange rate over the same period.

The Nasdaq closed 1999 at 4069.28 but it declined more than 65% in the ensuing 26 months, compared with about 35% for the narrowly based Dow-Jones and about 45% for the broader Standard & Poor's 500.

A Reuters report at the end of 2001 showed, with hindsight, the danger of optimistic medium-term forecasts based on short-term economic date.

There was a rise in consumer confidence and a couple of "heartening" profit forecasts, leading an investment strategist from a relatively minor firm to say the consumer confidence information was one positive sign 2002 would be a recovery year.

The year was negative.

Corporate scandals, poor profitability, an economic growth slowdown, ever-increasing noise from war drums, a consequent lift in oil prices and general lack of confidence affected US markets and spilled over into 2003.

Those matters were well known to anyone who followed the US market.

But they might have got a new shock in early March when investment sage Warren Buffet told investors in his Hathaway Fund he believed equities were still overvalued, would not be taking up so-called "bargains" and preferred junk bonds.

Mr Buffett realised junk bonds were risky. More downside risk existed in equities, in his opinion.

He could be wrong but his extraordinary investment performances in bull and bear markets over the years have given his assessments guru status, despite history being no guide to future performance.

The great 1990s US bull market is over and it could be years before share prices and the indices revert their 2000 all-time highs.

Some New Zealand investors seemed to realise the point.

Brokers specialising in deals for private investors report virtually no interest among their clients in direct US equity involvement, even when taking account of favourable exchange rates.

Institutions and their associated diversified investment funds are wedded to theory, based on so-called risk spread by country and asset classes, adherence to benchmark indices (subject to minor, sanctioned percentage deviations) and the views of overseas advisers, the latter being either branch/head offices or "independent expert" managers.

Portfolio theory was finetuned after the 1987 crash.

It would have been discredited if fund managers realised the glory days were over two years ago but they clung to outmoded concepts in the hope of market recovery.

Hathaway's Mr Buffett took a different approach. New Zealand private investors in the US should follow his example, apart from the move to junk bonds, which needs special expertise and the capacity for detailed analysis of individual offerings.

US sharemarket indices' movements *

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond

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