Warren Buffett is a Bull… Are You?

Published Thu, Jun 21st, 2012   Matthew Weinschenk, Senior Analyst

If you’ve been waiting for a heavyweight to bet on a bull market taking over the United States, you don’t need to wait any longer.

Over the last few months, Warren Buffett has made it clear that he’s on board with a recovery in both the economy and the stock market.

Most importantly, he’s not just saying it – he’s backing it up with dollars. Lots of them.

Last week, Buffett entered a bid to snatch up $1.45 billion worth of mortgage assets from the bankrupt Residential Capital, LLC (more commonly known as ResCap). And he didn’t just enter a bid… he offered to pay $50 million more than the previous bidder, suggesting that he’s willing to go higher if other potential bidders stand in his way. (He’s also offered another $2.4 billion for the ongoing mortgage business.)

For his ResCap bet to pay off, housing needs to turn around and foreclosures need to end – something we’ve been on board with for a while now.

As usual, Buffett explains his bullish position on real estate with clear and rational reasoning:

“Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

“At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.)

“Fortunately, demographics and our market system will restore the needed balance – probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.”

The ResCap bid isn’t Buffett’s only bullish play on the economy, either.

Earlier this month, Buffett placed a $9.6 billion bet on a resurgent economy in the form of 425 personal jets. The jets will be part of Buffett’s NetJets, Inc. division, which allows the rich to share ownership of private jets (similar to a timeshare). It’s a massive order, increasing NetJet’s number of planes by about 60%.

And if there’s one business that requires a good economy to prosper, it’s private jets.

Even if you’re not a believer in the mystical powers of the “Oracle of Omaha,” you have to at least consider that such moves by Buffett are compelling signals of a stronger market ahead.

If you’re still having doubts, here are three reasons I’d take heed to Buffett’s decisions…

First of all, while quoting historical returns seems unnecessary, it’s worth mentioning that Buffett’s Berkshire Hathaway has returned 13% per year for 20 years.

It’s also important to note that he draws a salary of only $100,000 and derives most of his wealth from the rising share price of Berkshire. So he’s become the second richest man in the world by delivering value to shareholders, not by taking it from them.

Second, Buffett doesn’t make moves unless he’s absolutely certain the timing’s right. As he told investors in 1998 and has repeated on several other occasions, “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.” Fortunately he doesn’t just preach patience, he practices it, as Buffett hasn’t been this “active” since the market bottomed in early 2009.

Third, you could consider Berkshire Hathaway a massive market data collection center. The company owns homebuilders, furniture sellers, jewelry stores, insurance companies, candy shops, shoe manufacturers, newspapers and more. Each one of those businesses reports the most up-to-date sales information back to the Omaha headquarters regularly. Even though Buffett isn’t a short-term trader, he has access to some of the freshest data on the economy.

In other words, I’d trade 20 reports from the Fed for one day’s worth of Buffett’s sales figures.

Bottom line: He has the best information and he knows how to use it. Granted, you should never follow an investor blindly. But if you don’t agree with Buffett’s bullish position, you’d better have a good reason. Give us yours in the comments below or head over to Facebook or Google+ to weigh in there.

Ahead of the tape,

Matthew Weinschenk