Fannie Mae and Freddie Mac must not Die: Bove

by:

Mar 25 2014, 9:46AM

The current plan to wind down Fannie Mae and Freddie Mac would result in lower housing prices for everyone. It would harm the United States economy by lowering growth. It would increase unemployment.

Despite this probability, the president and Congress seem to be intent on killing these companies – and the media and public do not seem to care. The prevalent belief is that these are failed companies with failed structures that exacerbated the American housing crisis that flared up in 2008 and therefore they must be expunged from the system.

In fact, the opposite is true. For eight decades, the system that they represent was successful in allowing tens of millions of Americans to own their own homes. The system was abused by politicians, regulators, and bankers beginning in the mid-1990s and this led to the downfall of these two giant companies. It was not structure but political and financial interference with proper underwriting that created their difficulties. The reaction to these misdeeds is to eliminate these companies without considering what this will do to housing and beyond housing, the economy.

Consider the current proposals, in Washington D.C.:

  • One set of ideas would result in the elimination of the 20- and 30-year self-amortizing mortgage.
  • Another concept would result in increasing the federal debt ceiling by more than $5.3 trillion and maintaining pressure to keep raising it going forward.
  • Another option would wipe away $350 billion of tax payer equity.
  • Other ideas would result in the complete nationalization of the housing finance industry.

What is certain is that under every one of the proposals, the concept of every American owing his or her own home is now gone. The result will be to create neighborhoods of rental units – or in my view, instant slums. Given the risks implied by the current proposals, one would think that Americans would want to know more about what is happening to home finance or, more specifically, the price of their homes. To date they are not interested – and neither is the media.

It is probable that the housing industry in the United States is the nation’s most subsidized sector. The problem, of course is how do we get from the most heavily subsidized system of home finance in the western world to a system that is not subsidized at all? Clearly if the transition is not handled properly, major dislocations will emerge and these dislocations will be very painful to all Americans.

If the current plan from the U.S. Treasury clears Congress and the courts, two things will happen: Fannie Mae and Freddie Mac will stop functioning on January 1, 2018; they will then enter a liquidation phase that may take at least 10 years.

This will not be good for anyone in this country. If there is no Fannie Mae and Freddie Mac, no bank will be willing to make 20- or 30-year self-amortizing mortgages. I have spoken to at least a dozen banks who feel very strongly about this issue – they just don’t view mortgage lending as the profit center it once was in the past. It’s more of a loss-leader to attract customers and cross-sell them other products.

Banks will simply be unwilling to put 30-year self-amortizing mortgages on their balance sheets, particularly at today’s interest rates. They will be willing to make 10- and 15-year adjustable-rate loans. The math here is frightening. The median income of American households is approximately $51,000. Under the new qualified mortgage rules, if you want to buy a home:

  • You must make a down payment equal to 20 percent of the value of the home to be purchased.
  • You are not allowed to pay more than 40 percent of your household income to meet principal and interest payments.

So, if the homeowner obtains a 30-year mortgage at a 4.25-percent fixed rate, then he/she/they can afford a home worth approximately $435,000. Conversely, if all they could get was a 10-year adjustable-rate mortgage at 6.25 percent (the average over the past 20 years), they could only afford a house worth $345,000 – a drop of $90,000.

You can play with the numbers any way you want but the bottom line is always the same: Affordability drops. Housing prices must come down. Moreover, if the American banks adopt the mortgage systems widely used in Canada, the 3-5-year balloon mortgage will be back.

Of course, no one believes that this will ever happen. However, they need to think again. The program to eliminate Fannie Mae and Freddie Mac is already in place. Unless Congress acts or the courts throw out the U.S. Treasury’s plan, the price of every home in the United States is about to fall. After the fact, people will care and the media will awaken from its somnolent state.

What should be done

To me it is very clear that the following should be done to minimize the impact of the government’s withdrawal from the home finance industry.

  • The conservatorship controlling Fannie Mae and Freddie Mac should be eliminated.
  • The companies should be returned to private sector ownership.
  • The government should exercise its warrants and sell the stock in the open market.
  • The dividend on the Series A preferreds should be returned to 10 percent.
  • The two companies should have as their mission:
    1) The elimination of their owned portfolios
    2) The expansion of their insurance roles without the full faith and credit of the nation behind this insurance
    3) The requirement that they give preference to insuring long duration fixed rate mortgages
  • The Senior Preferred Stock should be placed in a new trust dedicated to funding low-income housing.

None of this requires congressional or court actions. The president is able to do it by fiat. There is no massive government takeover of the housing finance industry and more importantly no massive bureaucracy created. It is simple, low cost, and would avoid disrupting the American public by forcing the prices of their homes lower.

– By Richard X. Bove

Richard X. Bove is an equity research analyst at Rafferty Capital Markets and the author of “Guardians of Prosperity: Why America Needs Big Banks,” which is due out on Dec. 26.

Refinancing Mortgage: The Secret To Saving Thousands On Your Mortgage |

 

 

Have you conducted a home loan health check lately? You might be surprised if you find out that despite getting a pretty good loan back then, there is still some room for you to save. The solution does not lie on your current home loan. What you might want to do is try to look at what’s out there for you if you wish to find ways to reduce your monthly mortgage costs.

 

Mortgage

 

A lot of people today are actually dealing with higher interest rates, which mean they have to pay bigger interest payments. The situation is the perfect time to find a better deal in the market. And once the opportunity to refinance to a better mortgage product reveals itself, you don’t let it pass. However, you do need to consult with your lender or a separate mortgage expert regarding your situation. Refinancing mortgage, just like other home loan solutions, has advantages and disadvantages. Before you can refinance, you will have to deal with the refinancing costs which will be comprised most likely of exit fees and several other charges your lender might impose.

 

Benefits of Refinancing to a New Loan

 

Refinancing to a new loan has other advantages aside from the obvious fact that of allowing people to lower their mortgage costs. Refinancing loans allows you to use the equity stored in your home as guarantee for a new loan. You can use the loan to fund the renovation and of your property. You can also purchase an investment property if you want using the funds you get from the refinancing home loan. Last but not the least, refinancing allows you to easily consolidate your loans as well as unsecured debts (e.g. credit card and personal loan) into one so you won’t have to pay high interest rates. The best thing about debt consolidation is that it makes debt management easy because you only have to manage a single account.

 

You can take advantage of refinancing when the interest rates are down. Once you have secured a loan, you can lock it in fixed rate for 15 to 30 years in order to preserve the low interest rate. When the rates go up, you’ll be saving a lot compared to those with variable rate loans. However, refinancing to a variable rate loan is the better option if you are not permanently settling in your home.

 

Refinancing mortgage takes you back to step one when you first applied for a mortgage. And if you remember, you need to have a cautious approach because you do not want to defeat the purpose of your refinancing. Simply put it, it’s buying your first all over again, which means you might encounter the same obstacles and procedures.

By  Robert  Charlson

Ocwen stock brushes off more headline risk

Pile of Money

Easily survives spate of negative news

March 19, 2014

Ocwen Financial Corp. (OCN) is set to pay $268 million to California residents as part of $2.1 billion settlement of a Consumer Financial Protection Bureau investigation into its servicing practices.

According to the San Francisco Business Times, the California Department of Business Oversight recently made the announcement.

Despite this, and other recent negative headlines, Ocwen stock is holding steady.

“Deceptions and shortcuts in mortgage servicing will not be tolerated,” said CFPB Director Richard Cordray when the settlement was initially announced in December. “Ocwen took advantage of borrowers at every stage of the process. Today’s action sends a clear message that we will be vigilant about making sure that consumers are treated with the respect, dignity, and fairness they deserve.”

Ocwen’s stock was slightly down for the day, closing at 40.59. That price is down 0.10 points from Tuesday’s closing price of 40.69.

Ocwen is part of the HW 30, HousingWire’s proprietary index of 30 key housing finance-focused stocks. The HW 30 was down 0.86 points (-.08%) after rising by nearly 3.5 points (0.32%) earlier in the day’s trading.

Most of the HW 30 was down as were all the major market indices upon news of the Federal Reserve Bank’s announcement to continue the taper.

Two of the companies on the HW 30 didn’t take the day’s news too hard.

Zillow, Inc. (Z) was the highest gainer amongst the HW 30, rising 2.3% over the previous day’s closing price. Trulia, Inc. (TRLA) was also up by 2.0%.

Lennar Corp. (LEN) was also up for the day by 1.82%.

Zillow: Sell on the West Coast, buy on the East Coast | 2014-03-19 | HousingWire

San Francisco - Bridge

Here are the top housing markets right now

March 19, 2014

If you are looking to sell your home, living on the West Coast drastically gives you the upper hand on selling power as spring home shopping season heats up. According to Zillow’s latest analysis of national buyers and sellers markets, sellers in the West have better odds selling their home, compared to buyers in the Midwestern and East Coast, who face less competition for buying a home.

“The real estate data in markets on both coasts are telling markedly different stories. Relatively strong job markets in the West are helping spur robust demand, which is being met with limited supply, causing rapid home value appreciation and giving sellers an edge,” said Zillow Chief Economist Stan Humphries.

“In the East, housing markets are appreciating a bit more slowly, and homes are staying on the market longer, which helps give buyers the upper hand,” Humphries added.

As a result, Humphries explained that buyers in sellers’ markets this spring can expect tight inventory, increased competition and a greater sense of urgency. In comparison, sellers in buyers’ markets may need to be prepared to lower their asking price, or to wait longer for the perfect buyer to come along.

As a result, Zillow comprised this list of the top five seller and buyer markets.

Top 5 seller markets

1. San Jose, Calif.

As the top selling market, San Jose boasts a $748,800 Zillow home value index, compared to a $2,819 Zillow rent index. Year-over-year the ZHVI changed 13.5%.

2. San Francisco, Calif.

The city home to the Golden Gate Bridge recorded a $648,700 ZHVI, a 17.7% year-over-year change. Meanwhile, the city posted a $2,676 ZRI.

3. San Antonio, Texas

San Antonio is the city furthest to the east and posted a $152,400 ZHVI, a 4.3% year-over-year change, and a $1,249 ZRI.

California

4. Los Angeles, Calif.

Los Angeles hit a $503,400 ZHVI, which is a 16% year-over-year change. Plus, the busy city posted a $2,356 ZRI.

5. Seattle, Wash.

Just south of Canada and home of Zillow, Seattle recorded a $312,400 ZHVI, a 9.7% year-over-year change, and a $1,751 ZRI.

Top 5 buyer markets

1. Cleveland, Ohio

Ranking as the number one buyers market, Cleveland recorded a $115,000 ZHVI, a .7% year-over-year change, and a $1,127 ZRI.

2. Philadelphia, Penn.

As one of two cities in Pennsylvania, Philadelphia posted a $193,000 ZHVI, a 2.4% year-over-year change, and a $1,517 ZRI.

3. Tampa, Fla.

Tampa, located in the Sunshine State, reported a  $135,900 ZHVI and a $1,226 ZRI. This represents 15.3% year-over-year change in ZHVI.

Illinois

4. Chicago, Ill.

Chicago reached a $177,800 ZHVI, a 8.3% year-over-year change, and a $1,615 ZRI.

5. Pittsburgh, Penn.

Barely making the top five list and the second city in Pennsylvania, Pittsburgh posted a $119,600 ZHVI, a 5.1% year-over-year change, and a $1,070 ZRI.

Fallout From Refinancing – NYTimes.com

 

 

Credit The New York Times

 

 

Homeowners who refinanced when fixed mortgage rates dropped below 4 percent will be less inclined to put their homes on the market as interest rates climb. And as a result, the limited property supply already impeding sales in many markets may not ease anytime soon.

A recent survey by Redfin, a national real estate brokerage based in Seattle, suggests that even those beneficiaries of low-refinance rates who do decide to move may want to make money renting out their homes while waiting for prices to rise, rather than sell right away.

Redfin questioned 1,900 people nationwide who said they planned to buy a home within a year; 42 percent said they already owned one, and of those, 39 percent said they planned to rent it out after they moved. The survey also asked buyers about their frustrations with the process, and “low inventory” topped the list.

 

 

Market dynamics are encouraging owners to keep their homes off the market for now, said Anthony Hsieh, the chief executive of loanDepot, a mortgage lender. “The rental market is very, very healthy today because a lot of Americans are locked out of the mortgage market,” he said. “And there is the promise that real estate is going to appreciate, because we’re just coming out of a deep recession.”

Of course, most borrowers can’t afford to buy another home without using equity from their first for a down payment. But Mr. Hsieh says that those who were able to take advantage of low refinance rates tend to be “premium consumers,” with very good credit and stable, above-average incomes.

“These are the folks that will think twice before they pay off that mortgage that is such cheap money,” he said. “They’re going to explore all types of options before they do that.”

They may want to consider a few other factors before taking on tenants, said Jed Kolko, the chief economist of Trulia, an online marketplace for residential real estate. First is the effort involved in managing a rental property. Second is the greater financial risk of owning two homes in the same market should home prices take a dive. And third is the changing nature of what’s driving rents.

“Over the past several years,” Mr. Kolko said, “the strong demand for renting single-family homes has been driven by people who lost homes to foreclosure but still wanted to stay in the same area. But now it is more driven by young people, and they are more urban focused.”

Patric H. Hendershott, a senior research fellow at the Institute for Housing Studies at DePaul University in Chicago, says he has witnessed the current allure of being a landlord firsthand. He lives in a housing community for older people, and he has recently noticed that residents who are moving to larger units are choosing to rent out their smaller ones.

But he views another scenario as more likely for low-rate holders: Those who can’t afford to move on without selling will essentially be “locked into” their homes. As interest rates rise, even buying another home at the same price will result in a higher mortgage payment.

In a recent analysis of the effect of lock-ins, Mr. Hendershott predicted that if rates continue to rise, the result will be substantial declines in housing turnover in strong housing markets, in which large numbers of households refinanced at low rates.

“We had a big episode of this in the 1980s,” he said, recalling when soaring interest rates locked in large numbers of homeowners.

Research cited in his analysis found that during that period, household mobility declined by 15 percent for every 2 percent increase in rates.

 

California Congressman on REO-to-rental warpath

 

Takano pushing four federal bodies to investigate

 

 

Congress

 

Longtime critic of REO-to-rental U.S. Rep. Mark Takano, D-Calif., is on the warpath Thursday, firing off letters to four federal entities asking for a detailed investigation into the growth of REO operations and REO-to-rental as an investment — and what they are doing to effectively regulate the emerging asset class.

Takano sent letters Thursday morning to the Consumer Financial Protection Bureau, the U.S. Department of Housing and Urban Development, the U.S. Securities and Exchange Commission, and Treasury Office of Financial Research.

Takano is concerned that rental prices are going up, and a surplus of investors in rentals — along with new rental-backed securities deals — could have the effect of artificially raising rental prices, making housing even more costly in parts of California and elsewhere.

Takano cites a Federal Reserve report, which claims if unchecked, investor activity in local housing markets may lower the quality of neighborhoods, while pushing up prices.

Investor purchasers have been an outsized figure in recent years in housing. Normally, about 85% of home sales are individuals purchasing with a mortgage, about 10% are all-cash sales, and about 3-5% are distressed sales. In 2013, something like 40% of home sales were individuals using a mortgage, 40% were all-cash, more than about 15% were distressed sales and 5% were flips.

Takano’s office wants a number of detailed questions investigated by the federal entities, including clarification on how single-family rental bonds are structured, what their metrics are, how their performance criteria could affect operations, and what is the risk that when bonds mature, the borrower would be unable to refinance the bonds and be forced to sell properties to repay bondholders.

From the SEC, Takano wants to know details about the investors who are purchasing the bonds, how the riskier tranches are sold and whether they are being re-packaged into collateralized debt obligations and resold with higher ratings.

He wants the CFPB to provide a list of local housing markets with high concentrations of rental properties linked to rental-backed securities, and analysis of common trends within these communities, so that they can examine the impact of REO-to-rentals and rental-backed securities on mortgage credit availability, rental prices, and housing prices in highly impacted communities.

Further, he wants the CFPB to perform a comparison between the rehabilitation, ongoing maintenance, and management costs that large investors spend on REO-to-rental properties with other actors, and how that impacts local neighborhoods.

From HUD and the Federal Housing Administration, Takano is asking for detailed information about the impact of large investor purchasers on first-time homebuyers’ ability to enter the market, and an evaluation of trends in FHA-approved mortgages in impacted communities.

To date only two REO-to-rental deals have been securitized.

Blackstone Group (BX) spent the past two years building an expansive portfolio of single-family rental homes via subsidiary Invitation Homes, spending $7.5 billion to acquire 40,000 houses. Blackstone then packaged rental income from single-family homes into a pass-through security, which is functionally not unlike a mortgaged-backed security.

Goldman Sachs (GS) started coverage on American Homes 4 Rent at a neutral rating and a price target of $18, reports say. American Homes 4 Rent has spent some $3.5 billion to acquire more than 21,000 rental homes.

“If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole,” Takano explained. “Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall.”

Jed Kolko, chief economist with Trulia, told HousingWire that the outsized and growing number of single-family rentals’ affect on rental rates in general is negligible.

Using American Community Survey data from 2005 and 2012, Kolko looked at the change in metro housing units that were single-family rentals.

Most metros had a large increase in the share of their housing stock that was single-family rentals. Among the 100 largest metros, Kolko looked at the top 10 with the biggest increases in institutional investments (from one to ten) – Las Vegas, Nev.; Phoenix, Ariz.; Cape Coral-Fort Myers, Fla.; Memphis, Tenn.; Riverside-San Bernadino, Calif.; Tuscon, Ariz.; El Paso, Texas; Lakeland-Winter Haven, Fla.; Fresno, Calif., and Sarasota, Fla.

 

Full Work Week and Rate Rally Boost Mortgage Apps

 

Mar 5 2014, 8:45AM

The volume of mortgage applications increased during the week ended February 28 for the first time since late January.  This good news was muted slightly by the fact that the previous week had been a holiday for many with government offices and schools closed.

The Mortgage Bankers Association said its Market Composite Index increased 9.4 percent on a seasonally adjusted basis from the week ended February 21 and 11 percent on an unadjusted basis.  The seasonally adjusted Purchase Index was 9 percent higher than the previous week but MBA noted that week was not adjusted to account for the President’s Day holiday.  The seasonally adjusted Purchase Index during the most recent week was 6 percent above the level during the last non-holiday week which ended February 14.  The unadjusted Purchase Index was 19 percent lower than during the same week in 2013.

Purchase Index vs 30 Yr Fixed

The Refinance Index was up 10 percent from the holiday week but was 3 percent lower than two weeks earlier.  Refinancing had a market share of 57.7 percent compared to 58 percent the previous week, the lowest since last September.

Refinance Index vs 30 Yr Fixed

Both average contract and effective rates decreased last week for all mortgage products.  The average contract interest rate for a 30-year fixed-rate mortgage (FRM) with a conforming loan balance of $417,000 or less decreased to 4.47 percent with 0.28 point.  The previous week the rate was 4.53 percent with 0.31 point.

Jumbo 30-year FRM (loan balances in excess of $417,000) had an average rate of 4.37 percent, 10 basis points below the average rate the previous week.  Points increased to 0.20 from 0.13.

Thirty-year FRM carrying FHA guarantees had an average rate of 4.13 percent with 0.13 point.  The previous week the average rate was 4.17 percent with 0.20 point.

The rate for 15-year FRM was 3.52 percent, down 4 basis points from the previous week.  Points decreased to 0.18 from 0.28.

Adjustable rate mortgages (ARM) held at an 8 percent share of mortgage applications for the fifth straight week.  The contract rate for the most widely offered ARM, the 5/1 hybrid, was 3.09 percent with 0.38 point.  The rate the previous week was 3.17 percent with 0.31 point.

MBA’s Weekly Mortgage Application Survey has been conducted since 1990.  It surveys mortgage bankers, commercial banks, and thrifts and covers over 75 percent of U.S. retail residential mortgage applications.  Base period and value for all indexes is March 16, 1990.  Interest rates are quoted for 80 percent loan-to-value ratio loans and points include the origination fee.


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Buffett’s annual letter: What you can learn from my real estate investments

In an excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors.

By Warren Buffett

The author visiting (for just the second time) the 400-acre farm near Tekamah, Neb., that he bought in 1986 for $280,000

The author visiting (for just the second time) the 400-acre farm near Tekamah, Neb., that he bought in 1986 for $280,000

FORTUNE — “Investment is most intelligent when it is most businesslike.” –Benjamin Graham, The Intelligent Investor

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small nonstock investments that I made long ago. Though neither changed my net worth by much, they are instructive.

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath as in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

MORE: Buffett widens lead in $1 million hedge fund bet

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped — this one involving commercial real estate — and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

buffett-graph

I joined a small group — including Larry and my friend Fred Rose — in purchasing the building. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.

I tell these tales to illustrate certain fundamentals of investing:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
  • With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.

MORE: Buffett looking to exit Washington Post’s former owner

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there — do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

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A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participation’s in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

When Charlie Munger and I buy stocks — which we think of as small portions of businesses — our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings — which is usually the case — we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

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It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these nonprofessionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners — neither he nor his “helpers” can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

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That’s the “what” of investing for the nonprofessional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’s observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

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My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.

And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.

Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.

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In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.

A couple of interesting sidelights about the book: Later editions included a postscript describing an unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and — brace yourself — the mystery company was Geico. If Ben had not recognized the special qualities of Geico when it was still in its infancy, my future and Berkshire’s would have been far different.

The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

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The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington & Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days.

I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.

This story is from the March 17, 2014 issue of Fortune.

Warning: Stocks Will Collapse by 50% in 2014

Sunday, 02 Mar 2014 12:42 PM

By Newsmax Wires

It is only a matter of time before the stock market plunges by 50% or more, according to several reputable experts.

“We have no right to be surprised by a severe and imminent stock market crash,” explains Mark Spitznagel, a hedge fund manager who is notorious for his hugely profitable billion-dollar bet on the 2008 crisis. “In fact, we must absolutely expect it.”

Unfortunately Spitznagel isn’t alone.

“We are in a gigantic financial asset bubble,” warns Swiss adviser and fund manager Marc Faber. “It could burst any day.”

Faber doesn’t hesitate to put the blame squarely on President Obama’s big government policies and the Federal Reserve’s risky low-rate policies, which, he says, “penalize the income earners, the savers who save, your parents — why should your parents be forced to speculate in stocks and in real estate and everything under the sun?”

Billion-dollar investor Warren Buffett is rumored to be preparing for a crash as well. The “Warren Buffett Indicator,” also known as the “Total-Market-Cap to GDP Ratio,” is breaching sell-alert status and a collapse may happen at any moment.

So with an inevitable crash looming, what are Main Street investors to do?

One option is to sell all your stocks and stuff your money under the mattress, and another option is to risk everything and ride out the storm.

But according to Sean Hyman, founder of Absolute Profits, there is a third option.

“There are specific sectors of the market that are all but guaranteed to perform well during the next few months,” Hyman explains. “Getting out of stocks now could be costly.”

How can Hyman be so sure?

He has access to a secret Wall Street calendar that has beat the overall market by 250% since 1968. This calendar simply lists 19 investments (based on sectors of the market) and 38 dates to buy and sell them, and by doing so, one could turn $1,000 into as much as $300,000 in a 10-year time frame.

Editor’s Note: Sean Hyman Reveals His Secret Wall Street Calendar in This Controversial Video, Click Here

“But this calendar is just one part of my investment system,” Hyman adds. “I also have a Crash Alert System that is designed to warn investors before a major correction as well.”

(The Crash Alert System was actually programmed by one of the individuals who coded nuclear missile flight patterns during the Cold War so that it could be as close to 100% accurate as possible).

Hyman explains that if the market starts to plunge, the Crash Alert System will signal a sell alert warning investors to go to cash.

“You would have been able to completely avoid the 2000 and 2008 collapses if you were using this system based on our back-testing,” Hyman explains. “Imagine how much more money you would have if you had avoided those horrific sell-offs.”

One might think Sean is being too confident, but he has proven himself correct in front of millions of people time and time again.

In a 2012 interview on Bloomberg Television, Hyman correctly predicted that Best Buy would drop down to $11 a share and then it would rally back up to $40 a share over the next few months. The stock did exactly what Hyman predicted.

Then, during a Fox Business interview with Gerri Willis in early 2013, he forecast that the market would rally to new highs of 15,000 despite the massive sell-off that was haunting investors. The stock market almost immediately rebounded and hit Hyman’s targets.

“A lot of people think I am lucky,” Sean said. “But it has nothing to do with luck. It has everything to do with certain tools I use. Tools like the secret Wall Street calendar and my Crash Alert System.”

With more financial uncertainty that ever, thousands of people are flocking to Hyman for his guidance. He has over 114,000 subscribers to his monthly newsletter, and his investment videos have been seen millions of times.

In a recent video, Hyman not only reveals the secret Wall Street calendar, he also shows how his Crash Alert System works so that anybody can follow in his footsteps (click here to watch it now).


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