2008 has been a year in which the stock market has been very difficult to decipher. Calculating Long-term value of firms is not as easy as Buffett may portray.
However, Warren Buffett has had a profitable strategy during bear markets with the focus on the long-term intrinsic value of a company. His strategy relies on focusing on value and avoiding quickly-growing companies with expensive stocks.
However, this strategy has been recently questioned by Richard Sparks of Schaeffer’s Investment Research. Richard states that it is nearly impossible to assess today what the future profits will be of any given firm. He further states that some financial stocks would not even survive the economic crisis. Long-term value is difficult to determine through profits, cash flow, or other measures says Richard.
When the stock market is moving very quickly, long term is not accurately measured. “Stocks lost a third of their value in one month last fall, and jumped 20% higher in three weeks this March. Buy or sell a position too early or too late and the effect on your portfolio could be disastrous” as stated in Businessweek.
All investing styles have had their downfalls and its just a difficult time to invest. Last year, for instance, Morningstar data showed a large-cap value funds drop of 37.5%, while large-cap growth funds are off 34.5% and large-cap blend funds lost 36.4%.
“Traditional value strategies did so well in the last bear market,” says Jeff Layman, director of investment services for BKD Wealth Advisors.
The best explanation for the poor performance of many value investors last year was due to financial stocks. These investors were burned by bank stocks since they looked like good deals by the end of 2007.
Warren Buffett had its fall by holding on to shares of U.S. Bancorp (USB), down 53% last year; Wells Fargo (WFC), off 49%; and American Express (AXP), which fell 68%.
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