Buffett, Sonders, & Tilson on what's next

This week we scan the investment world looking for thoughts and insights from the top minds on Wall Street. Here's what they are saying now.

By John Reese Oct 23, 2009 3:52PM

The investment world is filled with new theories about how best to make money. But over the years, I've found that the best way to produce solid, market-beating returns is to take advantage of the wisdom of history's best investors. That's why I created my Guru Strategy computer models, and it's why each week I take a look at what some of the gurus I keep an eye on are saying.


This past week, we heard from several of those gurus -- including perhaps the greatest of the bunch, Warren Buffett, who said he thinks the low point of the economic downturn has passed.


Several others, meanwhile, espoused some strong contrarian viewpoints. Take Liz Ann Sonders, chief investment officer at Charles Schwab. Sonders -- who was way ahead of the curve in calling the beginning of the recession -- told Forbes.com that she thinks the inflation fears now making headlines are overblown. Sluggish demand continues to hold down spending, lending and run-rates, keeping inflation at bay, she said, adding that inflation also usually falls for a full year after a recession has ended.


While the government has indeed pumped a ton of money into the system, Sonders says the velocity of money needs to pick up before any serious inflation occurs. “Money creation has surged during the past year, but there are no signs of inflation, meaning a lot of this excess money is going to shore up banks’ capital bases and/or fuel asset price inflation,” as it has with gold, she said.


Mark Hulbert of MarketWatch and Hulbert Financial Digest offered a similar take. While he's previously said he thinks major inflation is coming, he now sees evidence to the contrary. For one thing, he notes that bond prices remain high, which usually doesn’t happen when inflation is on the horizon.


In addition, Hulbert points to an analysis done by Ned Davis Research’s Joseph Kalish. Among Kalish’s points: There is a high level of excess capacity in the economy right now; following every recession in the post-war period, inflation has fallen; huge private sector deleveraging has more than counterbalanced surging public debt; and interest rates are actually high in real terms. All of those factors point to low inflation for the next five years or so, though Kalish does think inflation is a major risk after that.


Another contrarian view came from Tom Forester, whose Forester Value fund was the lone diversified equity fund to make money in 2008. Forester tells Fortune that, while many are running from healthcare stocks because of the potential of major industry reforms, he's not. “You’re going to have a lot of noise, a lot of arm-waving and at the end of the day they’re going to pass a bill that’s going to be a little negative to fairly neutral,” he says. Given that healthcare stocks are currently trading at about a third of the broader market's price/earnings ratio, that's good news says the top manager. “We think once the noise simmers down and the dust settles on this, these things will do quite well,” he says.


When it comes to the broader market, there are still mixed reviews from the gurus I follow. Steve Leuthold, the one-time bear who turned bullish this year, thinks we're in for a big November and December. He told Bloomberg he expects that investors who've stayed away from stocks will finally capitulate and jump in the market.


Sharing his bullish view was Anthony Bolton, who was one of the U.K.'s greatest fund managers before retiring in 2008. Speaking at a conference in South Korea, Bolton said he doesn't expect a double-dip recession, according to the Korea Times. Bolton reiterated his bullishness on emerging market stocks, particularly Chinese stocks, and said he's also high on value stocks, consumer cyclicals, technology firms, and financials.


John Mauldin disagrees. Mauldin, one of the few to warn about last year's market meltdown in advance, told Yahoo! TechTicker that he's concerned a double-dip recession will lead to another stock plunge. He says investors need to be nimble, and can trade or "ride the wave", but he says buying stocks and planning to hold them for five years isn't a good idea. He does think that, over the much longer term, the U.S. will recover and prosper, though.


Also sounding leery of stocks was Whitney Tilson, the money manager and columnist who predicted the housing bust. He's betting on another downturn in the stock market, telling CNBC that he's shorting more and going long on fewer stocks. He thinks the jobless rate will remain fairly high, which means mortgage and consumer loan defaults are going to surge. His favorite short area: homebuilders.


Finally, some particularly interesting broader investing advice came from hedge fund guru Joel Greenblatt. In a rare interview, Greenblatt told CNBC how, and why, his "Magic Formula" has worked so well over time. The big key, he said: discipline. No strategy works all the time, and those who have the fortitude to stick with a good approach during periodic downturns can reap great rewards, he explained.


John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".



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