Paulson, Buffett, Gross & Siegel on what's next

Each week I scour the investment landscape looking for thoughts and insights from the best and brightest minds in the market.

By John Reese Nov 21, 2009 8:56AM

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 week, a number of the gurus I follow weighed in. In general, most are finding opportunities in the market. But where they are finding those opportunities varies pretty widely.

 

For example, take two of the most successful investment gurus in the world: hedge fund manager John Paulson and the great Warren Buffett. Earlier this week, The Wall Street Journal reported that Paulson is making a big move into gold, launching a new fund that focuses on shares of gold miners and other gold-related shares and gold derivatives. This comes in addition to Paulson's already significant gold-related holdings.

 

Buffett, on the other hand, doesn't seem too keen on gold -- despite his belief that major inflation is coming. 

 

Berkshire Hathaway's latest holdings disclosure, made public this week, shows that Buffett's firm owns no gold-related investments. Instead, he's been buying shares in firms like Exxon Mobil, Burlington Northern Santa Fe Corp., Wal-Mart, and Nestle S.A., and he continues to hold major stakes in big names like American Express and Coca-Cola.

 

The Financial Post of Canada's David Pett had an interesting take on Buffett's no-gold portfolio: “Buffett appears to have his own strategy for dealing with inflation,” Pett wrote. “His theory seems to be that the best protection against inflation comes by investing in companies that have the ability to pass on price increases. A company can have pricing power if it controls a scarce resource (Exxon and Burlington Northern) or if it owns a favored brand (Nestle and Coca-Cola) or because it’s the biggest and most effective competitor in its field (Wal-mart)."

 

Also talking about inflation this week -- David Dreman, the noted contrarian investor, told Fox Business News that he thinks we could see inflation in the 8% to 10% range within three years. He says stocks and real estate are good places to be in such an environment. Dreman also says he thinks a correction is coming. But he says it's too hard to tell exactly when it will come, and, given his belief that stocks will trend upward in the longer term, he says investors should ride out the correction rather than trying to time the market.

 

Another top guru, PIMCO's Bill Gross, has been extolling the virtues of one particular area of the market: utilities. Gross says that in the "new normal", banks, auto companies, and other firms will become more regulated -- like utilities -- and thus return less than usual. “I figure, why not just buy utilities if that’s what the future American capitalistic model is likely to resemble,” Gross wrote in his most recent investment commentary on PIMCO's site. “Most importantly,” he says, “they yield 5-6% not .01% [like money market accounts]! … Utilities and even quasi-utility telecommunication companies now yield between 5 and 6%, whereas their 10- and 30-year bonds yield less and at a higher tax rate to you the investor.”

 

Looking at the market in a broader context, author and Wharton professor Jeremy Siegel says stocks as a group are still attractively valued -- even after the 60% run-up. In his latest Yahoo! column, Siegel examines earnings from some varying perspectives, and, in the end, says that earnings, productivity increases, and low interest rates all point toward the current rally being "far from exhausted".

 

As for the economy, a couple of top strategists gave very different takes on things this week. Meredith Whitney, the former Oppenheimer analyst who warned about the financial crisis ahead of time, told CNBC that she thinks the U.S. is likely to fall into recession again next year, and that there is "no fundamental rooting" as to why many stocks -- especially consumer stocks -- have risen so much. She says the consumer credit contraction is continuing to accelerate, which will be a major problem.

 

Liz Ann Sonders disagrees. Charles Schwab's chief investment strategist, who accurately called the start of the recession, told CNBC that historically the stock market has actually performed best when consumer credit has been the weakest. And, she says that GDP, corporate profits, valuations, and the huge monetary and fiscal stimulus across the globe are indeed providing fundamental reasons for the market's rally.

 

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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