Munger

Buffett has paid significantly larger P/E's for various businesses over the years, including when he ran the Buffett Partnership. Think See's Candies, the rest of GEICO, Coca-Cola, Dairy Queen, etc. With the benefit of hindsight, See's, GEICO, and Coca-Cola were actually purchased at dirt cheap valuations given the subsequent growth -- Buffett's genius shined. I don't think anyone expects today's large caps to achieve similar growth. At present, my point is that large-cap, high-quality stocks offer relatively better value than fixed income instruments. Couldn't agree more -- and this is a key point for me as well. Large-cap, high-quality stocks may in fact offer a good relative value trade but from a fundamental/Buffett/Graham absolute value perspective, the appeal is modest at best. And if the bond market is correct, the spread may narrow by the earnings (and stock price) declines rather than stock price increases. Personally, I'll wait for a better risk/reward.

It's a certainty. Institutions will have to move into these assets because their yields will diminish over the next year or two. I wouldn't be so certain. The investment approach sounds like one based on the assumption that a greater fool will always be willing and able to buy, which is fine until the music stops. Problem is that no one knows when the music stops and those left without a seat get destroyed. 7% would be a hell of a lot better than 10-year treasuries yielding 2.8% or 30-year treasuries yielding 3.8%. 7% would allow any insurer to be completely profitable. All true but also assumes interest rates remain at record lows for 10 and 30 years, highly unlikely. In fact, given the excessive US debt, odds are that interest rates rise sharply during these periods as investors demand a higher return to offset the risk of default -- see Greece. If interest rates rise sharply, the consequent collapse in the principal value of the investment will far offest any benefit from a 2-4% dividend yield, which would might not be sustainable given the likely negative impact of a sharp rise in interest rates on the overall economy and the resulting decline in earnings. This is in part why the pension problem will prove a disaster and I personally invest in no insurace companies. Further, remember that when Buffett was delivering outsized returns early in his career, he was buying boatloads of companies at 3-7x earnings (with the earnings growing) -- the broader public had truly given up on the stock market. We are nowhere this type of environment, although I suspect we'll see something similar in the future. Corporations in general are operating at terrific levels of efficiency. Even if we run into another period of decreased consumption like we saw in late 2008 and early 2009, corporations don't have the same level of overhead. In my opinion, this statement doesn't recognize how far the economy needs to (and will) contract as deleveraging continues... We're not talking about the 2-3% decline from peak to trough in the most recent recession. In order for the imbalances to correct, the economy will need to contract by at least 10% (and yes, unemployment will move to currently unimaginable levels -- at least 15%) and no company is prepared for this scenario. Much of the GDP growth over the past 20-30 years has resulted from debt fueled consumption and the bill now needs to be paid -- the longer the government tries to perpetuate this scheme, the greater the ultimate pain. The US will face serious hardship as the economy corrects at some point over the next 5-10 years -- the sooner, the better. Look at David Sokol's comments in bloomberg - I feel he got it right. Could not agree more with Sokol -- we will all be very happy if we look back 5 years from now and the economy grew at a 2% annual rate because this is not the likely scenario at the moment and it could easily be much, much worse -- i.e., GDP is lower 5 years from now than it is today.

Responding to Parsad, who wrote: "Not country...corporations. Multitude of general risks (housing bubble, credit derivatives, stock and commodity bubbles, trade deficit, corporate and consumer debt leverage) has also been reduced. Actual risk has been transferred from corporations to government. Buying shares in Coca-cola is a safer bet than buying U.S. treasuries over the next ten years." Reasonable observation on the surface but if the government wasn't running a budget deficit equal to 14% of GDP, we would be in a depression and corporations would not be better off. A 14% annual budget deficit is not sustainable and as a result, the current economic environment (which gives the appearance of relatively healthy corporate sector) is not sustainable. Given that inflated and unsustainable government spending is keeping the economy afloat (barely), risks related to house, credit derivatives, stocks, debt still exist and in fact are greater than before (in my opinion), given that there is now more debt in the system. Total debt to GDP now equals 358%, greater than the 290% level at the end of WWII. I also don't share the excitement for large cap stocks. Sure the valuation looks good relative to treasuries but from an absolute value perspective, I don't see the appeal. You might get a "trade" if capital move from treasuries to large cap stocks (but who can predict with any certainty). Taking the perspective of Buffet and assuming I buy IBM (or a basket of large caps) with the intention of holding forever, the current economic return wouldn't be much better than 7% -- that's fine for Berkshire Hathaway but I'd rather sit on my cash and wait for a much better risk/return and ideally come across a lollapalooza, in the words of Charlie Munger. Plus, who is to say the bond market has it wrong and a sharp economic downturn is not on the horizon -- under this scenario, the earnings don't materialize as currently anticipated and stocks in fact are not cheap on any basis and decline accordingly.

Disagree with Schiff re inflation. In order for inflation to take hold, borrowing and spending must increase -- i.e., the money supply must increase. The Fed's so called "printing" of money only increases the monetary base in an effort to increase the money supply -- the Fed is insanely trying to encourage more borrowing and spending. As was the case for Japan, this approach proves futile if there is already too much debt in the system --few are willing/able to lend/borrow. Deflation appears more likely and this should be viewed positively by those who live within their means and save money, which I suspect is the case for most on this board. Also disagree with Parsad, who suggested that the country is in a far better position today than in 2006. The only reason the US is not in a full depression today is because the government is running a deficit equal to 14% of GDP. Without this unsustainable borrow and spend policy, the US economy would be in a worse depression than the one experienced during the 1930s. Any appearance that the economy is better off today than in 2006 is nothing more than the consequence of an unsustainable borrow and spend ponzi scheme. The borrowed money has not been invested productively, which renders the so called stimulus nothing more than transitory as it largely pulled forward future demand. Unless the borrow and spend ponzi scheme continues forever (which it can't), there will be a period of reckoning for the United States, especially for those citizens who used borrowed money to spend beyond their means. No, we are not better off today than we were in 2006 -- not by any stretch of the imagination. This doesn't even take into account the future pension, medicare, medicaid, and ss promises that will prove impossible to pay in full. Impossible to predict when the day of reckoning occurs but unfortunately hardship will be experienced by millions of Americans at some point the future. In the spirit of Benjamin Graham and Warren Buffett -- we are in a period that requires a very high margin of safety before investing.