Warren Buffett Bullish on Stocks and Housing
Warren Buffett has made a number of recent comments saying that he thinks that equities and housing are currently among the best long term investment options.
The billionaire investor and Chairman of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) said in his annual letter to shareholders that he preferred to invest in "productive assets" such as businesses, farms and real estate. Buffett said that the ideal investment would retain its purchasing power during times of inflation, " while requiring a minimum of new capital investment."
Although many investors consider gold to be a good hedge against inflation, Buffett warned that we may be in the midst of a gold bubble. He said that investments like businesses and homes that provide much needed benefits are actually safer long term investments and better hedges against inflation than gold because the commodity is of limited actual use and is a nonproductive asset.
Buffet explained that "whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce."
Buffett acknowledged that his timing was off when he predicted a housing recovery in 2011 but defended the general thinking behind his earlier prediction because he says that "housing will come back – you can be sure of that."
He went on to say that "every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while 'doubling-up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure."
Appearing on CNBC's Squawk Box today, Buffett said that he would buy millions of homes if such an investment were practical. Instead of buying millions of homes, Berkshire Hathaway (BRK-A) has invested in several businesses that would benefit from a housing recovery.
While most investors have neither the time nor the money needed in order to purchase and manage several large businesses, there are a number of options available to investors who would like to profit from Buffett's advice.
Traders who believe that following the advice of Warren Buffett will payoff in the long run might want to consider the following trades:
- The shares of companies like D.R. Horton (NYSE: DHI) and KB Home (NYSE: KBH) could climb higher if Buffett's prediction of a housing recovery comes true soon. Recent data points to a possible recovery in the housing market, so Buffett could soon be proving his critics wrong once again.
- Investors who prefer a more diverse approach to investing should take a look at the SPDR S&P Homebuilders (NYSE: XHB) and SPDR S&P 500 (NYSE: SPY) ETFs. These ETFs stand to gain if housing prices climb higher while the economy improves and they carry less risk than purchasing individual stocks.
Traders who believe that Buffett is wrong this time may consider alternative positions:
- Shorting individual housing stocks like the ones mentioned earlier or buying an ETF like the ProShares UltraShort S&P500 (NYSE: SDS) could prove profitable if Buffett's timing is off again.
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