Warren Buffett says to ‘bet on America’ — here’s one prudent way to do it

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Warren Buffett is a legendary stock market investor. When Buffett speaks about the market, investors should listen.

Buffett held court at the Berkshire Hathaway annual investor meeting May 2. Read more here.

One thing he said that stuck out to me: “You can bet on America, but you have to be careful about how you bet. Markets can do anything.”

Let’s break down the comment in two parts — “bet on America” and “be careful.”

How do you carefully invest in this stock market, which has risen in the face of coronavirus-related economic deterioration? Is there a common-sense framework that prudent investors can follow?

Let’s explore “be careful” with the help of two charts. I will discuss “bet on America” in a future column.

Two charts

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, -0.78%, which tracks the Dow Jones Industrial Average DJIA, -0.77%. For the sake of transparency, this chart was previously published and no changes have been made.

Please click here for an annotated chart of Berkshire Hathaway BRK.B, -3.04%.

Note the following:

• The first chart is monthly, giving investors a long-term perspective. This chart should be the starting point of any stock market analysis.

• The most important point to note from the first chart is that May opened below the low band of the resistance zone shown on the chart. Based on the historical data, this is a high-risk point to buy and a good opportunity to take some profits. Unrealized profits can quickly disappear. For this reason, I’ve called for booking some profits on a continuous basis while holding proper position sizes of long-term core positions in stocks and ETFs.

• Due to wild gyrations that the stock market is experiencing, it creates a ton of confusion for investors. Prudent investors are looking for clarity. The first chart is a great tool to bring clarity and simplicity to the stock market.

• The first chart shows that the stock market hit the top band of the “mother of all support zones.” Then it bounced to the bottom band of the resistance zone. This is the normal expected behavior of the stock market.

• The second chart shows the support zone and the resistance zone for Berkshire Hathaway stock.

• The second chart shows that, as of this writing, Berkshire Hathaway stock is stuck between the support zone and the resistance zone.

• The second chart shows that RSI (relative strength index) is trending down. This is a negative.

• The foregoing items would call for avoiding Berkshire stock at this time. Buffett seems to agree. He is sitting on $137 billion in cash, yet he bought back only $1.7 billion of Berkshire stock even though it got cheaper.

• Buffett dumped his airline stocks — American Airlines AAL, -10.09%, Delta Airlines DAL, -9.03%, Southwest Airlines LUV, -7.59% and United Airlines UAL, -9.01%. He continues to own Apple AAPL, +0.98%, Bank of America BAC, -2.47% and Coca-Cola KO, -1.68%.

Framework for being careful

Here is a common-sense and proven practical framework for being careful:

• Start out by reading a gem from Warren Buffett’s annual letter that the media ignored: “Buffett is bullish on stocks but says the market can drop 50% — is he wrong?

• During the dip in the stock market, Buffett bought only $1.8 billion of stock, which is a small fraction of the record $137 billion cash that he is holding.

• Follow the concept of protection bands.

• Determine where you want to be in the protection bands based on your or your clients’ preferences if you are a money manager.

• Make a distinction between strategic and tactical buying/selling.

• Buy when the stocks and ETFs dip into the buy zones.

• Lighten up near the target zones.

• Do tactical buying and selling, especially in the short term, when signals are given.

For more details, please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”

Answers to your questions

Answers to some of your questions are in my previous writings. You can access them here.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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