Sunday, October 28, 2007

Berkshire Hathaway's Warren Buffett Warns on China

“We never buy stocks when we see prices soaring,” Berkshire Hathaway's (BRK.A) Warren Buffett told reporters while on a visit to northeastern China Wednesday. “We buy stocks because we’re confident of the company’s growth. People should be cautious when they see prices rising.”

He clarified the comments on CNBC saying "I, just said that we very seldom buy into a market that's gone up a whole lot, and I don't know anything real specific about the Chinese market or Chinese stocks. But I do know that when prices have gone up a whole lot then I'm more skeptical when they've gone down a whole lot. I really like the look of markets that have gone down rather than markets that have gone up. But I will say this, what I've seen in China just today, in terms of the industrial development in Dalian, is making a believer in me, certainly in the economy, but that doesn't mean that I think the stocks are attractive."

Buffett is always asked about his outlook for either a company, the US market, the dollar or just about anything else short of who will win the World Series (the Red Sox will). His almost pat answer is "I have no idea what will happen, I am smart enough to know what I do not know".

Why does this matter? When Buffett actually comes out and says something, we would be well advised to listen because the outcome most likely very closely related to his thought process. China stock, not necessarily the economy are approaching or are already in a "frothy" phase and that poses dramatic risk to investors. When you add the difficulty actually valuing securities from China, you now have a significant risk to investors. There will be a bunch of implosions of securities being sold today, that is inevitable in this environment. Buffett's warning is that the number may end up being much larger than people currently anticipate..

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