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Warren Buffett: Time to Buy Is Now


Brief scrutiny of today's headlines.

"Reversion to the mean" is a basic concept overlooked by many investors who routinely chase hot stocks or sizzling mutual funds.

It means: Hot stocks or funds won't stay hot because over time, things average out and high flyers return to earth.

The market downdraft might provide the long-awaited and much-needed reversion to sanity.
The market has taken a hit since the heady days of Dow Jones Industrial Average 14,000, and investment guru, Warren Buffett, says now might be a good time to buy.

Fortune reports that Buffett looks at the relation between total market value of US stocks and Gross Domestic Product, or the total output of the US economy.

When Fortune ran the numbers in 2001, stocks had retreated from their Internet-induced highs, but were still valued at 133% of GDP - suggesting they were overpriced and it wasn't a good time to invest.

Buffett said it might be time to consider buying stocks if the percentage relationship dropped to 70% - 80%. In late January, the ratio was 75%.

In an opinion piece published last October in The New York Times, Buffett said he was personally buying US stocks after holding no equities outside Berkshire Hathaway (BRKA).
Buffett said that he expected to have 100% of his net worth in US stocks if prices continued to fall. Prices have dropped about 10% since mid-October.

But the famously cagey Buffett isn't saying what he bought.

The Oracle of Omaha offered investors a framework for determining when equities are again an attractive investment.

The basic question is no longer "How high is up?" but "How low can things go?"

Do the math - and check your gut.
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No positions in stocks mentioned.
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