Buffett Beats Bernanke
By Anand Chokkavelu April 8, 2008


Fed Chairman Ben Bernanke is in a rough spot these days. When he lowers interest rates, the specter of stagflation is raised. When he rescues Bear Stearns (NYSE: BSC) from potential bankruptcy by brokering a sale to JPMorgan Chase (NYSE: JPM), he's chided for guaranteeing billions in private subprime loans with public money.

Of course, if he did nothing, I'm sure he'd be blasted for turning a blind eye as the nation spirals into recession.

Bernanke's problem is that he's tasked with fixing long-term problems with a short-term tool kit. We folks on Main Street leveraged ourselves into homes we couldn't afford while the folks on Wall Street gladly financed us. Greed and irrational exuberance drove both sides for the better part of this decade. Now that the bubble has burst, Bernanke is forced to try to minimize the damage.

Unfortunately for Ben, no one person, even with the strength of the government behind him, has the power to elicit anything more than a temporary shrug from the U.S. economy.

Enter Buffett
Well, there's one more thing we can do: We can learn from Warren Buffett and his stewardship of Berkshire Hathaway (NYSE: BRK-A). Buffett had already learned from the mistakes of others to avoid bubbles in the first place. He was fearful when others were greedy. We should follow his lead.

Back during the Internet bubble, despite charges that he was a dinosaur who couldn't adapt his investing strategy to a new paradigm, Buffett refused to buy into the new economy stocks the rest of us poured money into. He had surely followed the stories of Yahoo! (Nasdaq: YHOO) and Cisco Systems (Nasdaq: CSCO), but, then as now, he refused to buy into companies he couldn't understand or value thoroughly.

To be clear, there's a difference between understanding Yahoo!'s business model and being able to predict the emergence and future dominance of a competitor like Google. Buffett saw hard-to-assess businesses selling for astronomical multiples. He passed. Now, eight years later, both Yahoo! and Cisco trade at less than a third of what they did at the height of the Internet bubble.

Time to feast
Buffett wasn't fooled by the housing bubble, either. Berkshire was largely unscathed by the housing fallout and is trading about 20% higher than it was a year ago. In fact, in this volatile market that has other investors defecting, Buffett is on the prowl. He offered to reinsure -- on very favorable terms -- the municipal bond debt of subprime-stung insurers including Ambac (NYSE: ABK) and MBIA (NYSE: MBI). They didn't accept his offer, but he was being greedy when others were fearful.

No matter. I have a feeling Buffett will soon find a way to deploy at least some of the more than $40 billion of cash on Berkshire's balance sheet. After all, he's been avoiding bubbles and saving up for just such a buying opportunity.

Greed is good ... sometimes
We Foolish investors need to be more Buffett than Bernanke by:

● Taking the long-term view and not grasping at short-term solutions

● Avoiding companies that are simply a ticker and a story

● Finding great companies that have attractive stock prices

● Investing steadily in good times and bad.

Fortunately, there are a lot of great companies with attractive prices now that the market is throwing a fear-driven fire sale. Like Buffett, we should be greedy when others are fearful.