Rebuffing Warren Buffett: Japan Is Not a 'Buying Opportunity'

It's pretty daunting to take on the Oracle of Omaha. Warren Buffett, the billionaire investor and chairman of Berkshire Hathaway (BRK.A), recently stated that the extraordinary events in Japan offer a "buying opportunity." Buffett believes the massive earthquake could prompt a new bout of stock buying.

Is he right? Should you overweight your portfolio with Japanese stocks and take advantage of this "opportunity." I don't think so.

A real "buying opportunity" exists when stocks are mispriced. Six billion investors are looking at the price of Japanese stocks. They know every public fact about these stocks. They are well aware of the devastation and uncertainty caused by the earthquake and the instability of the nuclear reactors in Japan. They also understand the rebuilding and government stimulus that is likely to follow in the ensuing months and years. The collective wisdom of these traders has determined that the current price of Japanese stocks is a fair price, taking into consideration all of this news.

In his excellent book, The Wisdom of Crowds, James Surowiecki demonstrated that diverse crowds looking at the same data typically make an accurate assessment. That's precisely what is happening with the determination of the price of Japanese (and all other) stocks and bonds.

There is no "buying opportunity" if Japanese stocks are fairly priced. Investors will not earn above-average returns by investing in these stocks without taking above-average risks. It is the amount of risk undertaken by investors that determines the amount of return.

The Nikkei 225, a stock market index that consists of 225 of the largest publicly traded companies in Japan, increased from 10,000 in 1985 to over 38,000 in December 1989. Investors in Japanese stocks made a bundle if they bought the index early in that decade. Since then, it has been quite a different story. The Nikkei 225 closed at 9,206 on March 18, 2011. The past twenty years has hardly been a "buying opportunity" for investors in Japan.

Prepare to Wait

The current level of uncertainty in the Japanese economy has caused the prices of Japanese stocks to fall. Buyers of those stocks should understand they are taking on the risk of that uncertainty. Over the long term, investors are likely to earn a return that will reward them for stepping in at a time where others were fearful. This reward is unrelated to speculation about the price of Japanese stocks. It is directly related to the current risk of those stocks.

If you decide to take the plunge and buy Japanese stocks, the high risk of those stocks means you should be prepared to wait a long time to reap those expected returns. If you are investing for a short-term killing, you are likely to be disappointed.

The markets are unforgiving. They extract a price for the possibility of high returns. That price is "risk." "Risk" is a two-way street. High risk can mean high returns, but it can also mean significant losses. Just ask anyone who bought the Nikkei 225 since December of 1989.

If you are considering the purchase of Japanese stocks, remember this: Someone will be on the other side of that trade. Don't assume you know something they don't.

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May 29 2011 at 12:32 AM Report abuse rate up rate down Reply

Daniel - Warren didn't say buy Japan but rather has said buy when others are fearfull and sell when they're greedy. Japan's "fallout" has created fear and excess selling in companies who are not exposed. GE dropped over 10% since Japan's nuclear reactor "crisis" yet only a very small portion (

March 21 2011 at 7:25 PM Report abuse rate up rate down Reply

Never buy "damaged goods" when it comes to investing in stocks. There are far too many solid and valuable companies to invest you money in___rather than risk you money on "Damaged Goods"..

March 21 2011 at 6:17 PM Report abuse rate up rate down Reply

So far no one seems to be willing to either recognize or comprehend the magnitude of the destruction in Japan and the far reaching effects it will have on Japan and also on production globally. Even without their nuclear problems___their roads are gone, their rail lines are gone, their water lines are gone, their ports are gone___workers jobs are gone____business owners stores and factories and fishing vessels are gone____not all gone, but enough is now gone to cause a decade or longer to begin to recover. How long since our WTC was destroyed?? almost 10 years and it is not back yet. How long since New Orleans was destroyed__and it is not back yet.
I have no idea as to why___but Reality is always very slow to set in.
Buffet might be correct, if he is only thinking about investments in companies that will benefit from the rebuilding in Japan. But overall, Japan's economy will be suffering and struggling for a decade or longer to come.

March 21 2011 at 6:14 PM Report abuse rate up rate down Reply

By Solin's logic there is never a buying opportunity or a time to sell.

March 21 2011 at 5:17 PM Report abuse rate up rate down Reply

It's hard to believe that anyone can still say market valuations are inherently correct after the events of 2008. The market collapsed because valuations for derivatives and equities were wildly incorrect. It was the moment when the theory of free-market "collective wisdom of traders" was disproven once and for all. When the Federal Reserve became the bank of last resort to the largest corporations & financial institutions in the world, it was a signal that the free-market system of valuations had collapsed, and that the market is not self-correcting, as the free-market model suggests. Only an ideologue can still argue that market valuations are inherently correct. Even Greenspan has admitted the market doesn't work that way, after a lifetime of pushing that view. "Collective self-delusion of traders" has been proven to be the factor at work, and this article is an example of that.

March 21 2011 at 2:56 PM Report abuse +1 rate up rate down Reply

There are two immutable facts in this article, "It's pretty daunting to take on the Oracle of Omaha. Warren Buffett.." and "Over the long term, investors are likely to earn a return that will reward them for stepping in at a time where others were fearful."

March 21 2011 at 2:42 PM Report abuse rate up rate down Reply

Okay. So every stock in the market is always correctly priced and there is never any panic selling that is quickly replaced with a more rational price. Was the American market correctly priced after 9/11? On 3/9/09? As you point out, it's tough to make a living doing the opposite of what Buffet does.

March 21 2011 at 12:25 PM Report abuse rate up rate down Reply
1 reply to mm2048's comment

I believe you are correct. If markets are always rational it would be very difficult to lose money. Ask people who bought houses in California, Nevada and Florida in 2006 how the rational markets theory is working out for them.

March 21 2011 at 2:55 PM Report abuse rate up rate down Reply