Tags: Advani | Buffett | Bernanke | dividend

Bernanke Makes Buffett Richer

By Ashish Advani   |   Wednesday, 03 Oct 2012 07:35 AM

Warren Buffett is a legend when it comes to investing. I might disagree with his duration strategy of buy and hold, but when he is worth $60 billion, it is hard to argue that his style of investing hasn’t worked.

It never hurts to have friends in high places, no matter how rich you are. Federal Reserve Chairman Ben Bernanke has definitely contributed to bringing back Buffett from the 4th position last year to the 2nd position this year on the Forbes richest people on earth list.

How did he do that you ask? Great question!

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

You see, the world has been undergoing the boom-and-bust cycles of economy for the past 100 years at almost predictable intervals. It is somewhat comforting to know the rules of the game and play accordingly. This time though, Bernanke has broken the rules and the safest ideas are now the risky assets of tomorrow.

I could talk to you about the fact that the historically safest asset on earth, U.S. Treasurys, is now riddled with doubt and is a bubble waiting to burst. But that would be old news.

I want to talk to you about the safe haven of dividend stocks.

You have heard dozens of financial advisers hawk dividend stocks and dividend-yielding exchange-traded funds as musts for your portfolio. In traditional times, I would say, “Go ahead, that makes sense.”

In the current day and time — it is a hazard and a financial trap.

Going back to basics, when the global business environment gets uncertain and predictions of growth lag, we have investors who seek yield and flock to fixed-income investments. Enter bonds and Treasurys. However, in the new Bernanke world, this source of stability has been snatched away from us.

The length of the financial distress, as well as the depth of it, has led to a lot of liquidity chasing U.S. bonds and Treasurys for a long time now. To add to the woes, we have the Fed directly in the market buying U.S. bonds and Treasurys, muddying up the waters. The market manipulation of the 10-year yield is now at epic levels. Cap it all off by the assurances from Bernanke that he will keep the interest rates low for a very long time.

As a result of all of this, yields are at all-time lows, and we have no real incentive to invest in U.S. bonds at 1.6 percent per year for 10 years.

So, where do the investors turn? Another great question!!

They flock to defensive stocks, which happen to be the dividend-yielding stocks in the markets. The stock markets have been in rally mode despite lackluster economic data. But it has not been the cyclical or growth stocks that usually lead a rally that have been rising in value.

It has been the defensive stocks, such as food, utilities, automotives, restaurants, etc., that have been in rally mode. These are the traditional dividend-paying stocks that investors have been jumping into for the past six to nine months instead of investing in bonds. They are the pseudo bonds now.

As we all know, Buffett is the king of defensive stocks, and much of his holdings outside banks have been in non-cyclical stocks such as Coke, Gillette, etc.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

So, as these stocks surged because bonds have become heavily manipulated, Buffett has seen his net worth surge.

The problem with this scenario is that the average investor who relies on traditional lessons in the market will lose their shirt when the defensive stocks correct, and they will be penalized for seeking yield.

I would stay away from dividend-yielding stocks in the U.S. markets for now and seek such investments in fixed income overseas. I would seek dividend stocks in Asia, which are capitalizing on domestic and regional growth.

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