Investors Shun Buffett's Advice, Seek Shelter in Cash

Howard Gellis, former head of the corporate debt group at Blackstone Group LP, isn’t taking Warren Buffett’s investment advice to pick stocks over cash.

“The events of the last month have reinforced why I’m absolutely not putting any new money in the stock market,” said Gellis, 56, who’s retired and lives in Palm Beach Gardens, Florida. “You shouldn’t put any money in the market you can’t afford to lose.”

U.S. individual investors are sitting tight or returning to cash even as Buffett, chief executive officer of Berkshire Hathaway Inc., and money managers such as Jerome Dodson, president of Parnassus Investments, and Jeff Rubin, director of research at Birinyi Associates, say stocks are a good buying opportunity. Stocks are attractive because of corporate earnings forecasts and favorable valuations, said Rubin of Westport, Connecticut-based Birinyi Associates, a money management and research firm.

Investors had about 60 percent of their portfolios in stocks, 20 percent in bonds and 20 percent in cash, according to a survey last month by the American Association of Individual Investors, a nonprofit investment education group in Chicago. That compares with an average recommendation of 8 percent allocated to cash from strategists at brokerages compiled by Bloomberg, including Bank of America Corp. and JPMorgan Chase & Co.

Photographer: Daniel Acker/Bloomberg

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Photographer: Daniel Acker/Bloomberg

Berkshire Hathaway CEO Warren Buffett whose advice to choose stocks over cash is being ignored by investors .

“Clients want to make sure a dollar stays a dollar and protection from loss is the paramount goal rather than increasing money every day,” said Jane King, president of Fairfield Financial Advisors, a Wellesley, Massachusetts-based fee-only firm with clients who have $5 million to $10 million in net worth.

First Net Withdrawals

Investors pulled an estimated $14 billion from U.S. stock and bond mutual funds in the week ended May 12, the first net withdrawals since March 2009, according to the Investment Company Institute, a trade group in Washington. The Standard & Poor’s 500 Index has declined 5.2 percent this year and has gained 59 percent since the market low in March 2009.

The May 6 market rout that drove the Dow Jones Industrial Average to an almost 1,000-point drop before recovering has contributed to the aversion to risk. The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged as much as 128 percent since the beginning of the year to a high of 45.79 on May 20.

“Trust in the market is elusive at best right now because of erratic economic news and the role greed and avarice played in the market meltdown,” said Helen Modly, a fee-only planner at Focus Wealth Management in Middleburg, Virginia. “Folks naturally wonder who exactly is behind the curtain here.”

Bullish Sentiment Fell

The number of individual investors who are bullish for the next six months fell to 36.6 percent the week ended May 12 compared with a high in 2010 of 48.5 percent, said the American Association of Individual Investors.

Uncertainty about the resolution of Europe’s debt crisis and stabilization of U.S. economic conditions, including employment, fiscal policy, tax policy and the deficit, is keeping investors on the sidelines, said Carmen Reinhart, an economics professor at the University of Maryland in College Park.

Money available for immediate spending from sources such as savings accounts, checking accounts and money-market funds, increased 26 percent to $9.36 trillion as of May 10 compared with $7.44 trillion in May 2007 before the recession began, according to data from the Federal Reserve.

Endorsed Stocks

Buffett has endorsed stocks as Omaha, Nebraska-based Berkshire’s equity sales exceeded its purchases by $5.8 billion and net purchases of fixed-income securities were $8.7 billion in the 18 months ended in March, according to regulatory filings.

“Over the next 10 years or 20 years I’d much rather own U.S. equities than cash or 10- and 20-year bonds,” said Buffett on May 1.

Investors looking for returns may have trouble beating stocks’ potential in the current environment. The average yield for a money-market account, which is a bank product that is insured by the Federal Deposit Insurance Corp., is 0.79 percent and 1.38 percent for a 1-year certificate of deposit, according to data from Bankrate.com.

Retail money-market funds received $2 billion in the week ended May 18, following an inflow of $9.94 billion the previous week, the fourth time in the last 12 months they’ve had positive inflows, said Connie Bugbee, managing editor of Westborough, Massachusetts-based iMoneyNet, which has tracked money-market funds since 1975.

Investors Wary

Investors are wary and reluctant to put money back in stocks even though they may miss another rally, said Joseph Spada, an adviser at Summit Financial Resources based in Parsippany, New Jersey.

“They don’t want to go back to 2008,” said Spada, whose firm has $3 billion in assets under management. “It’s still too fresh in their psyches.”

Looking at other economic declines shows that it usually takes almost three years for retail investors to come back, so “if past is prologue,” investors should return in full force by March 2012, said Dodson, who oversees about $4 billion at San Francisco-based Parnassus, an investment management firm.

For investors who want to reenter the market, the best way back is through dollar-cost averaging, which is investing equal amounts periodically, according to Rubin of Birinyi Associates. He suggested investors who have $100,000 put a third in stocks now, buying shares of companies such as Apple Inc. or Tiffany & Co., and then adding a set percentage every month, regardless of market performance.

‘In to Win’

Diversification is essential in this volatile market, said David Kotok, chairman and chief investment officer of Sarasota, Florida-based Cumberland Advisors Inc., which manages about $1.4 billion. Investors should be diversified across countries, industries, markets and currencies, Kotok said.

Mutual funds that hedge the market and are also liquid, such as Gateway Fund, are attractive, said Spada of Summit Financial Resources. Modly of Focus Wealth said she favors Treasury Inflation-Protected Securities, or TIPS, because of concern that interest rates will rise, and short-term U.S. and international bond funds.

Before the recession, investors didn’t do a good enough job assessing their risk tolerance and are now investing more realistically, said George Pennock, a financial consultant in the Denver office of San Francisco-based Charles Schwab Corp., the largest independent brokerage by client assets.

“Wall Street keeps trying to sell people on ‘you must be in it to win it’ -- maybe that used to work, but not anymore,” Gellis said.

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.

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