“People really have three basic alternatives, short-term cash, which is an option of doing something later, long-time bonds or long-term stocks. And stocks are cheaper than bonds,” Berkshire Hathaway chairman and CEO Warren Buffett said.

By Ian Horswill

Posted on March 10, 2020

Berkshire Hathaway chairman and CEO Warren Buffett has some sage words of advice as the Dow Jones suffered its worst day since October 2008 during the Global Financial Crisis.

Each of the S&P 500, Dow Jones and Nasdaq plummeted more than 7% as fears over the coronavirus outbreak compounded with panic over a Russia-inspired price war in oil markets erased more than US$1.87 trillion from the S&P 500’s market value in 24 hours. In the UK, London’s index of top shares ended the day early 8% lower, wiping £125 billion off major companies. European markets all suffered falls over 7%.

Overnight, contracts on the three US markets turned positive, suggesting the market would rebound to a degree.

As of Monday evening, markets priced in a near 50% probability that the Federal Reserve would step in with a cumulative 100 basis points of rate cuts by the end of their April policy-setting meeting, bringing the lower band on benchmark interest rates down to zero from 1% currently, according to CME Group data.

“After last week’s rate cut, we said the odds that the Fed would cut rates to zero had risen to around 50%,” J P Morgan economist Michael Feroli wrote in a note Monday. “We believe the news flow has worsened since then: Our global colleagues have marked down growth estimates further—particularly in Europe — an increasing number of domestic activities are being cancelled, and the collapse in energy prices could deliver acute pain to certain regional US economies.”

“In this environment we see no good reason for the Fed to ‘keep its powder dry,’ but instead now believe it will cut the interest on excess reserve rate to zero at or before the March 18th meeting,” he said, referring to the amount paid to commercial banks to keep their funds with the Fed.

The World Health Organisation’s Director-General Tedros Adhanom Ghebreyesus said during a briefing on Monday that the “threat of a pandemic (had) become very real,” with the total number of cases topping 109,000 and the death toll breaching 3,800 on Monday. Italy, the country with the highest coronavirus death toll outside of China, extended a lockdown and travel restrictions to residents across the entire country.

Warren Buffett, coronavirus, WHO

Warren Buffett speaking to CNBC after the markets suffered a “correction” last month said that long-term investors shouldn’t be stressing out too much about news headlines.

Warren Buffett said he didn’t have specific thoughts on the virus itself, but investors should always remember that they are buying companies when they invest in stocks.

“The real question is: Has the 10-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours?” Warren Buffett told CNBC‘s Betty Quick. He added that he has owned American Express Co. for more than 20 years and Coca-Cola Co. for more than 40 years through plenty of negative headlines.

Most stocks, including those of the major companies, have dropped more than 10% from new highs. Warren Buffett advised against trying to time the market and said investors should instead focus on the value of the companies they are buying.

“I don’t think anybody knows what the market’s going to do. I think you … know whether you’re making an intelligent purchase at a given price,” he said. In other words, don’t worry if a stock’s share price has been up or down, or where it is going, simply make a purchase judgement on the current valuation of the company.

Warren Buffett said it was not always true that stocks are better long-term investments than bonds, but it has been the case throughout most of US history. Buffett said 30-year Treasury bonds yield around 2% today, and they have no chance for earnings growth for three decades.

He said few investors would jump at an opportunity to buy a stock trading at 50 times earnings with zero earnings growth potential.

“People really have three basic alternatives, short-term cash, which is an option of doing something later, long-time bonds or long-term stocks. And stocks are cheaper than bonds,” Buffett said.

Five of Berkshire Hathaway’s eight largest stock holdings are financial sector stocks, including banks such as Bank of America, Wells Fargo & Co and J P Morgan Chase & Co.

“I feel very good about the banks we own. They’re very attractive compared to most other securities I see,” he said. Berkshire has been decreasing its stake in Wells Fargo while buying shares of Bank of America and others, but Buffett refused to reveal his reasons behind selling Wells Fargo shares.