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Portfolio > Economy & Markets > Fixed Income

Alice Schroeder on the Fiscal Cliff, the Risk in Fixed Income—and, Yes, Warren Buffett

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Alice Schroeder, the Bloomberg columnist and former insurance analyst who knows all there is to know about Warren Buffett, offered advisors some sage advice—and a few warnings—about the outlook for the economy post-election day.

Alice SchroederSpeaking Wednesday at the National Association of Personal Financial Advisors’ (NAPFA) 2012 regional conference in Baltimore, Schroeder (left)—who penned the book The Snowball: Warren Buffett and the Business of Life, and is working on another book detailing how Buffett selected his investments and got rich—noted positive trends she sees in the economy that “offset dire risks that people are worried about.”

One of those “dire risks” is the looming fiscal cliff that must be addressed during the lame-duck session. While not elaborating on the outcome in her prepared remarks, Schroeder told AdvisorOne in a separate interview that the nation “had an incredible era of partisan conflict” during Obama’s first administration, and given that the election outcome has not changed the construct of which party controls each chamber of Congress, lawmakers will “have to come together” and agree on a solution, as Americans will not stand for anything less. While “we may go over” the fiscal cliff temporarily, a disaster scenario will likely be averted, she said.

Lawmakers, Schroeder said, ”will protect their own interests by reaching a solution of some kind [on the fiscal cliff] to avoid the ire of their constituents, albeit not necessarily a perfect solution. But something will be done.”

One positive trend Schroeder said she sees is in the area of risk management. “The great growth industry of the 21st century is risk management,” she said. “What investors should be doing now is being creative in scouring the horizon for opportunities in risk management,” adding that “the sophistication in which we manage risk is going to grow very fast.” She also said she “wouldn’t be surprised” to see a risk fund launched sometime soon.

Warren Buffett (Photo: AP)Noting her close relationship with Buffett (right) after following Berkshire Hathaway stock for five years and spending quite a bit of time at the company’s headquarters in Omaha while compiling her book, Schroeder said Buffett “taught me how to think about risk.” His advice: “Never bet more than you can afford to lose in any circumstance,” and the “ultimate shield against risk is valuation.”

Areas that Schroeder said are “underrated by economists,” but offer great promise, are innovations in science, engineering and the virtual world. For instance, cybercrime is a big risk, however, “great things are being created to mitigate that,” she said.

Schroeder told the audience of fee-only planners that they should “go long digital and short services.” The service economy, she said, “is going through what manufacturing went through in the 90s—lots of outsourcing.”

She added, however, that advisors as service professionals are well positioned as they have a “high level of expertise” to bring to clients.

But Schroeder told AdvisorOne that advisors’ “next big challenge” will be in fixed income. “The risk in fixed income will continue to rise.” She added: “the risk is of rates moving higher, leaving investors stuck in bonds that yield below market rates and therefore, could only be sold at a loss.”

So how did Buffett get so rich? Schroeder attributes it to his “intense focus,” the fact that he’s always ahead of the trend, and because he “tap dances” his way to work. Drawing on her time spent at Berkshire headquarters, she said Buffett “works with his door shut and shutters closed all the time,” rarely emerging for too long.

Another thing she learned about Buffett: he loves cash. “He views cash as holding a call option—on every asset class, with no expiration date, and one of the most valuable options you can have.”

See Gib Watson of Prima | Envestnet’s latest blog on AdvisorOne on “Helping Clients Ride Out the Coming Fixed Income Storm”


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