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Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Panic can help wise investors

WHEN billionaire investor Warren Buffett talks, I listen.

Most of my fascination with the man comes from the way he made his billions–not by inventing some world-changing technology, but by sitting in his attic, sipping Cherry Cokes, reading everything he could get his hands on and investing in undervalued businesses through his company, Berkshire Hathaway.

I look forward to Buffett’s letter to Berkshire shareholders, track the company’s stock investments and listen to interviews he gives. So I was excited about the April 28 issue of Fortune, which pictures the "Oracle of Omaha" on the cover sipping a root-beer float.

Fortune was granted access to a class Buffett gave in Omaha, Neb., to 150 students from the University of Pennsylvania’s Wharton School. He frequently teaches classes to business students.

Fortune’s article was titled "What Warren Thinks." It delved into Buffett’s thoughts about current economic times. Given that Buffett has made a good deal of his fortune during times of panic over the past 50 years, it’s well worth taking note of his thoughts. Among them:

Turmoil in the credit markets is causing irrational pricing. Buffett talks about Berkshire’s buying about $4 billion worth of auction-rate securities in the past two months. He talks about buying one security at an 11.3 percent yield, and the same day an identical issue going for a 6 percent yield. "When people panic, when fear takes over, or when greed takes over," people react irrationally, Buffett said.

Government regulation is important in capital markets, and the Fed was right to intervene in the Bear Stearns situation. Yet regulation can do only so much, and occasional panics are beneficial to investors. "You don’t want a capital market that functions perfectly if you’re in my business," Buffett said. "People continue to do foolish things no matter what the regulation is, and they always will."

On how he gets investment ideas: "I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report." After holding the shares for five years, Berkshire sold its PetroChina stake last year for $4 billion.

Buffett’s advice to most investors is to stick with low-cost index funds, and to buy them over time. "You just make sure you own a piece of American business, and you don’t buy all at one time," he said. And don’t act on fear or greed.

On the current credit crisis: Buffett said the de-leveraging that’s going on is "going to be painful" and will take time to work through. But he doesn’t buy stocks based on macroeconomic forecasts.

Mortgage-backed securities were sliced up so many times that many banks can’t possibly know exactly what they own. And hence investors can’t understand it either. (One note–Berkshire has been a recent buyer of U.S. Bancorp and Wells Fargo, which are commonly portrayed as two of the more conservative banks.)

Stocks are cheaper now than they were a year ago, and hence a better buy than they were. Over time the American economy "is going to do fine," Buffett says. "But it won’t do fine every year and every week and every month. I mean, if you don’t believe that, forget about buying stocks anyway."