Guru's U-turn keeps market on the alert

WARREN BUFFETT, the legendary US investor who warned last year that American stock prices were too high, appears to have changed his mind and is now saying the market rally has been justified because of low interest rates and the "remarkable" equity returns achieved by companies.

In his annual letter to shareholders in his Berkshire Hathaway investment vehicle, Mr Buffett said there was "no reason to think of stocks as generally over-valued", as long as US interest rates remained low and equity returns remained high.

The apparent U-turn will surprise market watchers who have seen some of Mr Buffett's recent moves into bonds and commodities as a forewarning of a downturn in the US stock market. However, Mr Buffett injected a note of caution, saying the current "remarkable" equity returns achieved by American companies "are not a sure thing to remain at, or even near, their current levels".

Mr Buffett's new stance follows his declaration in his 1996 shareholders' letter that the US stock market was "overheated and that Berkshire had risked paying too much for "virtually all stocks." Since then, the value of the Dow Jones Industrial Average - the leading indicator of the US stock market - has risen by around a third.

Revelations last autumn that Mr Buffett had been buying up US bonds, coupled with news last month that Berkshire Hathaway had bought up a fifth of the world's annual silver supply, convinced many observers that Mr Buffett was anticipating the end of the US bull run. As usual, Mr Buffett's 1997 annual letter to shareholders was peppered with the type of homespun investment philosophy that earned him the nickname "the Forrest Gump of Finance" from American magazine Vanity Fair.

The investment guru warned shareholders not to think of 1997's 34 per cent rise in Berkshire Hathaway's share value as a "great victory". He said: "In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world".

He added that Berkshire Hathaway only just out-paddled the "passive ducks" that invested in the benchmark Standard & Poor's 500 index.

Mr Buffett provided little detail of changes in his individual company holdings, although he did reveal slashed holdings of crude oil built up in 1994 and 1995.

Surprisingly, McDonalds - one of Mr Buffett's favourite stocks - did not feature in the list of "major investees". However, Mr Buffett's letter contained no indication of whether Berkshire had, in fact, reduced its McDonalds stake. In 1996, Berkshire held 4.3 per cent of McDonalds.

Mr Buffett's letter ends with his invitation to shareholders to attend Berkshire's annual general meeting (AGM) in Omaha. Shareholders are also invited to eat with Mr Buffett on the eve of the AGM at Gorat's - his favourite steakhouse. After dinner, shareholders are asked to accompany Mr Buffett to a local Dairy Queen, a fast food chain - which Mr Buffett took control of earlier this year.