You have to love The Wall Street Journal writer, Jason Zweig. His extremely inciteful “Intelligent Investor” column could be called “Jason’s Wet Blanket,” because he seems to throw a wet blanket on most investment disciplines in U.S. stocks. This week’s wet blanket is designed to create even more desperation for value investors via his interview with Charlie Munger.
Rather than telling Zweig to be “greedy when others are fearful,” Munger talked about protecting Berkshire Hathaway (BRK) “for those who have 90% of their net worth in the stock.” Munger’s first point was that nobody has called him and Warren Buffett offering what they call “elephant-sized” investments or desperation bargains. “The typical reaction is that people are frozen," he said. “The playbook doesn’t have this as a possibility,” he added, referring to the coronavirus economic contraction.
Second, Munger is perplexed by this government-mandated recession which appears unanalyzable to him. He said, “This thing is different (aka this time is different)!” We love that Munger seized on the thought that this time is different, because IT IS AWAYS DIFFERENT! However, each time that is different “rhymes” with past situations. If you weren’t focused on protecting those who have 90% of their net worth in your stock, you might go back to analogous situations to look for those rhymes.
“If there is light at the end of the tunnel, you are too late!” Sir John Templeton
Unfortunately, Jason Zweig made little effort to flush out what Munger said in relation to historical context. He didn’t compare this to 1972-1974 when an oil embargo, gas rationing and inflation were the virus. Berkshire Hathaway is gigantic, owning vast swaths of the U.S. economy in wholly-owned businesses. It came into this with over $120 billion in cash and produces copious amounts of new cash each quarter. Munger has pointed out every year for the last ten years at the Berkshire Annual Meeting that its size will retard future returns. He forgot to mention what would happen if large-cap stocks got too expensive and then got even more expensive by profiting from everyone’s misery in the quarantine.
Zweig chose to not talk about the historical divide between small and large-cap stocks or value versus growth, because Berkshire Hathaway has no ability, due to size limitations, to participate in the decimated sectors.
Source: Cypress Research, March 27, 2020. Data for the time period 1/1/970 – 1/31/2020.
Two months ago, the S&P 500 Index was at all-time highs, 19-times earnings and massively over-weighted in popular large growth companies. Those quality growth names have soared on a relative basis in this miserable market environment, just like the “Nifty-Fifty” stocks did in 1972. Bingeing on large growth glamour in 1972 led to a devastating bear market in 1973-1974 which lasted 22 months and removed 40% of the S&P 500 market cap. Buffett was interviewed at the bottom in 1974 and said, “I feel like an over-sexed guy in a harem!”