Value in the Four-Minute Mile
Due to the pandemic, there is a sense of permanence on Wall Street to what has transpired. This permanence focuses on the changes that we have seen in the recent five months in our daily lives. These changes include shopping online versus shopping in-person, getting takeout versus sitting in a restaurant and working from home instead of talking sports around the water cooler with our colleagues.
Economic Normality: When? Sooner? Never?
In the time since COVID-19 hit the economy and stock market, there has been three phases. First, the question was ‘when’ will the economy return to pre-COVID normal? Next came ‘sooner or later’? Recently, we have moved to ‘will the economy ever come back’? For long-duration investors like us, what are the investment implications in where we are now in a U.S. stock market with many securities priced for ‘never’?
True Stories of Financial Euphoria Circa 1998-1999
When you are in a financial euphoria episode, like the one we are in currently, it is hard to visualize the impact it has when it breaks. Historically, it is the leading cause of stock market failure. We thought it would be helpful to discuss the secondary impact of the euphoria on common stocks.
The Fear of Stock Market Failure
The stock market is a big place with thousands of investments that you can make as an investor. It’s a frustrating place. There is a myriad of investing disciplines that you can seek out. As a millennial, my generation is learning this for the first time. Don’t kid yourself for one second: they will destroy wealth.
To Hell and Back
Everyone who owned common stocks in the U.S. went through hell in the first quarter of this year. The 36% decline in the S&P 500 Index in February and March was the fastest 36% decline of my lifetime. This hell was especially damaging to those of us who have a positive view of the U.S. economy over the next ten years.
Sins of Omission
With markets extremely difficult and volatile as we work through COVID-19, we thought it would be good to review important parts of our investment discipline. One way to do that is to consider stocks we found via our eight criteria for stock selection and did not keep long enough to get to their ultimate rewards.
Amazon vs. eBay: A Case Study in Business Models
On June 4, 2020, eBay (EBAY) released a business update to make investors aware that the quarantine circumstances have caused their business to perform “significantly better than expectations,” compared to their earnings report on April 29, 2020.
A series of charts and historical evidence exists in late May of 2020 which shows that the S&P 500 Index and the vast majority of institutional investors of all shapes and forms have concentrated their investments in the most popular stocks in the stock market.
Only the Lonely Can Play
Great investment opportunities are lonely. History shows us the crowd behaviors to avoid and the investment market circumstances to capitalize on. We believe we are at one of the great junctures, where the crowd thinks they unequivocally know the future.
We are big fans of Buffett’s theories about businesses with low capital requirements and the ability to throw off cash to owners. Unfortunately, he recently emphasized indexing and didn’t shy folks away from today’s glamour tech stocks which require more and more capital
Searching for Peter Lynch
Late last year, there were three people that we observed as optimistic about the prospects of the oil business. These people were Warren Buffett, Sam Zell and Peter Lynch. In revisiting their comments before and after the shutdown of the economy, we can see that two of the three have significantly altered their opinion.
Berkshire Hathaway Annual Meeting 2020: Buffett Contradicts Himself
Warren Buffett has been arguably the best asset allocator and value stock picker of the last 60 years. We are normally thrilled to sit in his classroom. Quite frankly, we were baffled by the Berkshire Hathaway Annual Meeting held on Saturday in Omaha.
The Façade of Financialized Demand
The capital markets are a highly complex system, where perturbations can cause a tidal change. Every business around the world has been affected by Covid-19. For a profitable business anywhere, this is a calamity. For a business that was losing money before this, it’s a tombstone.
Munger’s Phone is Not Ringing
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.
The Blutarsky Moment
The year after I graduated from college, the movie Animal House debuted in 1981. With everything falling apart for the Delta fraternity, including grades and double-triple probation, all looked lost. At the point when others would give up, senior fraternity member, John Blutarsky, gave a spirited call to arms by reminding everyone that the U.S. didn’t give up when our Naval operations at Pearl Harbor were bombed on December 7, 1941.
Panic Selling Exacerbates Bargains
This year feels so much like late in 1981, late in 1999 and late in 2008 to us. The first reaction by investors was to flush whatever they had left in economically sensitive stocks. Then, as if there hadn’t been enough torture for value investors today, Saudi Arabia decided to chop the knees out from under the oil industry in the U.S.
Beware Lazy and Sleepy Investors
Investors have been awoken to the carnage of the last three weeks. These circumstances, while unenjoyable, may be hiding the actual problems with today’s market. The unforeseen circumstances of today are no different than the past.
Viral Collapse of Economic Optimism
Those of you who have been with us recently know that we are calling the recent decline in value stocks a capitulation in a value investing depression. The coronavirus has sucked all the economic optimism out of a market which has hugged tightly to large growth companies providing reliable sales or earnings momentum.
Berkshire Hathaway: No Urgency in the Urgent Zone
To us, Warren Buffett is the greatest value investor of our time. He wrote the annual letter to his Berkshire Hathaway (BRK.B) shareholders on February 22, 2020. This letter happens to coincide with some of his worst relative performance in the last year to five years.
Ethics in Stock Picking
A truly interesting contradiction is developing in stock markets around the world. A number of major corporate executives are calling for businesses to be judged by something other than the net present value of their future earnings or other conventional business/investment metrics.
Buffett on Aesop and Cinderella
In the annual letter to Berkshire Hathaway shareholders in early 2000, Warren Buffett attempted to remind everyone why value investing works, despite the financial euphoria all around him at that time. We will revisit this valuable lesson and draw implications for reviving enthusiasm for value investing at a point eerily similar to early 2000.
The Auto-matic Era Ahead: It’s Greased Lightning!
In a recent piece, Bloomberg journalist Keith Naughton laid out a wonderful counter-argument to the consensus of opinions for what the future looks like. His piece, “Millennials Could End Up Being a Boon to the U.S. Auto Market,” talks about the good news of the auto businesses future via Benchmark analyst Mike Ward’s research.
Antithesis of 1981
One of our favorite financial writers is Bloomberg’s John Authers. He recently wrote a tongue-in-cheek article about an investment company by the name of Hindsight Capital. In hindsight, or in the company’s case, Hindsight Capital, he talked about what the firm did and what you should have done over the last ten years to produce outstanding returns.
Newton’s Third Law in Action: ESG
One of the exciting buzz words among advisors and institutional investors is ESG, which stands for Environmental, Social and Corporate Governance. This subject is almost always granted a wonderful panel reception at any conference our firm attends as it is the topic du jour.
Riding Winners to a Fault
In a recent appearance on CNBC, we were asked about what we do with stocks we own which have run-up recently. They asked us how we plan to handle Disney (DIS), JPMorgan (JPM) and Target (TGT) after those stocks enjoyed strong price increases this year.
Teeter-Totter Stock Market
One way of thinking about the share price of a common stock is the price range as a teeter-totter. When the psychology of investors is very negative, enthusiasm for the company hits the ground. On the other end, when everyone is in love with a company’s shares, their end of the board can’t seem to get any higher. Where is the board end hitting the ground currently and who is stuck up in the air on a psychological high?
Keynes’ General Greatness from Chapter 12
In 1936, John Maynard Keynes penned his work The General Theory of Employment, Interest and Money. Most of the work was trying to strike against the consensus of economics. Many in the intellectual communities of the west believed in the classical theory of economics.
When Revenue Growth Collapses
In the revenue growth world of the last five years, this make-believe company would be a huge success story. They would tout a 100% growth in sales the second year and ask investors to ignore the doubling of the loss from $100,000 to $200,000 for the sake of growth.
In financial euphoria episodes, investors become immune to the risks of capital destruction by blacking out to their normal risk aversion. Usually these episodes come from extrapolating the recent past out many years into the future. What can we learn from other disciplines about blacking out? How did this happen with investors in the past and where are risks in the U.S. stock market blacked out today?
“Money for Nothin’”: Have we met Dire Straits?
When baby-boomer adults were in their twenties, we sang along with Mark Knopfler and Dire Straits. Their song, “Money for Nothing” defined the era of music videos. We got cable in 1981 and will admit that we were glued to the TV watching music videos of the bands and performers we loved.
Battle Royal Markets
Over the last ten years we’ve seen the rise of the Battle Royal markets and the shift away from one-on-one investing. There are all sorts of different battle royal’s, but the ones I watched as a kid were the biggest events in pro wrestling...
It is human to want to win and we are pre-programmed as children to get what we want quickly. Then we become adults in need of good investment returns and we are forced to operate in longer time frames of five to ten years. Only mavericks want to do what is needed.
Money Goes Where Treated Best
We believe money always goes where it gets treated the best. A recent article detailing the most attractive places in the U.S. for millennials to buy a house included the following cities, and that has implications for investing, not just nesting.
Unforgettable and Uninvestable
One of the all-time classic ballad songs is Nat King Cole’s “Unforgettable.” The song gives us a great picture of what has been going on in the common stock market with meritorious companies which have been thrown in the bargain bin.
As rates fall to zero in most of the world, the line that has been ringing in our mind is “You can check out any time you like, but you can never leave!” This is a chorus investors have sung through their capital allocations. We believe the Eagles provided an excellent understanding of what today’s market is giving investors in their song, Hotel California.
Munger and Icahn Make Oil Investing “Easy”
If you examine the portfolio of the Daily Journal, run by Berkshire Hathaway (BRKB) Vice Chairman Charlie Munger, you will see three main stocks. In 2009, near the market bottom, Munger purchased shares of Wells Fargo (WFC), Bank of America (BAC) and U.S. Bancorp (USB).
A Wizard’s Spell
In a recent interview by CNN’s Fareed Zakaria with Bill Gates the founder of Microsoft, Gates reflected on the wizardry of Steve Jobs and his ability to “cast spells on people.” Since Gates was a tech-magnate in his own right, his “minor wizard” status gave him the ability to identify the spells Jobs cast on employees and the world at large.
The Price of Knowledge
The stock market has a history of torturing highly-valued knowledge. About every seven years a consensus forms around the fastest growing sector of the stock market, or the fastest growing country, or the fastest growing industry.
Patience and Free Cash Flow
Why is free cash flow so important in common stock selection? First, you must think like the owner of an entire business. As a sole owner, the cash flow leftover after all obligations are paid is all yours. The more of it you get, the richer you are!
Value Investing: Business as Usual
For most millennials like myself the last ten years have formed what we believe the business to be: a bull market reinvigorated by the whims of the Federal Reserve Board. If anchoring is a powerful force in investor behavior, the anchor at the depths of our millennial beliefs is that value hasn’t worked.