What does Warren Buffett Know??

As the market grinds higher, despite overvaluation concerns, it’s been increasingly tough to maintain a conservative or even a neutral point of view.  And even if you just have a value-oriented style, like me, you’ve lagged the overall indices, and especially fallen behind growth strategies as the WSJ article documents:

Value investing is mired in one of its worst stretches on record, prompting concerns that the investment style favored by generations of fund managers is losing its effectiveness.

Value stocks, those that are cheaper than many peers relative to earnings or reported net worth and are typically purchased by fund managers anticipating long-term appreciation, have significantly lagged behind their growth stock counterparts this year, compounding a gap that has persisted since the end of the financial crisis.

Instead, investors have gravitated toward companies with fast earnings or price growth, such as Amazon.com Inc., Netflix Inc. and Tesla Inc., and the market’s price-earnings ratio has continued to rise—a trend that many value investors contend cannot continue forever.

And today we learn that the world’s leading value investor, Warren Buffett, is now holding over $100 billion in cash at Berkshire Hathaway.

Buffett is famous for his patience and unwillingness to buy at the wrong (i.e. high) prices. While he no longer looks for dirt cheap investments by favoring great businesses at reasonable prices, the fact that he apparently sees none today should be somewhat of a signal.

In any case the market moves in cycles and what’s unpopular today (Value) will undoubtedly have its return to favor one day.  Conversely chasing the currently hot T-FAANG (TeslaFacebook, Amazon, Apple, Netflix, Google) stocks today is probably not the best strategy if/when mean reversion sets in.

 

Brexit, the new Grexit

When the market hits a rough patch, the pessimists and doomsayers (who are always present) double down on their calls for some form of Armageddon. Last week people cited George Soros  selling stocks and going all in on Gold for fear of another global meltdown (nicely debunked here, and here). And there’s alway some exotic but horrible sounding crisis brewing. Today it’s Brexit, short for Britain leaving the EU. Before that it was Grexit – for Greece. Next month it will be something new (Italexit or Frexit?).

It’s always something and while these may be legitimate harbingers of trouble, the problem is there is no way to know with any reasonable level of surety. In January, markets were down sharply but have since rebounded (mostly). If you sold on that fear you missed that bounce. Markets will constantly try to shake out weak hands and throw head fakes to investors.

For the individual investor there is virtually no way to properly understand, interpret and act on macro global economic issues that have been driving markets in the past week or two. None of us can (or should) try to play that game. Goldman Sachs, JP Morgan et al employ legions of economists, strategists and analysts, few of whom accurately predict market action. And none can do it consistently, although they continue to put out market “notes” for their brokers to share with their clients in an effort to look smart and generate action – sales.

That’s not to say we should all stick our heads in the sand. There are sometimes good reasons to sell something in your portfolio: a stock has run up well past an estimation of fair market value, or its fundamental prospects have changed significantly for the worse.

A classic example of the former is Microsoft (see here) that hit a high in Dec 1999 at the tail of the dotcom bubble. It took over 15 years to trade at that level again. An example of the latter is Pitney Bowes (see here), the near monopolist in business mail systems, that also saw its all time high in 1999, right around the time that email was fully established as the corporate communications tool of choice. Today Pitney Bowes remains a near monopolist, only in a much smaller industry. But even those types of events are hard to see and act on.

So while there will always be uncertainty and concern in the future of the market, the reality is that it’s very hard to accurately interpret and act on macro events.  Being diversified with a long-term horizon is one way to ride through this noise.

Interesting things I read this week:

Jim Cramer Mad Money. Questionable Ethics. Or as one site put it “why does anyone listen to Jim Cramer? HuffPo

From Josh Brown – the perils of guessing what the next “hot sector” is going to be.  TRB

Quote:  there is any doubt in your mind about whether or not this is pure, pathetic performance chasing, let me ease your uncertainty. It is plain and simple, the most perfect form of performance chasing you’ll find. 

Never invest in anything you don’t totally understand – and other lessons shared by parents with their children. NY Times

How a $650,100 lunch with Warren Buffett changed one hedge fund manager’s life Yahoo Finance

Jason Zweig  on how today’s low-interest rates distort valuations WSJ

Quote:  “If you can only buy expensive things,” says Mr. Ilmanen, “at least buy a diverse set of them.”