Category: Missives

[…] Unless something bad happens to our very defensive list of relatively unpopular value-oriented names in the next two months, we could have the best year of the nearly 14 years of our strategy. Unfortunately for them, many investors would rather tell us what to buy, and that tells us that they will go off the cliff in the not very distant future. This means that we believe most investors will suffer stock market failure and dismal returns over the next decade. We don’t plan on being one of them.

[…] Therefore, based on history, what could happen as the bond market adjusts to much higher permanent rates of inflation as 90 million millennials replace 65 million GenXers in the key 30–45-year-old age bracket dominated by house and car purchases? Where will interest rates go and how will that affect the stock market that is overweighted in technology and multi-billion-dollar growth stocks? Which stock sectors can make money in a much more difficult stock market dealing with much higher interest rates and strong economic growth? […]

Today’s atmosphere is one that we rarely see as investors. This is not like junk bonds in the 1980’s or the run up in Valeant Pharmaceuticals and the other generic drug companies in the 2010’s. There is not a narrow way of looking at today. It is broad. To explain what the psychology is, someone would have to explain an opinion on central bank policy, inflation, crypto currencies, ventures, gamified trading and SPAC-money raising. Our issue with the psychology is that this era is being treated like these things all add up to something greater than the sum. In other words, we are on the steps of something that we’ve never had before. […]

We have entered the phase when the body politic and public opinion are aware that Facebook is disturbing our society. This is very important to us as investors, because the big tech companies make up a disproportionately large part of the S&P 500 Index. The Sherman Antitrust Act was written and enacted because our early leaders were concerned about ruining this experiment in Democratic Capitalism. They felt that the most likely “disturbance” would be “the concentration of capital in vast combinations.” We believe we have reached that point with the FAANG stocks. […]

The talk of inflation today looks much like housing did in 2007. Evidence is mounting everywhere that this is a real long-term problem that is only getting worse. You can read this in the media, but yet security prices don’t reflect how damaging this may be. Bond investors’ pivot from greed to fear could crush seemingly safe investments. Equity investors could be hurt by the stock market failure of an elongated equity euphoria that finally got the dumbest investors on board (millennials). This would be damaging to net worth for individuals and institutions alike. It just goes to show how powerful incentives are. What we will learn is how swiftly they can change. […]

[…] “Every time I look around” this financial euphoria episode is “making me crazy,” because of how long it has lasted, how much the math tied to its carnage makes sense and because the anecdotal evidence has been visible for some time. We are channeling our inner Alan Greenspan, who called the tech bubble “Irrational Exuberance” in late 1996, only to look foolish for nearly four more years. As Art Cashin said recently on CNBC, the Y2K technology spending explosion elongated the tech bubble for another two years. Is the COVID-19 pandemic any different in elongating this euphoria episode? […]

[…] The last thing the cynic is thinking with the McNealy problem is that we are using the past as a guide with Microsoft and Cognizant Technologies (the past) to look at DocuSign (the future). We are also speaking to financial euphoria that we haven’t seen since the late 1990’s, when Scott McNealy was the CEO of Sun Microsystems. The cynic would say that those past instances are irrelevant and you must look at how great these companies are. They will utter the four most damaging words known to investors: it’s different this time. Let us not forget this is an American specialty. “As the nineteenth-century financial writer William Fowler observed, ‘Imagination in this country, lives in the future rather than the past.’ Only in America could a man declare that history was bunk.” This is the McNealy problem.

We have argued for years that the biggest mistake being made by Berkshire Hathaway was not giving shareholders access to the thoughts and investment discipline of their two talented stock pickers, Ted Weschler and Todd Combs. After all, Buffett calls the shareholders “partners” and has not allowed his partners to understand anything about the strategies and results of upwards of $30 billion of shareholder capital. […]

[…] As I’ve often quoted in our conversations with investors lately, Buffett said in the 1998 Berkshire Hathaway Shareholder Meeting that to beat Bobby Fisher you have to play him in any game but chess. To beat the S&P 500 or bonds looking out over 10 years, we believe housing provides our investors a game to succeed. Housing drives average wealth. We theorize that home equity as a percentage of total net worth will go to higher highs than we have ever seen in the data. All this will be driven by the supply shortage and the demographic bump of millennials succeeding. Wall Street gets no such bump.

In the summer of 2020, we didn’t know quite a few things about how Americans would react when they got their social and entertainment choices back. We didn’t have vaccines yet and the media took everyone to the scariest place they could as they framed the future. Why are investors reacting in a similar way to this 2021 spike in positive cases? What opportunities does this create for the long duration common stock investor?