Migrating Blog

Long time no see!

Thanks for all the comments, even though I realized I haven't posted a single thing in just over 2 years. I still get emails from old readers and new readers alike. There are people who discovered this blog after my last blog post back in 2021, and they email me about this or that. That is really amazing, and I am happy that my writing has come in handy for some of you folks. 

Anyway, I have decided to finally migrate this blog to a Wordpress blog. It can be found here: 

http://brklyninvestor.com/

I am still working on it, and I do plan on fixing it up and adding some stuff to it. I know I said that before when I set up a different website (brklninvestor.com), but I didn't really do much there... Sorry about that. That is still there, and it's a good place to keep static files. I may eventually move that stuff over to the new WP blog as it is easy to just put static pages on a WP site and leave it there; there really is no reason to have another website running... 

Honestly, when I was posting here a lot, most of my time was spent on stocks; reading annual reports, listening to conference calls, reading business history books, watching John Malone interviews on CNBC etc... 

But the past few years have been very different for me, spending a lot of time on things other than stocks. Part of it was that for a while, there really weren't that many interesting things to do or look at, and part of it was just laziness, as in my portfolio, things that were working were working really, really well, and there wasn't any need to do much more. It's like, where can I find anything to do better? I have more to say on 'value'; I will make a post on that at the new site. 

Some of you have asked if I am fine, and I am doing great. Fortunately, there have been no personal or family issues; everyone around me are and have been fine, healthy etc.  I have no issues with anything. 

Some of you ask to meet, but I'm sorry to say I am still sort of a hermit; I really have not come out or confessed to anyone that I am the author of this blog, and am sort of not ready to do that, so unfortunately, our relationship will have to be virtual. 

Anyway, I don't really have much new to say, believe it or not, with what's going on in the world, but I do plan on posting some thoughts on the new blog. 

This blog will stay here as is. It's free, so there is no reason to kill it or anything. I can just leave it here as an archive. 

Stay tuned and see you at the new site!

BRK 2021 Annual Meeting

So, like many of you, I watched the BRK annual meeting (replay) as usual. It was nice to have Ajit and Greg join Buffett and Munger on the stage. Buffett and Munger both looked great, and it was good to see that duo in action again. 

There were a few interesting things this time. This is by no means a summary of the meeting or anything close to it; I will just talk about things that stood out to me or things that I thought about. I know I've said that before and then sort of ran through the various topics that came up. But in this post, really, I don't mention most topics that came up.

Opening Statement 

The first interesting thing was Buffett's comments before the Q&A started. He showed a couple of interesting tables. The first one is the top market cap companies of the world as of March 31, 2021. Here is the list: 

He pointed out that the top 5 out of 6 companies are U.S. companies. People who think the U.S. is on the decline should take note of this. The U.S. has a system that works etc.  He said that in 1790, we had 3.9 million people in the U.S., 600K of whom were slaves. Ireland had a larger population, Russia had 5x more people, Ukraine had 2x more people etc...  And yet, here we are in 2021 with 5 of the top 6 companies around the world U.S. based.

And then he talked about indexing and how pros are often wrong. He asked, of the top 20 largest companies on the 2021 list, how many will still be there 30 years from now. Then he showed us the list of top global companies in 1989 and pointed out that none of them are on the list today. 

Here is the 1989 list:

This is kind of scary because at the time, there were all these books out there, like Japan as Number One and many others that basically said that Japan has the industrial / political structure, hard-working, obedient and highly educated work force and many other traits that make them an inevitable force that will take over the world. Well, that didn't quite work out. 

So it does scare me a little what might happen to the top 20 list today. Buffett meant to show the greatness of America by showing us the top 20 list of today, but I don't know if he realizes that showing us the 1989 list may actually be telling us that we are peaking in our U.S. dominance. That would be a more consistent message from looking at these two tables.

 

Being Right on Industry Doesn't Equal Easy Stockpicking

The other thing he pointed out is that being right about the future of an industry does not lead to easy investment decisions. People are all excited about electric vehicles and whatnot, but he points out that the automobile in the early 1900s was the future too, and yet, I think he said more than 2,000 companies entered that field back then, and there were only three by 2009; and two of those went bankrupt. 

He showed a slide of some of the many companies in the auto business, but since there were so many companies, he only showed a single slide of companies whose names started with "Ma" (there were too many to list even just companies starting with the letter "M").

The same argument was made in the 1999-2000 internet bubble. People (I think Buffett / Munger too) pointed out that there were many, many railroad companies that jumped on the railroad bandwagon in the 1800s, and only a few survived. 

So being right about the future in terms of industries does not guarantee success, whether it be electric vehicles, cloud, AI, alternative energy or whatever... 

 

BRK vs. S&P 500 

Someone asked what the argument is for owning BRK over the S&P 500 after 15 years of underperformance. Munger said that he prefers BRK as it owns above average businesses. Buffett said that he has never recommended owning BRK. If you can't evaluate or analyze businesses, you should just own the S&P 500 index. He pointed out that he has always said this, and even has it in his will. 

That made me think about this for a second too. Why own BRK over the S&P 500 index? 

Well, let's think about the two things that Buffett always tells you to do. When evaluating a business, you have to answer two questions:

1. Is it a good business?
2. Is it fairly valued?

We never evaluate businesses based on how the stock price performed in the past. Well, in this case, there is some need to evaluate that. But hold off on that for a second. 

If you look at BRK, the answer to question 1 is probably, yes. It's a good business. It is certainly a collection of above average businesses. And 2? Probably yes there too. Definitely not overvalued by any measure. 

How about the S&P 500 index? Is it a good business? Well, it is average, at best. Right? And then how about question number 2. Is it fairly valued? Well, this can get tricky. I tend to believe we are not in bubble territory on the index overall, and a P/E in the low 20s in the current interest rate environment is not expensive at all. 

But there are pockets, maybe even big pockets of egregious overvaluation in the index. Like, say, TSLA.  I tend to think the large tech companies are not overvalued (not cheap either). But OK, many think the S&P 500 index is overvalued. 

So where does that leave us? The BRK is an above average business trading at a reasonable value whereas the S&P 500 index is an average business possibly trading at above reasonable value, or even at best, reasonable value. 

Here, you have to be with Munger. It's BRK; no-brainer. 

What about the past underperformance? Well, Munger calls it an accident of history. He believes that a collection of superior businesses will do better than a collection of average businesses over time. That makes total sense. 

So when you put it like that, and you sort of break it down like the above, it makes sense to own, or keep owning BRK despite it's long term underperformance. Too much Kool-Aid for me?

Now, I am sure there are others here that would actually prefer the S&P 500 index; especially the tech lovers who think BRK is a dinosaur. That is not a totally unreasonable view either. It's a matter of taste, to some extent. And it's true that over time, an index will evolve (S&P survived past century) and it is not at all guaranteed that an individual company will (GE?).

Kraft-Heinz / Myths

In response to a question about Kraft-Heinz (he said he is not in a position to give advice on KHC), Buffett started to talk about the problems caused by myths created about organizations. These myths can be handed down to the next CEO and on and on. This can lead to enormous errors. It happens all the time in business and goes beyond business. This is a possible topic for a future letter to shareholders, he said. 

Munger added that when you prattle on all the time, you pound ideas back into your head even if it's wrong. One of his favorite quotes is by Sir Cedrick Hardwicke, 

I have been a great actor for so long that I no longer know what I truly think on any subject.

Munger said it happens to a lot of people, and to virtually every politician. It is totally embedded in corporate world.

It makes you wonder what you are pounding into your head every day all the time, and what of those may actually be wrong. And it makes me wonder what the cases are that Buffett has in mind, and what they might have been at KHC (although we may guess it has to do with cost management etc.). 

For me, two things stand out that I used to pound in my head early on but revised over the years. One was the aversion to technology investing driven by what Buffett always said. But I have sort of been more comfortable with technology. I would not have touched them in the 1990s (and didn't), but have been much more open to them. 

The other thing is valuation. For a long time, I was also old-school valuation, looking at P/E ratios and things like that, and insisting on things below 20x P/E. But I quickly realized that there are not that many great companies at that kind of valuation, so I was more willing to pay up for businesses I really like. The way I tempered the risk and satisfied my aversion to high values was to simply not put too much money into expensive names. This allowed me to enjoy some decent growth while not having my P/L swing wildly every day. This is not a recent thing for me, this goes way back as I have been an early investor in CMG, for example.

The other one that is making me think hard right now is buy-and-hold forever. This is also one of those hard rules that a lot of us follow, although when things get really stupid, I do sell things. In a market like today, it makes you really think hard about everything you own. 

This may not be exactly what Buffett is talking about with corporate myths, but these things popped up in my head when he talked about myths.

Anyway, as usual, if you have time, check out the replay. It is pretty good. Mostly t he usual stuff, but it's free to watch (and fun). 

Happy New Year! Bubble Yet?

What a year it's been. Crazy. And what a crazy year it already is so far. I haven't been posting much because there hasn't really been much to say. Like everyone else, I am doom-scrolling and wondering when this nightmare will end.

 

I have no particular view on how Covid will play out, so have no opinion whatsoever on travel and other hugely-impacted sectors. My guess is as good as anyone else's, so I have done literally nothing in my portfolio since this all started. In fact, I don't think I have even bought or sold a single stock in all of 2020.

So to just get that out of the way. And all these predictions about what the world would like like post-Covid, as usual, is all nonsense. Just filler material for magazines, newspapers etc. Nobody really knows. Some say we will return, eventually, to what we were before. Others say no way, we are not going back into offices and stores. But the truth will be somewhere in between.

 

Howard Marks 

Anyway, I did notice a few things that made me want to make a post. One is that Howard Marks released a memo which was kind of stunning, I'm sure, for many value investors. His latest post, titled Something of Value discusses the comparison between growth and value and even Bitcoin. He acknowledges that recent business models may justify higher valuations than in the past, and even goes as far as to withdraw, for the moment, his previous judgement on Bitcoin; he now says he doesn't understand it as well as he thought, so will refrain from making a judgement on it for now. 

 

Buffett has always said that growth and value is joined at the hip, and Joel Greenblatt has explained that value investing is about buying something for less than it's worth, not just buying stuff that looks cheap on an absolute basis. So none of this is particularly new. 

But I guess Marks jumped into the discussion because there is so much talk about mean reversion and markets going back to value. Within that context, I have said that even though there are cyclical tendencies that seem to go back and forth between growth and value, a lot of the recent widening of the gap may be due to dying industries; many industries are going to literally be obsolete. And on the other end of the spectrum is the different dynamics of the large, profitable tech businesses.

 

I saw record stores go away very quickly, even when people in the industry kept telling me that it won't go away so fast as people love physical CD's, liner notes, plus people hate waiting for their music to download. Apparently, some of these people didn't understand the exponential nature of technology. Book stores shouldn't exist either (and yes, book-lovers keep telling me that they can't read on their phones or Kindles; that they need real books to touch. This too will change. This is not to say that small, specialty bookstores can't survive and exist). 

 

If you look around, and especially in the Covid world, you realize how the world is built around old technologies and capabilities. As Buffett says, if you were to rebuild something today knowing what we know now, and having the technology that we do now, would you build it the same way? (He actually asked if you would create the same company today from scratch, but close enough) Of course not. Think about that for a second, and you will see how much of what is in this world is obsolete. 

 

Anyway, as I said, do you really want to be short AMZN and long BBBY? Well, OK, BBBY had a tremendous rally off the lows, and look at GME!  Good thing I don't like to short things (and even if I did, I would never let a short go too far against me; I would cover quickly. I learned that lesson years ago. TSLA shows that many haven't learned that yet...). 

 

Back in my more short-term-speculating days, we would take something like Marks' recent memo and pass it around as a capitulation of a great investor, sort of like Julian Robertson throwing in the towel in 1999/2000, or Stanley Druckenmiller flipping and going long tech stocks during that bubble. 

My reaction this time, though, was that finally, he and much of the world is coming closer to my view. Which, of course, is sort of worrisome. I liked loving banks in 2011 when nobody loved them, and stocks pretty much all throughout this period as people kept calling this market a bubble. 

Shiller

And then Shiller said recently that the market is not all that overvalued if you adjust it for real interest rates. I saw a chart of that somewhere, but can't find it now. I was going to paste it here, but I guess you can imagine what it would look like. It would look very different than the scary looking raw CAPE-10 charts.

I've been saying this for years, that even if we adjust long term rates back to 4% (from slightly over 1% now), that the market can be fairly valued at 25x. 

 

I think I said something to the effect that, if, over the next decade, long term rates average 4%, I would not at all be surprised if the market P/E averaged 25x over that period. This means that the market can get up to 40x P/E in euphoric times and go down to 12x in panics. Remember, back in more 'normal' times, we thought that P/E's were normal at around 14x, and during bubbles, it went up to over 20x, and panic lows were around 7x P/E.

So that's all I'm doing. I'm taking what a future normal P/E ratio might look like and then giving it a high/low range based on what the market used to do around the average in the old days. 

I know people argue that interest rates and earnings yields only correlated for certain parts of history, and hasn't done so in the longer term and in other countries. But I can't get around the fact that asset prices are largely determined by interest rates, so there should be a relationship. 

Anyway, I think a lot of people are anchored to this idea that a normal P/E ratio is around 14x and think interest rates should be in the 6-8% range. 

 

People often say that if interest rates tick up, we will no longer be able to justify these high P/E ratios. This is true. But again, we would have to see long term rates go above 4% for us to even worry about that. Sure, the market is going to tank if we get rates to 1.2%, 1.5%, or even 2.0%. Markets will react to that for sure. But, when that happens, keep in mind that ALL of my comments are assuming a 4% long term rate.

Singularity

By the way, I still recommend the same old books for investors, like Security Analysis, but the book that may have had the most impact on me in terms of investing in more recent years might be The Singularity is Near. I've owned this book for years but only read it in the past few years. This really explains what is happening in the tech world. When I read this, I immediately understood what is going to happen to a lot of businesses, so it helped me stay away from them, and made me appreciate the 'winner-take-all' businesses. The moat in this century is very different than the moat that Buffett talks about. Well, Buffett never restricted his definition of moats to old-world businesses.

Anyway, with a lot of challenges ahead, I don't know if these winner-take-all businesses will keep winning. There is a lot of pressure to rein in these folks, but I don't know how successful that will be. We don't want to kill the golden goose in this country. 

Market Strong While the World Suffers

People talk about this all the time. With so much suffering, joblessness, starvation and death, the market continues to make new highs. Our nation's capitol is stormed and D.C. today looks like the green zone in Iraq. And yet, the market continues to make new highs. What's up with that? 

 

Well, first of all, the odds of a 'coup' succeeding was always zero (let's not debate what you want to call that. I don't care either way). There was no chance a civil war would have started. The question was always just how many people are going to get hurt. So the market not reacting to that is not abnormal at all since the market reacts to future potential earnings and economic growth, which is still intact (whatever you expect). 

 

And as for the economic, social and physical suffering in the world, when the government writes such huge checks, that money tends to go straight to the bottom line of a lot of companies. OK, maybe mostly to AMZN, WMT, COST, TGT and other big corporations. But guess what? Those big corporations are all listed companies, right? So small businesses (that are not listed) fail. Small restaurants go out of business. You want to eat out? Guess who is left standing? Yes, the national and international chains. So profits are moving from unlisted entities to listed entities. That is kind of huge when you think about it.

 

Look at CMG. I have been a fan for years, and have owned this for years (first purchase was in the $30s).  Even I think it's nuts how expensive it is. But they are just taking market share, or soon will do so because of Covid. I know this is not permanent, and eventually things will go back to normal. But I wonder how much  business will go back. If you are going to start a new business, who wants to open a new restaurant when insurers won't cover for pandemic closures? And who knows when the next one will come? Experts say that Covid-19 is not even the "big one" they are worried about.

Also, when there is stimulus where the government cuts taxes on the rich, a lot of those savings aren't injected back into the economy. Maybe they go into bonds or cash balances. Some of it will go to spending. Some go into real estate and other investments. But when you write checks to lower income folks, they are going to be more likely to spend a bigger percentage of that. 

Well, having said that, I know there is data showing that a lot of that money actually didn't get spent, but went to pay down debt, savings, and some to Robinhood trading accounts, and probably into Bitcoin. 

Renaissance Technologies

By the way, (and what's a Brooklyn Investor post without a random tangent / digression), people are wondering how the Medallion fund can return 70% while the institutional funds for outside investors are down 20-30%. Well, when they announced the new funds for outside investors, I knew it wasn't going to work, or wasn't going to be as good as the Medallion fund. 

This is a very important point to keep in mind. The Medallion fund has such high returns and is much more stable because they do a lot more trades and analyze every anomaly with many more data points. I was once involved in HFT / stat arb, and we had tons of data to work with even from the past three months, as we had every single trade (tick data) for every single stock, or at least the listed stocks. That's a lot of data. With that kind of data, when you find an anomaly, you are going to have a very, very statistically robust way of testing to see if it is meaningful, and you will have plenty of opportunities to make those trades to actually realize that statistical edge. And when you do so many trades like that, your returns tend to get more consistent, which means that you can lever up, which further boosts your returns. Just imagine the lumpiness of your daily revenues in a casino with 10 slot machines vs. one with 10,000 slot machines.

Now, if you try to apply some of this to longer term data, say, daily data, you suddenly have a small fraction of data to deal with. And, to me, much more significantly, you are now dealing with data that the human eye can see (such as P/E ratios, opening and closing prices). Anomalies found in tick-data is invisible to humans, and only visible to machines that have access to the data and models that can process and analyze them. 

 

Put it this way. If you use daily closing prices, there may be 253 prices per year. Over 100 years, that's 25,300 data points. Now, a fast model might use tick data, but let's assume you use prices from every second of the day. If there are 6.5 hours of trading per day,  that's 390 minutes, or 23,400 seconds per day. So in one day, a stock can generate almost as much data as a 100 year history of a stock using daily prices. Go back 3 months and you see how much data you can work with. So when Renaissance says there is not enough data for their longer models, this is what they mean.

Looking at it this way, you see how silly the bubble-callers comments are. They are making predictions based on something that happened, like, two or three times in the past century (some include all the bubbles in history, but it's hard to compare other bubbles to the U.S. market). That's not a lot of data points to test the robustness of any claim you make. 

So when people say, this is like 1929, 1987 or 1999, well, for it to be meaningful, you would have to have at least 30 of those events with the same variables at the same levels with most of them giving the same or similar results for it to be meaningful. 

There was a famous quant fund that went belly up in the 90s, and it was shocking what kind of trades they were making. The analysis was something like, the last ten times this has happened, the market did this on average. It's like, what? You are going to make a prediction on only ten samples?!  That makes no sense at all. 

And yet, there are still plenty of people still making those sorts of predictions. They see that P/E's were over 20x in 1929, 1987 and 1999 so assume that every time the P/E gets over 20x, the market is going to crash. Or something like that. And then they line up all these valuations metrics to show how insane everything is when they are all actually showing a single metric as they are all related / correlated factors; any statistically robust, well-built model would assign most of them as a single factor. For a statistical model to be meaningful, input factors have to be uncorrelated.

The fast models used by Medallion (of course, I have no idea what they do, but do guess they are very fast models) and others use a lot of data and only make trades where there is a statistically meaningful chance that it will be profitable. And they will make enough trades for that statistic to play out. For example, if you have a 60% chance of success, but you are going to die because there is a 40% chance of death, then that's not a good bet. But if you can roll a dice that is 60% in your favor and you are allowed to roll it 100 or 1000 times, then that's a good bet. Odds are in your favor and you have enough opportunities for that statistic to be meaningful.

This is how casinos work. You want as many slot machines and gaming tables as possible, with as much capacity utilization as possible. With a slight edge in your favor, you can print money. 

People who try to forecast the markets with flimsy models using very few data points is like a guy trying to run a casino with one or two slot machines, and wondering why he is getting killed. Well, most of them don't even have the odds in their favor as they haven't even calculated that correctly.

 

By the way, digressing from a digression, this is the same reason why most technical analysis is garbage. Books will show you all these amazing crashes following trendline breaks, head and shoulders tops and bottoms and whatnot, but they never show you the patterns that didn't work out. How many trendline breaks didn't lead to a crash? If you can't answer that question, then it is totally meaningless. Early in my career, I spent entire days and nights sitting in front of a computer (for one of the top hedge funds) trying to validate everything I was reading in books about technical analysis, and was unable to validate any pattern; needless to say, everything was random!

 

So next time you hear someone give you this technical baloney, ask them for data to prove it.

 

Anyway, moving on...

So, Are We in a Bubble?!

OK, so there is a lot of anecdotal evidence that there is a bubble going on. IPO's, SPACs, Robinhood trading, Bitcoin, just all sorts of stuff. 

Sure, there is a lot of speculation going on, and there are a lot of things I would stay away from. 

But at the end of the day, for me, as a stock investor, I just care about valuations. Is the stock market in a "historic bubble"? I don't know, but it doesn't really look like it. 

With interest rates at zero, and negative real interest rates, and all this monetary  AND fiscal pump priming, the market should be at 40-50x earnings. Well, I mean if this was a real bubble, it would be there. At that level, then yes, I would worry that we are in a bubble, and I would probably increase my cash position substantially (despite my "don't  time the market!" stance). Even at over 30x, I would probably go carefully through my portfolio and dump stuff that is not 'reasonable'. Or I would do it in a more conservative way. Well, this is something that should be done every day anyway.

But now? It really doesn't feel that way to me. I am not predicting that we would get there, and I definitely would prefer it not do that as it would be quite a hassle. You could potentially be looking at decades of no returns from the stock market, like Japan. So I would want us to avoid that.

Speaking of Japan, the Japanese stock market hasn't yet recovered it's 1989 high. In that kind of bubble, yes, I would worry about owning stocks. But remember, P/E ratios back then were 60-80x for the whole market. That's too expensive to grow earnings into in a decade or even two, not to mention the government spending the first two decades preventing any restructuring etc... that would help the market recover. It was all about protecting / defending the status quo. Things seem to be changing slowly recently, though. 

So, if we see that here (that kind of insane P/E), then yes, even I would start pounding the table to dump stocks, regardless of interest rates.

But I don't see that. In some places, yes, valuations are silly, but who cares? If you owned, say, BRK in 1999, who cares what the market valued Pets.com at? Just don't buy Pets.com! 

This is another long post for another day, but there is hope even in a mega-bubble situation. We saw it in 1999 when reasonably priced stocks did really well through the bubble collapse. Even in Japan, I think there were some really good, solid, blue-chips that did really well after the bubble. Small and medium caps did really well too. So hopefully, there will be opportunities even in that scenario.

People constantly worry about 20-30% corrections. I don't worry about those at all, and I assume we will have a lot of those over even the next 3-5 years. I don't care about things like that too much. In fact, I don't even worry too much about a 1999-like bubble, because if you look back, if you owned solid, decent stocks and held on through it, you would have been fine. I expect the same going forward. 

For me, I would only worry about a situation like 1989 Japan where things were so expensive that it might take years to work off the valuation, but even then, as I said, I would focus company by company and not worry too much about the overall market.

Sogo Shosha

Not quite a whale, and pretty small investment, but interesting nonetheless. As usual, people are trying to read all sorts of things into this investment, from bullishness on Japan, bearishness on the U.S., the U.S. dollar, inflation hedge / exposure to natural resources etc. It almost feels like nobody ever reads anything Buffett writes. He doesn't base investments on themes like inflation or economic views or views on foreign currency exchange rates. 

But anyway, one can only assume that Buffett feels that these Japanese trading companies are decent businesses with decent managements trading at attractive prices.

Foreign Investments 

This investment really reminds me of his Korean stock trade a while back. He said he was flipping through a Korean company handbook and noticed that a lot of stocks were trading at very low valuations. It seemed like he didn't need to dig into the details of every company to know that they were cheap enough and buying a basket would be profitable. This shosha investment kind of feels like that.

 

I remember noticing a while back in a photo or video of Buffett in his office that the Japan Company Handbook was sitting on his desk. So you knew he was flipping through that thing one company at a time looking for bargains. This may have been how he found this group. I would not be surprised if he has been reading all the annual reports of the big Japanese companies for years. Why wouldn't he, with so much capital to allocate?

First of all, I won't go into too much detail about the Japanese trading companies. They all have English annual reports on their websites, and you can just read about them on Wikipedia etc.

But I have to say my first reaction was not positive. I think many of us who are familiar with the Japanese market were a bit surprised. One pro said he was "disappointed". 

What does he see?!

Anyway, first, let's see what Buffett may be seeing. Since he bought five stocks, this is clearly not about any individual company or management. 

Let's just look at the big picture on these names. This table below is current as of early September 2020.

 

Since he has been accumulating these stocks for the past year or so, the most recent annual report he would have seen last year would have been for the year-ended in March, 2019 or more likely 2018 (as English versions of annual reports come out late). I have highlighted the March 2019 year figures, but he may have evaluated things based on 2018 figures too.

 

Prices haven't moved much (except Itochu), they are within sort of the range they have been for the past couple of years. So the table just compares everything to current prices.

 

In short, what he was seeing was a group of companies earning double-digit ROEs with single-digit P/Es and P/Bs below 1 (except Itochu).  Where can you get that combination? Maybe in some emerging markets. These are blue-chip companies with solid reputations, at least socially (banks and shosha were the two industries that parents traditionally wanted their fresh college grads to join). 

Initial Reaction

So just by the numbers, this makes total sense. No mystery here. It is exactly the sort of thing Buffett would jump into.

What about the reputation of incompetent Japanese management? That's what I would worry about most. Japanese management is and has been improving over the past few years, but I can't say I would be completely comfortable with management there, particularly in the big companies.

There are many cultural reasons why management in Japan has been so inept over the years. Things like seniority, lifetime employment, constant annual rotations of staff and the short put nature of employee positions have been really detrimental to companies there. I do have first-hand experience with this. It is getting better, I hear, but if you remember how a Korean airlines flight went down because it was culturally unacceptable for a co-pilot to point out an error to the pilot, cultural factors can be quite destructive. 

In Japan, one of the big ones is the notion of seniority. Meritocracy is increasing over there, but there is still a notion that older people know better so must be respected and not challenged. A lot of this gets mixed in with the natural tendency to defend your own turf. This combination may make it difficult for energetic, creative, competent young people to move up to benefit the company. Also, the lifetime employment 'promise' makes it difficult to make room for more competent employees. This combination of lifetime employment and seniority can be lethal in a fast changing, dynamic world.

The other big problem is that a lot of large companies tended to want to rotate people every three years to give them a broad experience to prepare them for senior positions at HQ. I remember dealing with some of these employees in NY and was shocked at how things worked. They come over to NY knowing nothing about finance, for example, and they speculate using firm capital not knowing what they are doing. Of course, by the time they start to understand what is happening, they are 'rotated' out to London or somewhere else. So they barely get to understand anything before moving on and they eventually end up at the head office, not really knowing much.

 

There were some trading companies that were close to blowing up or had to merge because they were on the verge of bankruptcy, and given my first-hand observations, that was no surprise at all. Did I tell you about one of the trading companies that would call our swap desk every day and ask for anything above a certain LIBOR spread? And they were indifferent to the risk; they didn't care. They mechanically just bought anything above a certain hurdle rate. I used to get invited sometimes to client dinners and I heard it directly too; they don't care about the risk, just give them something with this yield. They are willing to take whatever risk is implied in that given yield. Why this rate? Oh, that's our funding rate. Oh. Well, you have to take some risk, then. That's OK. Do you care what kind of risk you take? No, we just need to clear our funding rate. But structured products can be very risky. That's OK, we like structured products. etc...  You get the point. It was crazy.

 

This is one reason, by the way, why I thought a lot of the criticism against the banks during the financial crisis was baloney; a lot of these clients knew what they were doing, knew the risk they were taking. Or they simply didn't want to hear anything. They just wanted certain things regardless of the risk. Of course, I was never a salesman so would simply state facts, and they were like, OK. That's fine with us. Scary stuff. I'm sure things are better now (but I wonder. I just finished the GE book, and Immelt sounds very much like a clueless salaryman! Frightening. Except GE may have been worse; how is all of that stuff not fraud?!).

Of course, I am making all these sweeping, generalized statements, but here's another thing that you may have noticed. Some Japanese corporations do really well globally, particularly the manufacturers. If you look at Toyota, Canon, Sharp and many others, they have tended to do well in the past (although a lot of them are now under pressure from Korean / Chinese competitors). They succeeded because they mastered their craft in Japan and exported around the world and eventually built plants around the world implementing their techniques. 

But if you look at the businesses that tried to expand globally through acquisitions and / or the financial/service companies, they have failed miserably. The Japanese tend not to be great acquirers. Well, data show that this is true everywhere and anywhere; M&A tends not to work out well. But I always had the sense that it was worse for the Japanese when they venture overseas. 

As I mentioned above, I just finished the GE book, and it's funny how Immelt sort of acted like a Japanese salaryman; they just want to get the deal done no matter the price, and people are afraid to challenge the 'senior' person. In big companies, so often, things are decided by politics, so you can't afford to upset people. If you think a deal is bad, why would you risk your own career and point it out? 

This goes on to the next part of the problem in Japanese companies, and that's the short-put aspect of the employment contract. Again, there has been some change, but in general, Japanese companies are not known for paying outsized bonuses for success (well, you can argue that the Americans are very good at paying outsized bonuses for failure), so this discourages risk-taking. Why bother? If you step up and try to do something big and it succeeds, you get a nice pat on the back and maybe a small bonus. But if you fail, this can be detrimental. They may transfer you out of your job and send you to corporate Siberia. We've all read about the madogiwazoku. They can be like those empty rooms with no windows that we read about, but more often it is probably some transfer to some branch somewhere that nobody wants to go to. 

 

Although the long-call nature of U.S. business can create problems, the short-put structure of Japanese employment can be troublesome too.

Anyway, enough of this. Things have probably changed a bit. The above problems usually manifested itself in low profits, low margins and low ROE in Japan, as businesses pursued market share at all costs, spent money building facilities for their employees, created companies where the main company can dump unnecessary workers etc. 

But at least in the above table, we can see that ROE has been decent in these trading companies in the recent past. 

BPS Growth

OK, so we see that the stocks are cheap on a P/B basis. If we are going to evaluate something on a P/B basis, unless we are expecting liquidation, we have to look at how BPS has grown. So here is a quick table that shows the BPS of these companies; most recent, 2015 and 2010 figures, so we can see how BPS has grown for these companies in the past 5 and 10 years. I also added stock prices for the same time frame so we can compare.

BPS Growth of Buffett's Shoshas

 

Itochu is pretty good; they have grown BPS 11.2%/year over the past decade and 5.5%/year over the past five. This may even be better than BRK! (I didn't look). Stock price returns are not bad either. The other ones? Not so impressive, but including dividends, most of them look decent on a 10-year BPS growth basis, actually.  (Stock price change excludes dividends).

 

Anyway, moving on...

Itochu

I will spend some time over the next few weeks reading the annual reports of these companies, so maybe I will post more about them if I find anything interesting. 

But first, I took a quick look at Itochu. Itochu has been one of the top trading companies for years, and has a reputation of being a little more modern and 'hip' than some of the others which were part of a zaibatsu. Shosha as part of a zaibatsu makes you wonder where their real interests are; are they trying to make money for the shareholders? Or do they have a specific role to fill as part of the industrial group which would force them to do things that might not be economically rational? They also might seem a little more traditional / conventional, which is not a complement when it comes to Japanese business.

 

 

This is a great chart from the 2020 annual report. But this is illegible, so I cut it up below so you can see the tables below. 

 

It's hard to see, but the below tables are what's at the bottom of the above table. They show the stock price and valuation of the stock every year from 2011 through 2020. And you can see that the stock has always been really cheap; single digit P/E's and trading at around BPS. 

Despite this, their historical returns are pretty decent.

A cheap stock that has grown nicely over time is sort of a no-brainer, if you believe in the quality of the earnings and accounting values of book.

 

Trading companies are hard to analyze. I have spent time on them in the past, and they were usually just big, black boxes. They have evolved over the years from a purely import / export business to more of an investment business. A lot of investments, though, are related to their client businesses. For example, a company might buy a farm that produces products to export to Japan, or may invest in an oil field that will export oil to Japan etc.

There was a little block in the 2020 annual report explaining how they differ from private equity funds.

 

Here's another snip showing the ROE of Itochu going back to 2011. This is very unJapan-like, with double-digit ROEs for the whole period.

...and here's a nice snip showing labor productivity. But I am not so sure how relevant this is as they are investing more. Investments will increase profits and may not necessarily increase number of employees. Kind of like Berkshire Hathaway; not all employees are directly related to the revenues the holdings produce. 

...and here is a snip of all the medium-term plan targets and results in the recent past. They have achieved most of their goals. 

As Buffett explained about his IBM and Petrochina investments, he likes it when managements say they will do something and they accomplish it. IBM used to succeed in hitting all their goals too, which was one reason Buffett was attracted to the stock (which didn't work out in that case).

 

 

 

 

So Itochu looks very interesting. This doesn't count as much of an analysis, though, as you would have to go and dig into the balance sheet and see what's in there and how they're valued. Buffett said the accounting is good, but I think he means that many of these companies report under IFRS or GAAP standards and are audited by major accounting firms (well, this was true with GE and Enron too, not to say shosha are either of those). 

Marubeni took a big writedown in 2020, so you never know when these things will happen. I don't think we have enough information to make our own estimate of what these things are worth. So you have to just look at and use what we have. And I guess that would be cash flows and dividends. You can't really fudge those.

 

Conclusion

This is kind of interesting, and as I said, I will spend some time looking at these companies. But I am not at this point jumping with excitement about buying these names. If any, Itochu is certainly interesting. The others? Not sure.

A lot of these companies talk about wanting to invest for the future, but you can't just wake up one day and decide that you are now suddenly a venture capitalist. Marubeni has a fixed amount they said they want to invest in new businesses, which is kind of frightening. When you say you want to invest X in a certain sector, it makes management want to fulfill that regardless of the opportunity. Why would you want to do that? Maybe 0 is the best course of action. 

 

I probably told you guys about a supplier in Japan who told me that certain period-ends, they get a big influx of new orders. Why? Clients say they have money left over in their budgets and if they don't use them up, it will be cut next year. Nobody wants their budgets to be cut! Makes sense for the division, but a nightmare for shareholders!

Some of these annual reports eerily resemble Immelt's nonsensical ramblings about investing in the future and technology too. Scary.

Shosha investments in the past have been related to their clients; buying a factory that manufactured goods for them or a client, buying mines, oil fields, refiners, processors or farms that exported supplies to Japan etc. So there was this expertise and some proprietary knowledge behind those investments. 

But venture capital?  I'm not sure how that would work. It might work!  But it might not. Who knows. 

Anyway, I will probably follow up with more posts because this is sort of interesting. 

Is Buffett Really Bearish?!

So, with Buffett dumping airlines, JPM and not jumping into the markets in March, is he really all that bearish? His cash keeps piling up to the frustration of long time Buffett fans.

March Decline

First, I would have to say that the March decline was pretty quick. It crashed, and the market bounced back pretty quickly. Plus, what crashed are the stocks that are going to have a lot of problems. What rallied are beneficiaries. I would have loved to buy MSFT, GOOG, AMZN or whatever, but those didn't really tank all that much. 

 

Plus, for a company like BRK, you would want to take advantage of any distress to get involved, but as Buffett said, with the stimulus package, the phone wasn't ringing all that much. There may be opportunities within each of the private holdings too, and we know there is a lot of pain in just about every wholly owned business at BRK.

 

Buffett Bearish? 

A while back, I argued that this increase in cash does not necessarily reflect a bearish view on Buffett's part. OK, maybe it's not super-bullish. But it's not outright bearish, either. 

 

First, I said the accumulated cash pretty much corresponds to the rise in float; since the mid-1990s, cash and fixed income investments always approximated the amount of float. Also, just because Buffett doesn't buy stocks doesn't mean BRK is not fully exposed; some of his former stock holdings are now wholly-owned subsidiaries. Just because they are no longer publicly listed equities doesn't mean we can't participate in intrinsic value growth of the business. We still own the equity. Same with outright purchases of other listed and unlisted businesses.

 

To show this, a while ago I posted how BRK is fully exposed despite the high cash balance. First, I added up the stock holdings, and then to that, I added the net worth of our subsidiaries; the railroads, utilities, and manufacturing, services and retail, and it all added up the the full value of BRK's shareholders' equity.

 

I showed that the high cash holdings of BRK is not a drag on future potential returns as it would be in a mutual fund. If a mutual fund had a high cash holding, yes, then it would lag in a bull market. Not so BRK. 

 

Since manufacturing, services and retail is no longer itemized on the balance sheet, I can't do this, but if you net out the cash, cash equivalents and fixed income securities with float, you will see that what you have left is still equity ownership in the various businesses; the cash is not necessarily a drag on returns on this basis. Of course, if the cash was invested in higher returning securities, future returns would be higher.

 

But it's still fair to say BRK has 100% equity exposure.

 

Here are a couple of tables to illustrate this. 

Liquid Assets = Float

First, check out the liquid assets (cash and cash equivalents plus fixed income investments) against float. This is just an approximation of float using the 2 or 3 items shown on the consolidated balance sheet so may not match what Buffett calls float, but it is close enough.

This ratio is on the far right of the below table labelled, "Liquid / float". Since 1999 or so, it's been remarkably stable at around 1. Someone asked about this at a recent annual meeting and Buffett said there is no relationship. It is a head-scratcher because it seems to match perfectly over time.

By the way, the cash and cash equivalents include only what is at the top of the balance sheet and excludes cash held in railroad / utilities (for simplicity, and most cash is in the insurance segment anyway).

 

Stocks to Total Shareholders Equity

Some insurance companies like MKL and Y use their equity portfolio to shareholders' equity ratio to show how much stock market exposure they have. This, for BRK, is in the column labelled "Stocks to sheq". It is amazing to think it was above 100% before the Gen Re merger. BRK back then was a leveraged play on Buffett's stock-picking skills, and any investment in bonds offered free incremental points on ROE above all that. No wonder why returns were so high back then. 

 

Since then, the stock portfolio (including equity method investments) has averaged 52% of BRK's total shareholders equity.  Despite the huge cash holdings, note that the year-end figure was 62%, and at the end of the 2Q2020, it was 56% despite the portfolio taking a big hit this year. This is higher than the 52% average since 1998. I use the average since 1998 because the beast was a different animal pre-Gen Re. 

So, this piece of evidence doesn't really show any bearishness on Buffett's part, or at least compared to the last 20+ years.

 

BRK Balance Sheet Stuff

 

This next table shows some other ratios. Investment leverage is used by insurance companies too, total investments versus total shareholders equity. This is not really all that relevant for BRK because insurance is only one part of the business. 

 

Investment Portfolio

But let's look at the portfolio in a conventional way. We will add the cash, cash equivalents and stock portfolio and see how that breaks down. 

 

The column labelled "equity %" shows how many percent of total investments was invested in stocks (including equity method). 

 

And, check it out! This also averaged 52% since 1998, and at year-end 2019, this was 65%, and was 58% at the end of 2Q2020.  

Buffett bearish? Well, according to this piece of evidence, not really. Or, at least, not all that much more than in the past 20 years.

Maybe this is a little tautological but liquid assets as a percent of total investments is also below historicals, and also liquid assets vs. total shareholders equity is also lower: 51% average since 1998, but 34% and 41% at year-end 2019 and 2Q2020, respectively.

 

 

 

AAPL

By the way, for those who say Buffett has lost his touch, what do we call AAPL? At $470/share, the gain to BRK on this buy is $83 billion! This is not how much it's worth now, but how much BRK has gained on the position of around 250 million shares. That's as much as the total shareholders equity BRK had as recently as 2004, and also as much as the gains on all of the other holdings as of the end of 2019 (so before the recent decline in most of these holdings). 

This is the table from the annual report, excluding AAPL.

I admit I have been an AAPL naysayer for years. Part of this multiple expansion is probably due to a shift in the business model from a hardware, consumer electronics business to more services. I have no idea how this will pan out over the years, but I do notice more and more people living their lives in a very Apple-centric way.

Conclusion

People are frustrated that Buffett continues to accumulate cash. The cash just gets bigger and bigger and it makes Buffett seem more and more bearish. But as you can see from the above, the cash balance may grow, but so does BRK. So on a relative basis, the cash balance hasn't really been growing all that much. Judging from this analysis, you can't really conclude that Buffett is any more or less bearish than he has been in the last 20 years. But that won't stop people and the press from obsessing over this 'nominal' figure. Oh well... 

Tsunami etc.

Yes, it's a tsunami. Tsunami of liquidity. A fiscal tsunami. Both at the same time. People seem baffled at the strength of the stock market; they keep saying the market is 'divorced from economic reality' and things like that. Others say this is a big bubble waiting to implode. 

I don't mean to argue that the market is always right or anything like that, but the market is reacting to some massive, massive stimulus and liquidity injection. Some of that is bound to leak into the stock market. As I said earlier about  Covid-19, this is forcing governments around the world to try to offset the negative effects of the virus. And as usual, they are going to overdo it. And this, in turn, will lead potentially to a really massive bubble. 

As of now, with S&P 500 forward P/E of 23, or whatever they say, it doesn't really seem all that bubblish. Too, the median P/E ratio of S&P 500 companies on a forward basis is around 18.5x vs. a 15.2x average since 1982, I think. So that is not that crazy looking either, given much lower interest rates now than most of this time period. 

 

People say the S&P 500 forward P/E is as high as it was back in 1999/2000, but don't forget, interest rates were a lot higher back then. Also, the median P/E is much lower than that, which is again, just like 1999/2000. And if you remember 1999/2000, if you didn't own the bubble stocks, you actually did really well throughout the 2000-2002 bear market. It is very possible that this will happen again. Many of the frothy names can have large declines, maybe the S&P 500 index even goes down 50% or more, and people who didn't own the most expensive stocks might actually still do well. So, don't let people scare you out of the market with this talk of market P/E's. If you are happy with what you own and how they are valued, hold on and things should be fine (like it was in 1999/2000). 

This rickety house can symbolize a highly levered equity fund vulnerable to a bear market, but when I saw this picture, the first thing I thought of was all the shorts being steam-rolled by this tsunami (or simultaneous tsunamis). 

Greenblatt and Marks

Anyway, I wouldn't necessarily put this in a category of good news; some would say this is really bad news. But a recent Howard Marks note talked about all the reasons why current market valuations might be reasonable; that the current tech companies leading the market actually has really good, strong business models. Also, Joel Greenblatt was on Bloomberg TV the other day saying we are not in a bubble like 1999/2000 for the same reason; that the recent market leaders have real business models and are really good businesses that might actually deserve high valuations.

 

While not pointing to any individual names, I have been thinking the same thing over the years.

Buffett, Gold and JPM

So, as usual, the financial media is going crazy over the fact that Buffett bought ABX. Most of them didn't even mention that this could be a Ted or Todd pick and not a Buffett pick. Also, he dumped a bunch of JPM, which is actually kind of surprising. Not sure what is going on there. Maybe it's a valuation play as BAC is cheaper. I think Dimon is a much better CEO than Moynihan (who hasn't really been tested yet, whereas Dimon has been through many crises). Maybe BAC has a longer runway as Dimon has health issues. I don't know. Maybe he is a lot more worried about this pandemic than most of us. 

 

Market

Anyway, back to the market. So yes, it's kind of acting contrary to the expectations of many, but not really. If you look at the market leaders, they are really doing well earnings-wise. Sure, this may be a one-time bump for some of these names, but for the most part, Covid-19 is only accelerating what was going to happen anyway (move to cloud, retailers dying off etc...). So there is nothing wrong with being in companies who have been enjoying a tailwind for years and then suddenly gets a big gust from behind. 

As for consumption, as Dimon said, some unemployed, I think he said 60%+, were making even more money from the $600/week assistance than they were making when employed. So that explains the consumption figures. Of course, this is not sustainable forever (new plan hasn't been passed yet as of now). 

I have been spending more time recently looking at things to do due to the extraordinary nature of the what is happening, but I have to say nothing is really jumping out at me. 

I am tempted, of course, to jump into airlines, hotels, real estate, energy, anything travel-related and some other areas hit hard, but nothing is really jumping out at me. If you like any of these businesses and believe in them for the long term and are fairly sure they will survive this crisis without too much dilution, then it's a great idea to buy. 

But the problem is that most of the above businesses are not in areas I would have been interested in pre-crisis. So if I got into any of them now, they would just be 'trades'. I would get in, hold until normalization, and then get out. They would not be situations where I would want to buy and hold forever. So that makes me a little hesitant. 

 

 

Election Stuff

There is a lot of uncertainty about the elections. But as usual, I would say, look back at all the other times we were worried about something. We should never forget 2016 election day. What about the fiscal cliff? All sorts of problems, uncertainties over the years. 

 

So, as usual, I would just say ignore it all. I don't want to talk about politics here as there is plenty of other places to talk about it, and I don't think I have anything to add to what everybody is saying anyway. 

 

But I would say that whatever people worry about, I wouldn't worry too much about it. Whether it's pharmaceutical stocks when Clinton got elected, insurance companies with Obama, financial stocks when Elizabeth Warren was looking good etc. Whenever you have big moves on those worries, as traders, it's actually probably a good idea to trade against it. 

 

Books

I am reading this new book about GE, Lights Out, and it is terrifying. I'm only 1/3 way through it but it sort of confirms what we suspected all along, but at least for me, it's a lot worse than I thought.  

If you always wondered why Buffett always spoke so highly of Immelt and GE but never bought stock (other than emergency financial crisis financing), this would help explain it. I've always wanted to love GE, and it was always on my to-do list to do a detailed analysis of GE and even buy some shares at some point, but it never got to that point because of Immelt. He came across to me as this rah-rah cheerleading type; the kind of manager I would not want to put money with. And his denials and lies throughout the crisis was worrisome too (I didn't realize how much he was lying, though...)

And Immelt apparently still blames Welch, but jeez, the guy ran the place (into the ground) over 16 years; that's enough time to fix things, and many of the big moves / mistakes were his own. It's like a 40 year old man blaming his parents for his behavior.

I am still looking at it and wanting to jump in, but it is quite scary.

Long Book Excerpt

So, during this pandemic, I have been reading a lot as usual, and I started reading an old book that I am embarrassed to say I've never read before. 

Paths to Wealth Through Common Stocks

This is a Philip Fisher book. I think Philip Fisher is sort of underrated compared to Benjamin Graham. Everyone (including me) always talks about Security Analysis and Intelligent Investor, but not everyone talks about Common Stocks and Uncommon Profits or this book. 

That's probably for a good reason. First of all, Graham was the first in setting the ground rules of value investing so comprehensively. But on the other hand, I feel that Fisher has had more of an impact on Buffett (and he admits it) than even many Buffett followers realize. Buffett is still referred to as a 'value' investor, and 'value' is still viewed as things with low P/E ratios and P/B ratios. But Buffett has for decades been saying that he would much rather pay a fair price for a decent business than a good price for a mediocre business (OK, I totally butchered that one, but I'm a little rusty, you see...). 

Anyway, I was reading it and this whole section made me jump out of my seat as I immediately thought of quite a few people I would need to send this book to:

The Economists Go out -- The Psychologists Come In

    I have already commented on the strange tendency of the supposedly forward-looking financial community so often to fail to recognize a changed set of circumstances until the new influence has been in existence for years. I believe this is why the man who attempted to forecast the course of general business was regarded as so important a factor in the making of investment decisions during all of the 1940's and much of the 1950's. Even today, a surprising number of both investors and professional investment men still believe that the heart of a wise investment policy is to obtain the best business forecast you can. If the outlook is one of expanding business, then buy. If the outlook is for a decline, sell.

    Many years ago there was probably considerably more merit to such a policy than there could possibly be today. The banking structure was weaker. There was no assurance it would be shored up by the government in times of real trouble -- a process bound to produce a massive dose of inflation. There was no tax system of a type that can hardly fail to produce strong inflationary spending whenever business (and therefore federal tax revenues) are at abnormally low levels. No public opinion had crystallized to assure that whenever business levels dipped sharply, the government would take strong countermeasures to stem the tide. Finally, the industrial base was much more narrow. The large number of industries in today's complex economy that bear little relationship to each other in their basic characteristics probably assures that even without the actions of government, modern business recession would be somewhat less severe than its former counterpart. Some industries would be enjoying unusual background conditions enabling them to expand, while the majority might be in a declining phase. This tends somewhat to stabilize the economy as a whole.

    All this means that a depression is of less significance to the investor than it was many years ago. It does not mean knowing what business is going to do would not be quite useful information to have. But having such information is not vital for obtaining magnificent results from common stock investments. Simple arithmetic should show this. When a stock market decline coincides with a fairly sizable economic slump as happened in 1937 to 1938 or 1957 to 1958, most stocks sell off from 35 to 50 percent. The better ones then recover when the slump ends and usually go on to new high levels. Even in the greatest slump of all time, only a small percentage of all companies failed, that is, went down 100 per cent. Most of these companies were companies which had had fantastic amounts of debt and senior securities placed ahead of their common. After one of the wildest speculative booms ever known, much of it financed by borrowed money, the average stock slumped 80 or 90 per cent. In contrast, when stocks rise over a period of years, even the most casual study of stock market history shows many figures of a very much greater order of magnitude. Compared to the temporary declines, usually of 35 to 50 per cent, that frequently accompany depressions, the outstanding stocks (those of the unusually well-run companies that have maneuvered themselves into growth fields) go up several hundred per cent, stay at these levels, and then go still higher. Many can be found for which a decade's progress can be measured in multiples of 1000 per cent rather than 100 per cent. 

...

    From the standpoint of obtaining results, I have noticed that investors who place heavy emphasis on economic forecasts in the making of investment decisions usually fall into one of two main groups. Those who are inclined to be cautious by nature can nearly always find an impressive sounding forecast that for quite plausible and persuasive reasons makes it appear that important economic difficulties lie ahead for the business community. Therefore, they seldom take advantage of opportunities when they present themselves and, on balance, these missed opportunities mean the economic forecasts have done them considerable harm. The other group are the perpetual optimists who can always find a favorable forecast to satisfy them. Since they always decide to go ahead with whatever action they are considering, it is hard to see how all the time they spend on business forecasting does much good. 

    More and more investors are coming to recognize the wisdom of making their decisions about common stocks largely on the basis of such outright business factors as appraisal of the quality of the management and the growth potential of the individual company's product line. These things both can be measured with a fair degree of preciseness and have a far greater influence on how good a long-range investment will be... 

This book was published in 1960, and it is amazing as it still applies to this day; there are still people who think that predicting the economy accurately will lead to superior investment results. 

So...
Anyway, this is a fascinating time to be living in. This pandemic is really terrible and I hope we at least find some sort of treatment to take death off the table. I feel this is the key to normalization rather than vaccines. Of course, a vaccine would be great, but it is probably unrealistic to expect one to come within a year. If we can figure out how to treat the worst cases, and this treatment becomes widely available, this would sort of turn Covid-19 into something like the flu.

But who knows, really. 

As for stocks, there is certainly a lot of trading opportunities, but for us long term investors, I would stick to things that have secular growth potential. I don't really feel that excited about buying the dip on something in a long term downtrend. Not to say those can't be great trades. I would rather buy the dip on things in long term uptrends. If things are in secular downtrends but got a bump up due to this, then that's probably a great time to sell.

As for the market, it may seem like it's crazy, but keep in mind the amount of stimulus and liquidity injected into the system. It's not just lower interest rates. Also, people keep talking about overoptimism about the virus, but if you look at hotels, airlines etc., the market is clearly not all that optimistic about anything returning to normal any time soon.

Also, keep in mind that a lot of the big winners this year are making a lot of money; revenues are growing at incredible rates, profits etc. Other than the cloud players, look at COST, WMT, TGT etc. What is happening is that the smaller operators are suffering. Fast food is taking share away from the independent restaurants. As those are closed, if you want to eat out, you have fewer choices so you end up at CMG or QSR (Popeye's). A lot of the eating out money is moving to eating at home (groceries, again, COST, WMT, TGT etc...). 

 

If airline and hotel stocks were making new highs, then I would think the market is nuts. But that's not what's happening. You have to sort of look under the hood to see what's going on, but of course, that's too much work for most! I get it. 

Also, a lot of the revenues / profits that were not listed (small, mom-and-pop restaurants / stores) are moving to listed companies; as independents go under, the only ones left standing are the big ones, and often those are listed companies.

So there is a lot about this market that does make sense. This is not to say the market is always right, or that the valuations of each of these businesses at this point is correct. I am just pointing out that it may not be as crazy as some suggest. Airlines and hotels, REITS are down, and they are down big. Cloud players, stay-at-home beneficiaries are up big. What is so crazy about that? I don't know. 

Also, I think there has been a lot of tech adoption from the never-adopters. I see all these posts about kids teaching their grandparents how to use a tablet, how to get on a Zoom call with family, how to chat on FB, Line, or how to use email. People (many of them seniors) who only used land-line phones and didn't know how to turn on their TV (well, I have trouble with that too with so many remotes and buttons...) are chatting with their kids / grandkids on Skype on their tablets. They are learning how to order things online. 

A lot of this will be permanent. When things clear, many of these newbies will keep using their new devices and will continue to shop in their new ways. Not all of them, of course, and maybe not as often as right now. But this has caused an increase in this market for sure.

 

As for all the talk about how things will never go back to the way it was, that people will never go to conventions ever again, and that client visits will never happen again as Zoom calls work just as well, and offices will decline as people get used to working from home, I think, is rubbish. People always extrapolate what they see. Sure, it may take some time to get back to normal, but things will get back to normal, eventually. 

 

Surely there will be some permanent changes for the better, utilizing things we have learned during this time, and that's great. But I wouldn't expect a lot of this stuff to be permanent by any means.