• Local
  • Pittsfield, MA
  • more weather >
Nati Harnik/AP
Attendees at the Berkshire Hathaway shareholders meeting held this past weekend in Omaha, Neb., watched Chairman/CEO Warren Buffett, left, and Vice Chairman Charlie Munger on large screens in overflow rooms.

CAPITAL IDEAS: Buffett-stock and China gets rocked

By Wednesday, May 8, 2019 Trade and Commerce

Dalton — Berkshire Hathaway, the multinational conglomerate headed by famed investor Warren Buffett, held its annual shareholder meeting this past weekend. It’s like Woodstock for investors of the Omaha, Nebraska-based company, drawing roughly 40,000 people to an arena—Buffett-stock, if you will. There were multiple hours of conversation, too much to detail for a short article, so I did you the favor of boiling much of it down to my version of CliffsNotes. Anything following in quotation marks is from the meeting or was said during a Monday morning follow-up interview with Becky Quick of CNBC.

  • There is a price at which buying even the best companies makes the investment a bad idea.
  • Berkshire Hathaway is holding $114.2 billion of cash because they are “operating on the assumption that we will have an opportunity to deploy it at very attractive rates” (i.e. they expect and welcome lower stock prices). I like Warren’s snarky comment on this subject. He said: “We could invest $100 billion in the next year, just not at the prices that we like. It is not in in the interest of the shareholders that we start behaving like everybody else.” Oh, snap!
  • And Mr. Buffett’s partner, Charlie Munger, had some snark himself, saying, “You don’t need a portfolio of 50 stocks if you know what you’re doing.” Ouch! That one stung me since my company primarily uses low-cost, tax-efficient exchange traded funds. But I hear you, Charlie: You go for maximum return and we, well, we’re admittedly chickens and like a good deal of protection—although Warren seemed to agree with the ETF approach as he argued, “All you have to do is just buy a cross-section of America and {don’t do anything irrational}.”
  • Having a high IQ is not enough to be a good investor, and it can be especially dangerous if it leads to overconfidence. Even the most rational of people become irrational when it comes to buying and selling stocks.
  • On becoming a better investor, Warren said: “If you want to grow your investment circle of competence, you want to read a lot and study a lot of businesses. It is more competitive now than it was when we started investing, but if you build your circle and have the discipline to be patient and do nothing a lot of the time, you can still do well.”
  • Investing for the long-term is a good idea (if you buy the right company); however, buying and forgetting is stupid. You can look back at any time period and find once-dominant businesses that have weakened significantly over time. My company acts as a coach to business owners, and a big theme in those conversations is that their industry looked different a decade ago and it will look different in another decade. If the company doesn’t keep up with the competition, it’ll flounder, or fail. As an investor, you don’t want to hold onto the shares of those companies for the long term.
  • Buffet is a “card-carrying capitalist” and rejects the recent U.S. embrace of socialism (that’s an economic view, not a political one; Buffett was a big supporter of Democratic candidate Hilary Clinton in the 2016 presidential election).
  • Contrary to the views of many card-carrying capitalists, Buffett downplayed the nearly $1 trillion federal deficit, citing, “Those who regularly preach doom because of government budget deficits might note that our country’s national debt has increased roughly 400-fold the past 77 years.” He went on to note that people who panicked because of a deficit concern: “might have eschewed stocks and opted instead to buy gold. And they would have netted 1 percent of what an investment in a Standard & Poor’s 500 index fund would have generated … We are lucky—gloriously lucky—to have that force at our back.”
  • Buffet is not, in general, a fan of hedge funds or private equity.
  • Buffet is, in general, currently a fan of U.S. equities, saying that he thinks “stocks are ridiculously cheap {if interest rates stay at these levels},” adding that “Since money doesn’t cost anything, you can print lots of money and have full employment and no inflation.” (That is not contrary to the earlier comments regarding Berkshire Hathaway’s holding $114.2 billion of cash. The way they buy companies is usually different than the way you and I buy businesses. Sure, from time to time they’ll buy the stock of a company. For example, co-managers of Berkshire Hathaway’s investment portfolio have purchased shares of Amazon. However, the company typically buys a controlling interest of the entire company, which is an entirely different valuation technique.)
  • An escalation of the U.S.-China trade war is bad for the United States and bad for the global economy. He did note that in negotiating trade deals, sometimes the negotiators need to “talk tough” and even “act half crazy” to get results.

Speaking of half-crazy, on Sunday I received an alert regarding a Tweet from President Trump, triggering more concerns about a trade war with China. Details were seemingly less important than the sentiment of talking tough (or maybe even half crazy) prior to this week’s scheduled meeting of Chinese negotiators, led by Vice Premier Liu He (aka “the closer”), visiting Washington, D.C. As of writing this article late Monday afternoon, a Chinese Foreign Ministry spokesman said that China’s trade team will still travel to Washington, with He, which is a potentially positive sign for a deal.

The gist of the tweets was that U.S. tariffs on $200 billion of Chinese goods would be raised from 10 percent to 25 percent enacted 12:01 a.m. Friday in retaliation to China retreating on some of the progress that had been made. However, as of Monday evening, Treasury Secretary Steven Mnuchin told reporters that the U.S. would reconsider the tariffs if the progress of the talks got back on track.

The fallout from the tweet was a 500-point drop in the Dow Jones futures and a five-percent drop in the Chinese stock market. The VIX, or “fear gauge,” spiked 45 percent at the start of the day before coming back to still-elevated levels. That was no surprise. The longer the market goes without a drop in price, the more shocking it is to investors when it does actually happen. Since 2017, when President Trump took office, there have been eight other gaps down at the opening of more than one percent on the S&P 500. Five of those eight were associated with China and trade (e.g. trade war concerns, the Chinese firm Huawei’s CFO getting arrested, the effect of tariffs on earnings). However, as I posted on LinkedIn that morning, according to data from Bespoke, since 2017, these big gaps down haven’t meant the end of the bull market. In fact, on average, the market had been up one week and then one month later.

I’ve been forthright in my expectations of a coming correction, so obviously it would come as no surprise if this were the catalyst to trigger it. I would, however, be surprised (like aliens-landing-in-my-backyard surprised) if it triggered the death of this bull market.

–––––––––––––––

Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to aharris@berkshiremm.com.


More by »
»