FYI | May 06 2020
By Peter Switzer, Switzer Report
Investing lessons from Warren Buffett's exclusive shareholder's meeting
If you didn't lay in bed with your beloved at 6.45am on Sunday morning, watching an 85-year old in Omaha Nebraska sip full-strength, 11 teaspoons-full-of-sugar Coke, then you're reading the right guy, right now! I can make up for your bad decision.
Despite how peeved off I was that I couldn't attend the shareholder's meeting in the flesh because of COVID-19 I still tuned in online. At one stage I closed my eyes and Maureen nudged me, thinking I was going back to sleep, but I was really just digesting every word. I even sent an email question to an address that Warren gave and if/when I get a reply I'll be sure to let you know!
That's because when Warren Buffett speaks, he thinks and draws down on years of wisdom that go back to the year of his birth, 1930, when the Great Depression redefined what Americans thought about the stock market, banks and their economic futures. And extends to his best year ever on the stock market 1954 when he worked for the legend's legend, Benjamin Graham, who wrote the market masterpiece, Intelligent Investor.
The most unforgettable lesson to Warren and all of us, is central to making money out of stocks: "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
Out of that came the message that has driven great investors like Warren, his great friend Charlie Munger, Hamish Douglass at Magellan and WCMQ and WQG, who are great performing US fund managers, who we brought to Australia to list on the local stock market.
These people and their investment success speak for themselves but behind them is a thinking and an analysis that we try to pass on to you in this Switzer Report. We know you're smart (that's why you read us!) but like me, you want to get smarter and better at investing. And if you don't want to do the research, we'll help do it for you.
By the way, that's why some investors buy stocks like Berkshire-Hathaway, because they get the brains of Warren and his team across a pile of great, diversified companies. But even Warren would not advocate investing in only one company, even if it was his!
Gerry Harvey once told me that his competitive advantage came out of the fact that he'd hang out with smarter, older people when he was young man, even if it meant drinking with them on Friday nights! (There was irony in his recollections).
What you get out of people like Buffett varies according to who you are. One young fund manager, who tuned into Warren yesterday, told me that he saw that the Oracle of Omaha's purchasing of stocks since the crash and bounce-back was small. However, he'd cashed up to the tune of $US4 billion plus by dumping his 10% holding of America's biggest four airlines!
This then gave my friend the belief that Warren was betting on another leg down for stocks.
But that was not the key message I took from these revelations. It was more, as he said about his investment: "It turned out I was wrong," he said. And he conceded it was an "understandable mistake", where he was blindsided by COVID-19 and the government policies of economic closures, lockdowns and social restrictions.
Getting out of a bad investment early is a lesson we should never forget.
Now I'd never rule out that Warren and Charlie might be thinking another 10-15% down for stocks would make a business they want to buy even cheaper, but I don't believe they're driven by the vicissitudes of the voters who determine short-term prices. Note I didn't say "stocks they want to buy" but instead I said "businesses" they would want to buy. And that's a more important lesson for us.
Sure, when markets irrationally oversell because of fear and uncertainty, that creates the perfect case of the market price being too low compared to the intrinsic value of the company. That's when people like Buffett and Munger pounce. On the other hand, they can take profit when markets look overpriced.
Late last year, Warren sold more than $800 million in Apple stocks, unloading 3.7 million shares between October and December, when Apple's share price rose by more than 30% (from $US219 to $US294). In 2016, he spent $US1 billion on 9.8 million Apple shares in the year's first quarter. They were valued at around $100 at the time.
But, despite selling off 3.7 million shares, he still owns around $US72 billion worth of Apple shares, or 5.6% of this computing giant.
Buffett confesses he doesn't know what the market does "tomorrow or in one or two years" but he believes in the tail force that powered the US economy for decades and the stock market that goes along for the ride. But he doesn't wait for the economy, instead he believes in it!
Back in 2008 during the GFC, he told his shareholders: "We are certain, for example, that the economy will be in shambles throughout 2009 and probably well beyond but that conclusion does not tell us whether the market will rise or fall."
This proved to be the case in 2009, when the U.S. economy contracted by 2.8%. This was its first recession since 1991, and yet Buffett was spot on. Those investors, who were waiting for the economy to show signs of improvement, missed out on over 50% of gains in a matter of months!
I think another leg down here is a real possibility, but it might only be small, if the economies of the world rebound faster than expected. If you can time perfectly, well that's great. But if you get it wrong, it doesn't matter because people like Buffett (and yours truly) expect the market will be a lot higher in two, four and six years' time.
This chart above shows what lies ahead for the S&P/ASX 200 Index a steady growth of the Index for anyone who wants to bet on Australia. Buffett bets on the USA and it's a lesson he learnt in 1954, when the Dow eventually passed the level it was before the Great Crash in 1929.
It took from 1929 to 1954 for the Dow Jones to get back to where it was before the Crash. That was because the Great Depression, which was caused by bad, inept government policies over the 1920s and then in the 1930s to address the economic collapse, killed confidence in banks, the economy and the future for individuals.
Yesterday, Buffett was in high praise for what the likes of The Fed had done and the government initiatives to offset the problems that the world economy faced because of this Coronavirus. And it will be these stimuli that will build the foundations for companies to eventually get over the pandemic's effects and become the driver of stock prices going forward.
But remember what Buffett has taught us, if you wait for the economy to make you feel comfortable, you probably will miss out.
Go back to the S&P/ASX 200 chart and note where we are. Our post-crash rebound has taken us up 15% and we fell 36%, we need a 57% gain the Index to get back to our old all-time high of 7162.
That means 57% upside lies ahead. And remember this: one of the strongest rebound years is the year after a crash. So, whatever you do, you better be in, even if you are in too early, or you might live to regret not heeding the wise words of Warren Buffett.
The voters have taken the stock market down with this Coronavirus crash but it's now time for you to weigh in with Buffett-like guidance to position yourself for the next market cycle ahead.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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