News conferences

There were three high profile, noteworthy news conferences this week. The first meeting was Janet Yellen’s televised testimony before the House Financial Services Committee. It was no surprise to learn from her that she is going to raise interest rates this year. Yellen said, responding to a question about what is behind the markets’ meltup. “I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings.”

On Thursday, Donald Trump attempted to set the record directly to the American people on why the “fake” news media is spreading lies about his administration. Outside the pure entertainment value, there wasn’t much learned from this press conference. The third meeting offered much more insight.

Warren Buffett’s right-hand man, Vice-Chairman Charlie Munger of Berkshire Hathaway, spoke at the annual Daily Journal Corporation. There were three takeaways that helped to reinforce my view on the markets. They are as follows:

  1. There are no more cheap companies and it’s become impossible to make large returns. The investment world is much more difficult.
  2. Beating the index is absolute agony for investment professionals who have almost no chance of beating it.
  3. You need to adapt your investment strategy to what offers you the best chance of investment success.

A decade ago when the P/E of the market was 10, and value stocks dominated the index, it was much easier to buy growth companies in order to beat the market. Currently, 4 of the top 8 holdings of the S&P 500 are the leading technology companies – Apple, Microsoft, Amazon, Facebook. To beat the benchmark on the upside, you must now take more risk than even the fastest growing companies that have huge free cash flow and recurring revenue. Good Luck!

Even Charlie and Warren have recognized that they can’t beat the index. They also used to think that the airline industry was a “joke,” and in the last few months they bought billions of dollar’s worth of airline stocks. For decades, they avoided technology companies because it wasn’t within their circle of competence, and now they own over $7 billion worth of Apple. They also became large shareholders in IBM a few years ago. Charlie, now 93 years old, was asked about the sudden change in philosophy, and he explained how he and Buffett have changed with age. “Warren learned better over time, I’ve learned better. The nice thing about the game we’re in is you can keep learning, and we’re still doing it.”

The reason why Charlie and Warren don’t take their own advice and buy the benchmark is that they don’t want the loss potential of the benchmark. If Charlie and Warren are wrong on their investments, they want money returned to them through the free-cash flow that a company generates in the form of dividends and buybacks. This helps to limit the overall chance of permanent capital destruction. Warren’s two rules of investing are, “Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.”

I help my clients with point #3. My strategy includes continuously adapting my investment strategy that offers the best chance of investment success.

My next post with be on March 4th. Have a great long weekend in celebration of President’s Day!

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