Warren and Charlie Take Center Stage
While it was a fact-filled week, the most interesting news came from the Berkshire Hathaway Annual Meeting held Saturday in Omaha. Warren Buffett and his partner Charlie Munger make so much sense and put true profitable investing into its proper perspective.
The statement that I liked best came from Charlie, who I have known along with Warren for over 20 years, was that “we are just trying to be rational”. The message was clear that to be a successful investor you need a process that is orderly, consistent and makes sense. Also you must always be open-minded and willing to do an about face if wrong as they did on their IBM investment which I, too, felt was ill conceived. I had mentioned previously that I had taken a railroad to them to buy, but they turned it down only to purchase Burlington Northern eighteen months later. Why? They finally realized that rails are quasi-monopolies; tonnage tracks the U.S. economy; there is a price/cost advantage over trucks; and finally, and most importantly, rails are huge free cash flow generators.
Several of the more salient points discussed at the annual meeting were that the U.S. economy will chug along at 2+% growth even without Trump’s agenda being passed; the healthcare bill as written benefits the wealthy due to their tax reduction; corporations need to reduce costs if bloated was mentioned as a response to their partnership with 3 G Capital who are notorious cost-cutters; the reduction in business taxes as proposed would not be revenue neutral which is therefore bad longer term however it would reduce their tax bill by over a billion dollars; Wells Fargo senior management should have acted much earlier after becoming aware of the cross-selling problems; they are on the hunt for acquisitions every day with over $90 billion in cash on hand earnings next to nothing: and hedge funds that underperform over time don’t deserve a 2 and 20 fee structure. By the way, Paix et Prospérité charges a 1.5% management fee then a 5% hurdle rate before earning a 20% incentive fee with a high-water mark. We never want to earn an incentive fee when we lose less money than the markets. Since opening our firm, we continue to beat the averages by a wide margin and other hedge funds by a ton.
Let’s look at some simple truths and what they mean for investing:
- The global economy is improving as growth is accelerating and inflation is finally moving up.
- Most governments are loosening the purse strings with a more reflationary bias than in past years.
- Monetary policy remains accommodative; however rates are likely to rise from here.
- Corporate profits are improving at an accelerating rate with order books and selling prices rising sequentially quarter-to-quarter. Notwithstanding managements continue to prune costs and hold back on capital spending although it has finally shown signs of life.
- China has stemmed the tide of capital outflows and reserves are building once again providing support for their financial system as it tightens lending policies to reduce leverage and excessive speculation.
- The U.S. economy is clearly rebounding and is likely to grow well over 3% with inflation nearing 2.0% in the second quarter. The combination of employment growth of over 2 million jobs and wages increasing over 2.5% over the last year is a recipe for continued strong consumer spending for the foreseeable future.
- M & A activity continues to pick up steam as the benefits are clear-cut for both the seller and the buyer. Monitor the asset sales needed to get the merger approved by the authorities, as the acquirer may be an attractive investment.
- Trump clearly has had a mindset shift from the far right to right of center which improves his chances of passing many parts of his agenda. He remains pro-business and pro-growth.
- Trump passed his healthcare proposal in the House by the slimmest of margins, and it will be totally rewritten in the Senate before going into committee
- Trump introduced a blueprint for his tax overhaul legislation. It is clear that the end product will be different with the wealthy getting far less, reducing future deficits than initially feared, improving the chance of passage.
- Trump continues to move aggressively reducing/eliminating overly restrictive regulations that inhibit growth and creativity.
- The U.S. relations with China are clearly better than most feared reducing the potential of trade war with our largest trade partner. Expect dumping to become less of an issue over time benefiting U.S. producers.
- The stock market is undervalued based on forecasted year-end 2017 and 2018 interest rates and earnings without even taking into account any changes due to Trump’s agenda; a corporate tax rate reduction to 20%, for example, boosts S & P profits by over 11%.
- OPEC is working closely with the major non-OPEC producers to control production and maintain prices over $45/barrel. U.S. shale producers are the problem.
- Disruptors continue to pop up all the time changing the dynamics of many industries creating new winners and losers. If a company does not continue to reinvent itself, it is doomed to languish over time and eventually fail.
The bottom line is to hold the line and don’t let the media/pundits alter your mindset. Improving global growth is the new trend with profits accelerating faster than expected and interest rates staying historically low as the monetary authorities stay one step behind. Remember that this is a market of stocks and that opportunities are being created on both sides of the market, as change is everywhere.
Warren and Charlie remain bullish on investing in America and so are we, for the next year or two, at least.
So remember to review all the facts; pause, reflect and consider mindset shifts; analyze continually your asset allocation and risk controls; do independent research on each idea and…
Paix et Prospérité LLC