Warren Buffett gives a lesson on when to sell a share: the sale of all his US airline shares13/5/2020 A downward movement on the stock market is not a reason to sell a share. What matters is the underlying economics and quality of management. If those economics or management deteriorate then it might be a candidate for sale, but this is not because Mr Market has shoved the price down. Warren Buffett said a few days ago,
“If we hold stock XYZ, and we like the business, and the stock goes down 20, 30 or 40% we don’t feel we’re poorer. We would feel we were poorer if [when something like] what happened to the airline business [occurs]. The world has changed for the airlines. The virus will cost Berkshire money. It doesn’t cost it money because our stock moves around…But there are certain industries – the airline industry among others – that are really hurt by a forced shutdown.” He sold, in April, all the airline shares held by Berkshire for $6bn, making a $1bn- $2bn loss on these four investments. Tomorrow’s newsletter discusses the mindset needed for a successful investor.………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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We’ve all heard of Ben Graham’s Mr Market, a fable kept preeminent in Warren Buffett’s mind ever since he learnt it by reading The Intelligent Investor in 1949. Buffett gave a twist to the fable in his Mr Farmer story told at Berkshire Hathaway’s virtual AGM a few days ago.
Buying a small part of a business, not counters in a game of speculation “We’ve always looked at stocks as being part of a business. People bring the attitude toward them too often that, because they are liquid and quoted, that its important to develop an opinion on them minute by minute. That’s really foolish when you think about it. That’s something Graham taught me in 1949: that single thought that stocks were parts of businesses and not just little things that moved around – charts were popular in those days.” Buying a farm with a peculiar neighbour “Imagine that you’d decided to invest money now, and that you bought a farm; say 160 acres at X per acre. And this farmer next to you bought 160 acres of identical quality. And this farmer was a very peculiar character because every day that farmer, with the identical farm, says ‘I’ll sell you my farm, or I’ll buy your farm, at a certain price”, which he would name. Now, that’s a very obliging neighbour. That’s gotta be a plus to have a fellow like that on the next farm.” Shares are different “You don’t get that with farms; you do get it with stocks. If you own 100 shares of General Motors on Monday morning someone will buy your 100 shares or sell you another 100 shares at exactly the same price. And that goes on five days a week.” Intrinsic value “When you bought the farm you looked at what the farm will produce- that is what went through your mind. You say to yourself, I’m paying X dollars per acre and I’ll get so-many bushels of………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 At Berkshire Hathaway’s AGM last Saturday Warren Buffett offered a few thoughts on severity of the Covid-19 shock.
“It’s been a flip of the switch in a huge way in terms of national behaviour, the national psyche. It’s dramatic. There’s a wide variety of possibilities on the health side, and on the economic side. Of course, they intersect, bouncing off each other. The range of possibilities on the economic side are extraordinarily wide. We do not know what happens when you voluntarily shutdown a substantial proportion of your society. In 2008-9 our economic train went off the tracks. There were some reasons why – because of the banks and all that. This time we just pulled the train off the tracks and put it in a siding…unavoidably breeding a huge amount of anxiety and changing people’s psyche, causing them to somewhat lose their bearings in many cases.” A V-shaped recovery? I think Warren is probably in the extended U-shaped recovery camp - see what you think: “I don’t know the consequences of shutting down the American economy. What we do know is that for some period – certainly during the balance of this year, but it could go on a considerable period of time, who knows – our operating earnings will be less, considerably less than if the virus hadn’t come along. It hurts some of our businesses a lot, it affects others much less.” “We don’t know how long this period lasts. And nobody knows. Most people think the virus will, to some extent, decline in its spread during the summer months. I would think that it will come back at some later date. How the American public reacts if they get their hopes up through some reopening, and how they react to a second attack by the virus – it’s like Dr Fauci says, the virus is going to determine our behaviour. You’re dealing with huge unknowns, and the degree to which it has disturbed the world’s habits and endangered businesses indicates you’ve got to be not too sure of yourself or what it’ll do in the next six months or year or whatever.” Buffett gives special mention to Boeing and Airbus (not BH investments) who “don’t know what their future is…the real question is whether you need a lot of new planes or not. It’s a blow to have essentially your demand dry up”. As an example of the knock-on consequences: Boeing buys from BH’s Precision Castparts who are now badly affected. “It won’t be any fun with the businesses where the world has really changed. You’re seeing a lot of change. If you own a shopping centre you’ve got a bunch of tenants who don’t want to pay you right now. The supply and demand for retail space may change… and for office space…significantly.” Why haven’t you been buying shares or preferred stock? “There was a period right before the………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Warren Buffett sent what at first glance seems a confusing message to investors when speaking at Berkshire Hathaway’s virtual AGM on Saturday. On the one hand, he reaffirmed his conviction to always back the “American miracle” by investing in US companies. You should never bet against continuation of the miracle, he says. The country is set up in such a magnificent way that the US economy will thrive, driven by the capitalist culture nurturing excellent companies, which will raise living standards.
On the other hand, he said that in April Berkshire sold over $6bn of shares, and bought only a handful (not Buffett’s buying, but Todd and Ted’s – his assistant capital allocators). Furthermore, while in January and February he was content for Berkshire to buy its own shares because they were selling too cheap in the market, in March and April, even though BH shares had declined by around 30%, he chose not to. Berkshire has $124bn in cash or near cash (Treasury bills) and yet Warren Buffett says that he cannot find anything of quality selling at a reasonable price. How to reconcile this seeming contradiction It is to do with time-spans and value. While the American miracle is long term phenomena, and here we are talking about decades – in 20 or 30 years from now the economy will be much bigger and companies will be producing much larger profits of owners of pieces of those business - regarding the next week, next month or next year Buffett says he doesn’t know if the market will be up or down. The miracle might go through a bad patch, as it did in the Civil War or the 1930s – or it might not. And then there is value. In January, the range of potential future scenarios for company earnings, including Berkshire, were seen as being concentrated in a band at a fairly high level. But the facts have changed. The profits of many businesses will now be wiped out over the next year or two and there is an existential threat to many companies, e.g. airlines, retailers and hotels. And the economic scars might continue long after the next 24 months. Therefore, logically, our estimations of the discounted future cash flows that business owners can take away (owner earnings) are significantly lower now than they were in January. The range of scenarios has shifted to the darker side of the spectrum. Therefore, what is considered a reasonable price for a share has shifted downward. Berkshire has insurance companies, retailers, aerospace parts producers, and railroad companies hauling oil – all are suffering. Even Cola-Cola sales are down by one-third and the big banks are bearing large loan write-offs. This collection of companies will not generate as much as was earlier supposed. Therefore, while Berkshire’s shares were selling at below intrinsic value in January and so Buffett bought, they are now priced by Mr Market at above the new intrinsic value. Similarly, Buffett can’t find other companies’ shares selling below intrinsic value with a sufficient margin of safety. Perhaps things will turn out less bad than Buffett thinks. Perhaps the lockdowns will end next month, and we’ll all get back to normal, flying again, going to the cinema and the pub again. And then intrinsic value (discounted future owner earnings) will be larger and justify purchases. Clearly, after the large rise in the US indices in April Buffett is not tempted by what is on offer. Buffett’s optimism about America “I was convinced of this in WW2, during the Cuban Missile Crisis, 9/11; and I was convinced of this in the Financial Crisis: nothing can stop America. We’ve faced great problems in the past and the American miracle, the American magic, has always prevailed, and it will do so again.” A little perspective: Covid-19 may be bad, but the current time is still great, “If you were to take one time to be born and one place to be born, you would pick today and you would pick America.” Taking the long view: “In 231 years this country has exceeded anyone’s dreams. The wealth....... To read more go to https://newsletters.advfn.com/deepvalueshares/ Ray Dalio is a billionaire investor, having founded Bridgewater Associates as a youngster in 1975 and turned into a mammoth $160bn fund. He is author of the best-selling Principles: Life and Work and a renowned philanthropist. Last week he was interviewed by Sal Khan. Below are his thoughts given in that interview. There are the plenty of warnings about division and violence within societies and across borders; about the rise of populists and dictators, and; about the risk of inflation, making money a poor store of wealth. But he seems to think the US stock market will be bailed out by policymakers. I would question whether they really do have infinite firepower to fill every “hole”, especially when the economic winds from the 82% of the economic world that is not American are blowing so cold.
A damaging virus “I think of the virus like being a tsunami…when it goes away there’s still terrible damage…to incomes and to balance sheets. Every individual, every company and every government has a certain amount of revenue and a certain amount of expenses, and they have savings, a certain amount of balance sheet. Those have been severely damaged…necessitating cutbacks. Think about companies like Disney [cut half its staff] or small businesses; great, great damage.” The hit to the economy “This will be the worst economic downturn since the Great Depression. The unemployment rate will approach 20%, and the financial wreckage will be of that magnitude.” Can policymakers stop it? “The good thing is the government is acting to fill those holes [in income and balance sheets of individuals and companies]. The resulting social unfairness is dangerous “When you think of the economy there’s the rich and the poor. I think there’s going to be a restructuring. People and policymakers will think: who’s going to pay for what? So they’ll be a reallocation of resources. Tax rates are going to change, and also spending. What really worries me is the fragmentation, the anger, or the carelessness of one extreme or the other to mess up the continued improvement of the pie…Restructuring will probably take a few years.” Geopolitical danger "Hitler came to power in 1933 because the internal fighting was so great. And there could be a move to a more autocratic and confrontational type of politics. And because this is a world problem there’s going to be competitions going on all over the world - China is a rising power. And then there’s a lot of the world that that won’t have the support the US has had because we’re blessed to have the world’s central bank – we can produce dollars…they can be spent around the world. Very few currencies are like that. Those other countries will not be able to fill holes in income and balance sheets. We’re gonna see a change in the world order, and there could be fighting. So how it is handled is the most important thing. It’s very similar to the 1930 – 1945 period. What happens when y………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
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