Get Used To Making Less
Each new year brings a myriad of projections about politics, investing, life, global warming and all things in between. I view most as “for entertainment purposes only,” trying not to take them too seriously.
I pay attention to investment pundits who have walked the walk, coupled with a solid, proven track record over a long period of time.
Last spring Motley Fool reported about remarks from legendary investors Warren Buffett and Charley Munger:
“During Berkshire Hathaway’s annual shareholders meeting…Buffett’s right-hand man, Charlie Munger, had a warning to investors. ‘I think value investors are going to have a harder time now that there’s so many of them competing for a diminished bunch of opportunities.
So my advice to value investors is to get used to making less.’
…. Consider this piece of good news: Buffett believes that short-term thinking and dumb ideas are running more rampant than ever. Investors who combat these impulses with patience can gain an edge over Wall Street.
…. Opportunities occur when people do dumb things
Because Berkshire is so big now, Buffett and Munger can’t benefit much from investing in traditional hidden gems. Instead, they have to focus more on finding high-quality companies and letting those investments compound over time.
Yet value investors around the world still look up to them for their ability to identify what Buffett would call ‘a wonderful business at a fair price.’
Today’s media landscape has more voices preaching fast and easy money.
…. This presents a challenge for investors that have to filter out the noise and determine if a prospective growth stock can bridge the gap between expectations and reality.
…. Buffett said:
‘New things coming along don’t take away the opportunities. …. I would say there’s been a great increase in the number of people doing dumb things, and they do big dumb things. And the reason they do it to some extent is because they can get money from other people so much easier than when we started.
…. The world is overwhelmingly short-term focused. And if you go to an investor relations call…the management is interested in feeding them expectations that will slightly be beaten. That is a world that is made to order for anybody that’s trying to think about what to do that should work over five, or ten, or twenty years.’
When Buffett was first starting out, the greatest advantage a value investor could have was access to information. Today, with information beyond the young Buffett’s dreams available without much effort, the greatest advantage is the ability to ignore distractions and the discipline to maintain a long-term time horizon.
Focusing on what matters most
Buffett’s disdain for speculative gambles…has been an ongoing narrative for several years. However, Buffett did provide a reassuring comment for investors that are managing less capital — such as individual investors.
‘I think that investing has disappeared so much from this huge capitalistic market, that anybody can play in, but the big money is in selling other people ideas that aren’t outperforming. And I think that if…you’re running small amounts of money, I think the opportunities will be greater.’
But then Charlie and I have always differed on this subject, he likes to tell me how gloomy the world is and I like to tell him, ‘We’ll find something,’ and so far, we’ve both been kind of right.”
In one of Munger’s last public appearances before his death, he spoke about relying on the Ben Graham approach:
“Great brand companies, of course, are good, getting the right price. The whole trick is getting them on a few rare occasions when they’re really cheap.”
While patiently waiting, Berkshire Hathaway began selling, taking profits. In November Fortune reported:
“Warren Buffett sees so few worthwhile deals that…Berkshire Hathaway Inc.’s cash pile scaled a fresh record at $157.2 billion, bolstered both by elevated interest rates and a dearth of meaningful deals where billionaire investor Warren Buffett could put his money to work.
The hoard — which Berkshire has largely parked in short-term Treasuries…also reported operating earnings of $10.76 billion, a jump on the prior year, as it benefited from the impact of elevated interest rates on the cash pile.”
Every investor has a “horror story” about expensive investing lessons leading to serious losses. I’ve certainly done my share of “dumb things.” My mistakes were impatience, taking on high risk, hoping for extraordinary gains, getting emotionally caught up with hype and hope – and relying on “experts” with something to gain by me following their advice. Doing my own homework, filtering out the hype, and patiently thinking things through would have saved me a lot of expensive lessons.
It’s much easier to get poor quick than it is to get rich quick.
Just what is a “fair price?”
The Epoch Times explains the connection between Warren Buffett and legendary investor Benjamin Graham:
“Fans of Buffett know that before he became known as one of the most successful investors in history, he was a student of Benjamin Graham. Graham literally wrote the books (‘Security Analysis’ and ‘The Intelligent Investor’) on value investing, a method of buying stock in companies that are trading at a discount to their intrinsic value.
…. While you may not have gotten to study under Graham at Columbia University as Buffett did…. Many…have chosen the path of…mimicking the investing style or matching the portfolio picks of movers & shakers like Buffett.”
“What Is the Graham Number?
The Graham number (22.5) measures a stock’s fundamental value by taking into account the company’s earnings per share (EPS) and book value per share (BVPS).
The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued and thus worth investing in.
It is used as a general test when trying to identify stocks that are currently selling for a good price. The 22.5 figure is included in the calculation to account for Graham’s belief that the price-to-earnings (P/E) ratio should not be over 15x and the BVPS should not be over 1.5x (thus, 15 x 1.5 = 22.5).”
Why is Berkshire Hathaway holding on to billions in cash?
In early December gurufocus.com told us the current P/E ratio for the S&P 500 is over 25 – 66% higher than the Graham P/E number of 15 indicating a good value.
Friend Chuck Butler recently warned us:
“I feel the pundits/stock jockeys are telling their clients that the bear market in stocks has ended; the next move for interest rates will be down, expect a stock rally… Personally, I feel any current stock market rally is a bear market rally, and nothing more… The Fed/Cabal/Cartel isn’t going to be cutting rates any time soon. All the historical indicators we’ve used to tell when a recession is coming, are flashing red… Which means… stocks have not done well in past recessions…
I recommend extreme caution, don’t be fooled!”
How do investors protect the value of their nest egg?
How do retirees pay their skyrocketing living costs?
Luckily there’s a proven way for you to stay ahead of inflation, just like 20,000+ investors are doing right now…
Here’s how you can be one of them. Click HERE for more information.
Get used to making less – less than what?
If Munger is referring to the exorbitant stock gains that resulted from historically low interest rates forcing people into the market, I would agree. The effects of the Fed’s easy money policy, public and private debt reaching historic levels, and the government’s ridiculous spending are all coming home to roost. I’m skeptical of the Fed preaching a “soft landing.” I’m hoping for only a recession, not something worse.
On the flip side, Berkshire Hathaway’s many billions are invested in short-term, safe, interest-bearing instruments paying more than the current inflation rate.
Individual investors can also invest in short-term CDs, government bonds and preferred stocks; many currently selling below par value, paying close to double-digit interest.
Baby boomers can’t afford to lose money or buying power to inflation. Ignore the get-rich-quick stock jockeys. There are plenty of safe investments with much higher returns than we have seen over the last decade or so. A lot of investors are making more, not less, with safe, worry-free interest and dividends than they’ve earned in years while sleeping much better at night.
As Munger said, “I think value investors are going to have a harder time now that there’s so many of them competing for a diminished bunch of opportunities.” While there are very few “wonderful businesses for a fair price” available today – stay cool, they will come to you if you are patient.
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On The Lighter Side
I saw a cute post on Facebook. I hope everyone had a great Holiday Season – now I’m ready for summer! When I lived in the cold weather, that would have been me.
College football is in the middle of “bowl season,” ending with the national championship.
Unfortunately, it has taken a turn in the wrong direction. Athletes can now enter a “transfer portal” that allows them to easily change schools – and opt out of playing in their team’s bowl game. NIL (Name, Image & Likeness) endorsement money is becoming a big factor in choosing where they want to play.
I was disappointed last week watching #12 Oklahoma play #14 Arizona. Eleven Arizona players and fifteen Oklahoma players are not playing.
Undefeated Florida State (ranked #5) plays Georgia (ranked #6) in the Peach Bowl. Why is the lower-rated Georgia a 20-point betting favorite?
Larry Brown sports tells us:
“Saturday’s Orange Bowl game between Florida State and Georgia is going to be a joke as far as the Seminoles are concerned.
…. Between players choosing not to play in the bowl game and those leaving via the transfer portal, FSU will be without more than 20 players for the Orange Bowl.
…. They will look like a shell of the team we saw fight to achieve an undefeated record.
A matchup between the No. 5-ranked team and the No. 6-ranked team would ordinarily be a great one, but in this case, we could be looking at a very forgettable game.”
Bowl games used to be the highlight of the college football season. The current rankings mean nothing. The winning coaches might just be best at having fewer kids quit the team.
The NCAA sets the transfer portal dates for athletes in fall sports to begin “the day after championship selections are made in their sport.” The window closes on January 2nd. I’d suggest members of their rules committee sit in some of their marketing classes at their esteemed universities. NCAA football brings in billions of dollars and they are degrading the quality of their product at the time their consumer interest is at its peak. Stupid….
I just can’t get as excited as years past.
Quote of the Week….
“The way a team plays as a whole determines its success.
You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime.”
— Babe Ruth
Friend Rob G. shares some clever thoughts for our enjoyment:
- Remember what the valet who parked your car looks like because we do not have valet parking.
- How do you milk sheep? Bring out a new iPhone and charge $1500 for it.
- To get rid of unwanted junk during the holidays…. Put it in an Amazon box and leave it on the porch.
- Interviewer: “So tell me about yourself.” Me: “I’d rather not, I kinda want the job.”
- When one door closes and another door opens, you are probably in prison.
- When I say “the other day” I could be referring to any time between yesterday and 15 years ago.
- I don’t mean to interrupt people; I just randomly remember things & get really excited.
- I had my patience tested. I’m negative.
- When I ask directions, please don’t use words like “East”.
- My luck is like a bald guy who just won a comb.
And my favorite:
- If you answer the phone with, “Hello, you’re on the air!” most telemarketers hang up.
Until next time…
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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