Follow the Sage - a decade on

We were reminded this week about the strength and durability of the Berkshire Hathaway story. Here is a February 2008 Trustnet article that we wrote on the company and Warren Buffet’s approach to investing and business, entitled Follow the Sage.

“We live in challenging times, and at times such as these it pays the medium to long term investor to take a step back from the market melee, and try to discern where the next opportunities may lie. History teaches us that there are invariably multiple new investment themes and trends which emerge from a fundamental period of dislocation and doubt such as the one we are living through presently. Negative news abounds from the banks, the housing market, the service sector, on the jobs front, and on corporate earnings growth. Last week-end the IMF revised downwards its forecast for worldwide growth for 2008, but you got the distinct feeling that they are as much searching for straws as they are doing hard & confident analysis of the current and future state of the world’s major economies. No one knows if the US will avoid recession, and least of all, I would suggest, the IMF. Equally, no one knows whether the much-discussed decoupling theory – that the world can grow even when the US is in recession – has much or any validity…
For investors who don’t get paid for intricate macroeconomic analysis or sitting on their hands well beyond the point of maximum opportunity, this is a classic time to be seeking out solid investment opportunities. Witness Warren Buffett, who invariably only really gets busy in such times. If it’s time for him to go to work, surely it might pay us to turn away from the endless gloom watch, and return to old-fashioned tyre-kicking. It’s an irony that when the big picture noise is at its loudest and most pessimistic, it is usually the time to return to bottom-up analysis of company fundamentals. The companies that are thriving in this environment, and whose share prices are giving tell-tale signs that they are more than holding their own, despite the downturn, these are the names to be adding to your wish list. Then add patience and the passage of time, and you have the ingredients of a future investment strategy, looking beyond the current gloom and despair. Follow the Sage


The power of compounding

Money manager Chuck Akre explains how he finds "compounding machines" -- companies that produce high rates of returns for shareholders. Chuck says these companies are few and far between, but once he finds them, he holds on to them. The Akre Focus Fund is rated 5-star by Morningstar and has delivered nearly 19% annualized returns since its inception

Everyone has a plan, until they get hit in the mouth

One is reminded of a well known boxer's observation on plans and experienced reality, after the last week of extraordinary market volatility.

Last Friday, the US 10-year Treasury yield surged 0.443 of a percentage point on Feb. 2, to a four-year high of 2.85%, on the threat of higher inflation, after the January US jobs report, released that morning, showed that wage growth had increased by the highest monthly rate since 2009.

“The real key to making money in stocks is not to get scared out of them.”
— Peter Lynch

A sharp reminder that essentially all assets worldwide are priced in relation to 10 year US Treasuries. In the period since the great financial crisis, investors had grown used to a world of muted inflation, low bond yields and slow, but steady growth. But everything seemingly has now changed. Higher growth, higher inflation, higher bond yields, higher volatility. This was a very long time in coming, the painful re-adjustment when risk is re-calibrated back to something resembling normality.

This will eventually play out, over time. Overall it should be seen as a positive change. Positive relative to a fantasy world of excessively cheap money and mis-priced risk. Positive as well if this allows dedicated, patient managers to find outstanding companies selling at outstanding prices. This after all is the essence of long term, value orientated investing.

Across the globe, money managers who are paid to seek out value, who have waited patiently for this, will now be redoubling their efforts to find those rare opportunities.

As Peter Lynch once noted, “the real key to making money in stocks is not to get scared out of them.”

This is indeed what the investment business should really be substantially concerned with (as opposed to the business of following a trend by tracking an index, or worse, fiddling around with exotic and impossible to understand 'products'): making judgments on valuation, exercising patience and guile, understanding your investment inside and out, adding on weakness, and yes, trimming on excess. Doing this over and over again in a consistent manner. Then, when you get 'hit in the mouth', you are more able to remember your plan and to stay the course.