18 June 2022
Dear Fellow Investor,
Our
portfolios were down about 3 % last week in the face of extreme negative news,
rising US interest rates as well as rising rates in most countries. High energy
prices and rising inflation are squeezing consumers. The ongoing Russia/
Ukraine conflict continues to strain economies and markets. The result of
these factors have caused many investors to panic and dump their shares.
Many high quality shares such as Apple and Microsoft are being sold.
In times
like these there is commentary and a quote from Charlie Munger shared by
Bill Spetrino from Dividend Machine a service I subscribe to that
will help us get through this turmoil.
Charlie Munger has been managing investments since
the 1960s, and has seen his fair share of market rallies and recessions over
the past half century. The investment partnership he ran from 1962 to 1975
before joining Berkshire posted compound annual returns of 19.8%, navigating
markets as the OPEC oil embargo blew up energy prices and led to crushing
stagflation in the U.S.
His general investing philosophy may sound familiar
to a Dividend Machine follower — focus on a concentrated number of holdings
that you understand well and hold onto them for the long term. However, Munger
just came to mind not necessarily because of that, but instead because the
current market reminded me of a particular quote attributed to him.
That quote? “It’s in the nature of stock markets to
go way down from time to time. There’s no system to avoid bad markets. You
can’t do it unless you try to time the market, which is a seriously dumb thing
to do. Conservative investing with steady savings without expecting miracles is
the way to go.”
That observation is probably more important than
ever for us here in 2022. Before I explain why, let’s take a closer look at the
news that’s shaking Wall Street to its foundations.
On Friday, the consumer price index figures for May
were released . . . and to be blunt, they freaked everyone out.
The CPI jumped 8.6% as compared to May 2021,
marking the fastest rise since December 1981. It was only slightly higher than
the 8.3% expected by analysts, yet it seemed to be that last straw in
shattering the hope that we had made it past the “peak inflation” point.
I’m certainly not going to argue that inflation
isn’t bad. It’s terrible, honestly. Energy prices are up 34.6% on an annual
basis. Food costs are up 10.1% year over year, and shelter costs are higher by
5.5% over 12 months, marking the biggest surge since February 1991.
The scene is ugly, and in response, our elected leaders
are shrugging and kicking the can to the Federal Reserve, who only have one
viable tool in response — raising interest rates. It’s expected that the Fed
will raise rates by another 0.75% after its meeting on Wednesday.
The aim of the Fed’s interest-rate policy is to
slow consumer spending, reduce demand across most industries and businesses,
and essentially drag the economy into a recession . . . if we’re not
technically in one already.
Well, they will keep claiming that they can “thread
the needle” and potentially avoid a recession, but that’s wishful thinking.
Accomplishing that would require a presidential administration and Congress
that actually understood the economics of supply chains and the need to bolster
our nation’s oil and natural gas production, and possessed the willingness to
clear burdensome regulations that are crushing businesses right now. If you
think any of that is happening under President Joe Biden, you’re kidding
yourself.
So, here we are, stuck in a tough situation as
Americans and as investors. Yesterday, the S&P 500 officially dipped into
bear market territory on a closing basis, sliding 21% from its recent highs.
The Nasdaq has fared even worse, currently down 33% from its last peak.
The Dow, S&P, and Nasdaq set new 52-week lows
during the trading day, and at one point, every single S&P 500
stock was in the red. That’s as stunning as it is rare.
We’re seeing a massive, desperate rush to cash and
away from risk-on assets, with crashes in tech and the cryptocurrencies
accelerating. Bitcoin fell below $23,000, and its all-time high of $68,789
— set not all that long ago in November 2021 — is a distant memory.
Even energy stocks, which have been buoyed by the
doubling of crude oil prices, were hit in Monday’s selloff, with the sector
falling by over 5%.
In recapping all of this bad news that’s pounding
Wall Street, it may sound like I’m about to have a change of heart and say you
it’s time to sell everything and go to cash. I’ve had plenty of people calling
and emailing me asking just that. “Bill, things are so negative right now, and
this president isn’t doing us any favors — should we get out of our positions
and just wait for better days?”
My answer to each and every one of those people has
been easy, though: Don’t do it. We need to stick to our strategy.
Let’s circle back to Munger’s quote. As he points
out, timing the market is a “seriously dumb” thing to do, and no system has
ever been invented to accomplish that feat. He can’t do it. Buffett can’t do
it. High-priced hedge funds can’t do it. All those so-called experts out there
who claim they have a “system” to time markets can’t do it, as their track
records prove. I’ll tell you right here I can’t do it.
That’s because, in the short term, markets are very
unpredictable. Whether an individual stock will be up or down in the next
minute, next hour, next day, or next week is often nothing more than a roll of
the dice.
Think about this: If you’re tempted to sell every
stock you own in a panic such as the one we’re in the midst of now, where does
that leave you?
For one, you’re giving away your hard-won assets at
fire sale prices.
And then, unless you’re swearing off investing
forever, there will come a point where you’ll want to get back in. When is
that? If your confidence is rattled, you’ll likely hesitate until markets show
some improvement — meaning you may be buying back those stocks you sold at
higher prices than when you exited.
I don’t know about you, but to me, selling low and
buying high seems like the exact wrong way to build wealth over the long run.
Munger, Buffett, and billionaires like them didn’t
get rich by letting emotion and panic drive their decisions. Munger nailed the
right approach when he said, “Conservative investing with steady savings
without expecting miracles is the way to go.”
On a positive note the majority of our Asian
holdings with a focus on dividends are holding well. These are value
stocks with proven fundamentals. Our Asian banks are benefiting from higher
interest rates. Our EWH the Hong Kong country fund is benefitting from the
Shanghai reopening and the portfolio of value shares both in China and Hong
Kong .
Take care
Bill
Another good news. November 2022 is the mid term elections and polls project him and his party will lose. It would mean economic recovery and lower energy/ food prices.
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