Portfolio Reviews

 

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.