Is it me or did Buffet’s annual letter didn’t get as much play in the media as it used to? Or am I just in a different social media bubble that I don’t see the using fawning over what he wrote? Same thoughts apply to Marks latest Memo, normally I would see this all over the social media/news, but its gone quiet.

Berkshire – 2020 Letter

Regardless, I spent the weekends going through Berkshires and amidst the talk of buybacks, and how Berkshire is effectively one of the largest land based conglomerates of transport assets, I found the below 2 most interesting. Enjoy with a link to the rest of the letter.

“And bonds are not the place to be these days. Can you believe that the income recently available from a10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen94%from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future”

“In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring either hamburgers served with a Coke or a French cuisine accompanied by exotic wines. But you must not, Fisher warned, capriciously switch from one to the other: Your message to potential customers must be consistent with what they will find upon entering your premises.”

Link: https://berkshirehathaway.com/letters/2020ltr.pdf

Marks – Something of Value

Finally, much of the worry about whether we’re in a bubble relates to valuations. For the S&P 500, for example, the current ratio of price to projected 2021 earnings is roughly 22 (depending on which earnings estimates you use). This seems expensive compared to the historic average in the range of 15-16. But knee-jerk judgments based on the relationship between current valuations and historic averages are too simplistic to be dispositive. Before making a judgment about today’s valuation of the S&P 500, one must consider (a) the context in terms of interest rates, (b) the shift in its composition in favor of rapidly growing technology companies, with their higher valuations, (c) the valuations of the index’s individual components, including those tech companies, and (d) the outlook for the economy. With these factors in mind, I don’t think most of today’s asset valuations are crazy. Of course, a big correction in speculative stocks could have a negative impact on today’s bullish investor psychology.”

“Although no markets are starved for capital these days, there may be alternative “alpha” markets where investment skill can add to returns, hopefully without a commensurate increase in overall risk. Some of this additional return is simply a premium for bearing illiquidity, and the pain suffered by some institutions during the 2008-09 crisis shows how important it is to correctly assess one’s ability to live with illiquidity. And some of the return increment will come from employing managers with alpha, or the ability to add to return without a corresponding increase in risk. However, relying on positive alpha exposes investors to manager risk, or the possibility of hiring managers who turn out to have negative alpha.”

Link: https://www.oaktreecapital.com/docs/default-source/memos/something-of-value.pdf?sfvrsn=b0d46166_8

I’ll throw in my 2 cents, even I adjusted my thinking re investments 2 years ago (and for those that know me, I can be rather stubborn), its paid dividends (+35% since the end of ’19 versus a flat ASEAN). I don’t know the minutiae of the impact from all this money printing, but I do see the basics of supply destruction and demand recovery leading to multiple industries likely to perform far better than investors expect. However yes the human side of me does see that the costs will all be borne by the consumers for the coming years and you’ll just have to deal with it.

  1. Always insightful, thanks! I appreciate your commentary. I think Marks is probably right, and there’s been a permanent shift in valuations which will persist going forward. Investors making decisions based on the previous paradigm’s valuations are going to get left in the dust.

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