INSIGHTS

On May 08, 2023

Cliff's Notes: Important Advice from the "Oracle of Omaha"

In honor of the annual Berkshire Hathaway shareholders meeting this weekend, I thought it a timely reminder why Warren Buffet is the most successful investor in history and "The Oracle of Omaha." He discussed a multitude of topics:

• The banking crisis — still a confusing situation.
• The debt ceiling — not something to toy with.
• Artificial intelligence — he is impressed by the possibilities although expressed worry about unintended consequences “we know we will not be able to uninvent it.”

Throughout the weekend, however, there were several investment principles both Buffet and Charlie Munger consistently discussed. These principles are at the core of their success. What's remarkable is that this success is not based on anything complex or fancy, rather the opposite and a quite simple philosophy based on common sense. 

Here are three of his core investment principles that are worth reminding ourselves of in this era of volatility and amidst what we view as a secular Regime Change:

1. Invest in good businesses, with good management at reasonable prices (which creates a margin of safety and a less volatile ride along the way).
2. Don't try and time the market but take a longer-term view. Timing is nearly impossible and missing just a few of the best days can be costly over a lifetime.
3. Harness the power of compounding dividends and interest (for those interested, Barron's also had a headline article on this topic this weekend which is worth a read).

If we want to channel some of Buffet's common-sense advice in this challenging environment, where should we focus? Here are some solutions. For example, focusing on quality, dividend growth stocks can help an investor enjoy not only the “8th wonder of the world” — compounding income — but also the opportunity to allocate within a sector that has a reasonable valuation today vs growth (providing a good margin of safety in a world where we face plenty of uncertainties). Diversification can also help build a more resilient portfolio. It is a multi-speed economic world and international markets provide good opportunity to diversify. For instance, areas within both emerging markets and developed markets (e.g., select countries in Europe sport reasonable growth prospects, and reasonable valuations that are cheap to U.S. counterparts while parts of Asia are benefitting from reopening).

These ideas make good sense especially given that last week’s news sets us up for continued volatility. Friday's strong jobs report clocked the lowest unemployment rate since 1969 at 3.4%. This fueled the stickiness in inflation with wages still running close to 5%. What it also showed is that the supply of labor remains woefully short of demand, even still after 500 basis points of rate increases. This is a tough mix for the Fed outlook and does not support the "quick pivot" to lower rates priced into markets. 

Therefore, we continue to focus on ways to mitigate inflation and volatility (two of the three AAM CIO investment themes) and build a resilient portfolio that doesn't rely on a pivot. After all, a pivot really can only happen one of two ways, either we have an "Immaculate Disinflation" and soft landing which I would agree would be miraculous, or a recession. Challenges such as the rolling regional bank crisis, sticky inflation, the debt ceiling duel are among a long list of worries, while the Fed likely holds rates longer than the market expects. So, even though some do not see a recession (we do think a recession is a high probability)...investors should at least expect that a material economic slowdown (our AAM CIO office’s third theme) will result with lower earnings on the near horizon. As a reminder, even the Fed forecasts a recession — a rare occurrence, at least in my 35+ years of investing. Regardless, the multi-decade era known as the “Great Moderation” in economic and market volatility is long in the rearview mirror as the “stabilizers” of fiscal and monetary policy are now more aggravators of instability.

We suggest that financial advisors should take the opportunity to think about the part of their portfolio they do not have invested in cash (their core holdings) and as well, think about harvesting some of the recent strong gains in less resilient sectors (rate sensitive, longer-duration equities for example) or in broad, passive index-based strategies with huge name/sector concentrations to reposition toward sectors which should do well for the new landscape we live in. For example, a sector that has a long secular tailwind such as the energy sector (a Buffett favorite). One might even enjoy a Cherry Coke while the dividends come in.

CRN: 2023-0508-10868 R