June 28, 2022
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As we continue to tread in choppy waters, we embrace the concept that lower prices benefit net savers long term. Buying more of something while it’s on sale can be a great benefit to investors long term. We use declines in two primary ways:
1. Invest incoming cash flows at better prices. This means investing the dividends and interest current investments spit off and investing new money you may be adding.
2. Rotate from lower-quality assets into higher-quality assets at bargain prices; looking for investments that will come out even stronger on the other side of a downturn. Perhaps this means owning more companies that have huge cash piles and buyback their company stock (making your shares more valuable); or buying companies that can expand to take over weaker competition.
Many of our investments and stock holdings are designed well ahead of time which allows us the luxury of sitting back and watching them compound capital that will eventually yield a wonderful harvest in the future.
One of the greatest investors of all time, Warren Buffet, sums up this philosophy very well in his 1997 Berkshire Hathaway annual letter. This is one of the best communications about REAL RISK that I can find and Evergreen Wealth fully embraces this dynamic and thinking as our primary risk viewpoints long term. Below is worth reading a few times to help fully embrace the power!
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire “saves” for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners’ indirect savings program will be.
Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.
At the end of every year, about 97% of Berkshire’s shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.
So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)
We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate “saver,” Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.
We FULLY expect Mr. Market to get MORE crazy as the economy is very likely to experience a continued decline. However, this too shall pass and we will eventually see the Federal Reserve normalize rates; inflation will slow its rise and markets will rally again. We do not know when exactly, and so we will continue to own great investments we believe will be around 5, 10, or 20+ years from now and will provide us with strong cash flows well into the future.
With markets pushing toward -25% declines we are starting to see some real opportunities unfold. We could have a way to go but are starting to inch into some more favorable holdings that have been on our ‘watch list’ for quite some time. We are carefully putting cash to work (cash we raised from trimming profits in good times).
If you have excess cash that you had earmarked for long-term investments …now is the time to start thinking about putting it to work. Give us a call to discuss if this makes sense within your overall plan and we are happy to devise a buy-in strategy over time for your needs.
If you’re taking income…not a net saver anymore (like many retirees). Rest assured we are diligently hedging risk with diversification, looking to rotate into new income opportunities, and aim to get large pay raises via increasing the dividend and interest payouts as opportunity allows. Naturally, if you’re a more moderate or conservative investor then you have likely not seen anything close to a -25% market decline! You are being rewarded for the risk mitigation that we established at the beginning of your planning process. All accounts are performing in alignment with our expectations, and we are getting a little more excited as we see prices decline at the new opportunities just starting to unfold. It may take until 2024/2025 for us to see the fruit of today’s moves…but we are starting to plant crops that we believe will yield a nice harvest in years to come.
It is a tremendous honor to help steward your assets and retirement journey during this time. Thank you for your trust! Please reach out if you have any questions. You and your families remain in our prayers as we continue this journey together.
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.