Below is a good little video from Bloomberg about Warren Buffett’s Berkshire Hathaway being down about 12% in 2015. Also I saw that Bill Ackman’s Pershing Square, which was one of the best performers in 2014 was down more than 20% for the year, so I’ll share that article too. This is why I always preach that you don’t want to chase short-term performance. These guys are both obviously brilliant investors but absolutely nobody will outperform each year or quarter, so if you are constantly chasing whatever is hot, you are bound to get crushed at one point or the other. Berkshire Hathaway’s stock looks a lot more attractive at current levels, so while others may be selling, we are far closer to our purchase price. Don’t be shocked to see it in your portfolio, especially if it continues to drop
Today’s market is extremely interesting because in general, the stock market is very expensive. Economic growth is quite weak. Eventually, index funds and mutual funds are going to get destroyed. It is not a matter of if but instead is a matter of when and I think it is likely to be sooner than later since there is so much froth in the market. With that said, there are a few specific opportunities that are so highly attractive that even if I knew the stock market as a whole was going to go into a bear market, I’d still buy them. AGO is a perfect example of this. Right now we are in a “workout” situation. No matter what you assume happens in Puerto Rico (thus far the news has been better than even I expected,) the stock is so cheap that I could not be more confident we are going to make a lot of money over the long-term. Their insured portfolio is basically in runoff so each quarter the risk goes down. Meanwhile they have a $10 billion plus investment portfolio that spews income and cash flow, that will benefit with rates going higher. New business production has been minimal due to low interest rates, but AGO stands to be one of the biggest beneficiaries of higher rates as it will increase financing costs for municipalities, which AGO can help reduce. A mild recession really wouldn’t mean much due to AGO’s high quality insured portfolio.
How many investments do you think there are right now where the odds are so skewed in our favor? The answer- very few! That is why we are big in it and that is why I discuss it a lot. I do not expect our results over the next 3 years to be similar to the market. The key condition to being successful is letting things play themselves out. Puerto Rico will get worked out in 2016 one way or the other, meanwhile dividends and stock buybacks will also increase. It would be a much simpler process if Puerto Rico wasn’t a political hot button but either way we will be fine. Often the financial media likes to bag on guys like Buffett, Berkowitz or Ackman when they are down, but I’d be much more inclined to take the contrarian approach because I understand their investment strategy. In the late 1990’s there were a lot of 25 year old money managers making a fortune in tech companies and people couldn’t invest enough money with them. They all blew up with the tech bubble, along with many peoples retirement portfolios. Value investing has stood the test of time and will continue to do so due to the simple process of buying a security at a significant discount to intrinsic value, assuring yourself of an adequate margin of safety. One thing else I want to mention is that when I say I expect index funds and mutual funds to get killed fairly soon, don’t overreact as my timing is not necessarily better than anybody else’s. Most savvy investors knew the tech bubble would blow up but were far too early! On the plus side, many of those same investors made a fortune being long conventional companies involved in industries outside of technology, despite the Nasdaq dropping 75% in the following years. I don’t think we will see that sort of a selloff, but the accounting quality and valuations of some of the most widely held stocks are quite absurd. I’ll discuss this more in a webinar later this month. I hope you enjoy the video and article, and I’ll keep you posted on new developments.