This weekend, Warren Buffett’s Berkshire Hathaway holds its annual meeting where investors flock to Omaha Nebraska to listen to the valuable insights offered by Buffett and his partner Charlie Munger.  It’s a great time to reflect on why these investors have been so successful and how it can be applied to our own investments.  Today, the WSJ had a nice article about Buffett’s preference for dividend-paying stock and the long-term nature of those investments.  When you are holding a stock for a long time, there are inevitably going to be periods of underperformance and outperformance, but the focus is on maximizing risk-adjusted returns over the long-term.  You don’t just sell a stock because it is down over a quarter or even a year, if the intrinsic value is growing, or if the stock trades at a meaningful discount to that intrinsic value.  Companies that consistently pay dividends are showing you that they are profitable, and are expecting to remain profitable, while hopefully growing well into the future. RISK

The article talks about how Berkshire should take in roughly $5.7B in cash this year from dividends alone.  As we look at the market in 2023, we have a very bifurcated market.  While value stocks did quite will up until March, big tech and consumer staples have dominated since then, as fear has permeated.  The latter stocks are trading at near record-high multiples to earnings.  As we saw in 2022, it can be very painful when mean reversion kicks in for these types of stocks, but currently, investors are attracted to their recent performance and earnings potential.  Value and especially small to mid-cap stocks are on a major sale.  It is easy to find very profitable and growing companies, yielding 4-5%, with the ability to grow far beyond that.  These are very fertile grounds to create your own Berkshire Hathaway of sorts, with a portfolio that will pay you growing dividends for many years to come.  Uniquely, we intertwine the dividends with strategies such as covered calls, which can often increase the cash flow produced by the portfolio by 50-100%.  Usually, the full impact of the options doesn’t shine through until options expiration, which usually transpires in bulk in mid-January of the following year, as I like to remind people.  The current market environment is one dominated by fear and headlines, far more than fundamentals.  That is generally an unsustainable phenomenon, so it is a time to stay disciplined and focused on our long-term goals and take advantage of attractive opportunities as they come up.

At TTCM, we’ve also highlighted that bonds are more attractive than they have been in decades, and we have invested quite a bit into them at these high yields.  Currently, the yield curve is as inverted as it has ever been, which has been a pretty reliable indicator of pending recessions.  This means that longer-term bonds have lower yields than short-term bonds.  If rates all the sudden start declining rapidly, long bonds would likely outperform, but if rates stay higher for longer than short-term bonds might be the better play.  We’ve invested in both but prefer the short-term bonds with the higher yields, then we balance that with the longer-term stock investments.  Today we’ll see what the Federal Reserve decides to do regarding interest rates.  The expectation is a 25-bps hike and then what will matter after that is the guidance.  I personally think the Fed has been too aggressive as the impact of rates is a lagging factor, so I’d welcome a pause here personally, but that is not super likely.  Earnings have exceeded expectations, and while you wouldn’t believe it based on news stories, financial stocks have produced very strong revenue growth and earnings, far in excess of market estimates.  I can’t tell you when the fear will subside, but ultimately it will.  I expect a very strong 2nd half of 2023, as our options and investments play out, and like Berkshire Hathaway, we can count on a very steady stream of dividends and interest income in our portfolios based on current positions.  Here is the article on Buffett if you are interested:

Warren Buffett’s ‘Secret Sauce’ Involves One of Investing’s Most Basic Strategies – WSJ