Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday June 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

The Real, Sensible And Wise Warren Buffett

Last weekend, Warren Buffett, one of the most famous and highly revered investors in the world, held a live online virtual annual shareholder meeting for his company, Berkshire Hathaway. Buffett, a man of almost 90 years old, ran the meeting non-stop for almost 5 hours and again delivered  valuable and memorable business, finance and life lessons.

Though many in the internet were quick to point out that this might be the first time Buffett was pessimistic, uncertain and sometimes contradicting, we think this offers a good opportunity for us to see a real and sensible Buffett from whom average investors can learn a great deal. 

Buy and hold? 

Buffett has been widely quoted to be a buy and hold stock investor: financial advisors, service firms and media often use his name to persuade people to stay the course in stock investing: perpetually buying and holding stocks forever. He himself did have quotes like “Our favorite holding period is forever.” So it was shocking for many to hear that Berkshire Hathaway liquidated all of its four major airline stock holdings in this crisis, most likely during the market bottom in March. So what happened?

The short answer is: it makes sense. Nothing inconsistent here. 

The long answer is as follows:

Regardless of what have been said and quoted about Buffett, he is in essence a business man. Ultimately, he invests/purchases businesses based on their intrinsic earnings or profit potential, not based on any public stock price quotes for these companies. Amid the Covid-19 crisis, he found that the airline business has some fundamental long term issues such as  “We like those airlines but the world has changed…and I don’t know how it’s changed,” Because of the recent Covid-19 crisis, those airlines are now planning to borrow $10 billion to $12 billion each. “That takes away from the upside,” he said, “and I don’t know whether two or three years from now, that as many people will fly as many passenger miles as they did last year …The future is much less clear to me about how the business will turn out through absolutely no fault of the airlines themselves.”

Imagine you are a business person who owns an airline business and let that sink in for a moment, and then ask yourself what to do?

Well, if the underlying condition of your business becomes so much uncertain going forward (not uncertain on how much you’ll be able to make, but not even sure whether you’ll be able to survive in the future), what would you do? Maybe you’ll need to cut the loss and move on. 

And that’s exactly what Buffett did. 

But how about his ‘buy and hold forever’ mantra? Well, what Buffett really meant here is that: daily pricing of a business in a public exchange (called ‘stock exchange’) is totally unreliable and most times is absurd. If you think about the stock exchange as a person, let’s call it Mr. Market, you’ll find Mr. Market is extremely volatile, sometimes, it quotes you an outrageously expensive price and sometimes, it offers you a fire sale. Furthermore, Mr. Market’s mood is quick to change: as short as seconds. 

This of course was partially caused by the short term uncertainty of a business: no body, even the CEO or the owner of a company, can precisely know how the business will do in the coming month, coming quarter and years. 

But one thing is certain, on aggregate, high quality businesses will earn inflation beating profits in a long term in a fair capital market (see, for example, March 18, 2019: The Risk Of Stock Investing). So to realize this, one has to buy and hold stocks for a long time, in general 20 years or longer. This is more out of necessity than for the sake of owning a stock for a long time, income tax issue notwithstanding. 

So as shocking as it might seem, Buffett’s sales of the airline stocks with a large loss is totally consistent with his past teaching. 

Individual stocks or S&P 500 index? 

It’s actually very challenging for many average investors (in fact, for most professional investors too) to study, evaluate and monitor individual businesses. That’s why Buffett actually suggested individual investors to buy S&P 500 index: “In my view, for most people, the best thing to do is owning the S&P 500 index fund.”. This time, he emphasized the low cost: “There are huge amounts of money people pay for advice they really don’t need” . 

The reason, certainly is that one can do as well as or even better than many active managers/advisors with much lower risk: a broad base index like S&P 500 is a very consistent, no surprise index that’s very diversified. It will be much less seriously impacted when something goes wrong. For example, Buffett’s mistake in airline stocks affected Berkshire’s investment returns in some meaningful way as the airline stocks took up about 10% or so of the overall investment portfolio. So a half or 50% loss of these stock values will probably shave 4-5% off the overall portfolio’s return. 

Another interesting question came up in the meeting was that when Buffett was asked to address Berkshire’s underperformance against S&P 500 for the past 10 and even 15 years, he only assured that he and others in Berkshire are fully vested in Berkshire and will do their best for the company. He can’t guarantee Berkshire’s stock will beat S&P 500 even in the long term. Again, as we have discussed in the past (see, April 1, 2019: S&P 500 As A Business), when you invest in S&P 500 index, you are effectively investing in a business that has had an outstanding long term track record for more than 100 years: 4-6% extra annual returns over inflation and never lost any money (i.e. negative profit) in any single year since 1871. Warren Buffett, as great as or better than any great investor in the world, was just simply very honest here to advocate S&P 500 index investment!

Stocks are of good long term values vs. Buffett isn’t buying anything at the moment

Some people find it confusing that while Buffett advocated buying and holding stocks is much better than holding Treasury bills, Buffett himself didn’t buy anything in the last several months, even when stock markets were in a dump. 

Again, Buffett as a businessman is just simply trying to find good businesses with a good price (preferably dirt cheap prices). If he can’t find anything undervalued, he would rather wait. 

Who said you need to always plunge your money to stocks in any moment? Granted, for most of average investors, it’s hard for them to value individual stocks. But Buffett did offer a very good and simple valuation method for general stock market: the ratio of total stock market capitalization to  Gross National Product (GNP) as a yard stick to measure the stock market valuation. In his 2001 Fortune magazine article, he stated that  

“The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment”.

At the moment, the indicator stood at: 

Source: Advisor Perspective

So with the ratio being at historical high, higher than those in 2000 and 2007 peaks, no wonder why Buffett couldn’t find bargains fast enough (the Federal Reserve acted super fast this time to rescue the market and that gave Buffett a very little window to find bargains) and he’s still holding lot of cash right now. 

For an average investor, acting like Buffett based on his indicator to buy and sell S&P 500 index fund has actually done a far better job than just simply buying and holding S&P 500 all the time. MyPlanIQ has tracked the following portfolio for more than 10 years now: 

Portfolio Performance Comparison (as of 5/1/2020):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 7/1/2001
P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash 4.1% 11.8% 6.0% 5.3% 9.7% 11.5% 11.1%
SPY (SPDR S&P 500 ETF) -11.6% -1.1% 8.0% 8.3% 11.3% 8.2% 6.6%

AR: Annualized Return

Our take away from the meeting is that we are seeing a real, sensible, honest and extremely wise person who has been very consistent, disciplined and smart in his business and investment decisions. Regarding Berkshire’s recent underperformance, we encourage readers to read the famous contract bridge story: ‘If you had played it right you would have lost it.’“ In fact, long term Berkshire’s shareholders should find it more assuring that Buffett is still sticking to his investment approach. Regardless of whether Berkshire’s stock will outperform S&P 500 in the long term (subjectively, we believe it will as it’s cheaper than S&P 500 right now), the business is in a good hand. 

Though financial media tend to simplify his teachings in some bite size messages, one can benefit greatly if paying enough attention and digging through a bit to understand Warren Buffett’s overall approach. As a bonus, this learning extends beyond investing to our daily life. 

Market overview

As the Covid-19 crisis drags on, it seems that people are getting restless and even numb to the ongoing infections and deaths. The following two charts show the latest (as of 5/4/2020) daily trends in the U.S.:

Even though it declines a bit, the curves are not flattened as much as one would wish. As more states are reopening up economy, this is still very concerning. IHME  is now projecting a total of 134k deaths by August this year, a whopping increase from 60k two weeks ago. 

Earnings wise, investors seem to be determined to shrug off the bad earnings in 2020 all together: based on Factset, Q1 earnings decline is now -13.7% and analysts further expect the full year earnings decline to be -17.8%. S&P 500 index stood at 2800 level, not far from its all time high. 

Again we emphasize that stocks are still highly overvalued. Given the plenty of uncertainties associated with Covid-19 crisis, one shouldn’t be complacent. In fact, as stocks are still highly priced, it’s a good time to review your portfolio allocation and make adjustments based on your risk tolerance. Our boilerplate suggestions below still apply: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

For more detailed current market trends, please refer to 360° Market Overview.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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