Decades, Not Days

The Long Game

Greg Abel took over as CEO of Berkshire Hathaway on January 1^st from longtime head Warren Buffett. If you follow the financial markets at all, you know that Buffett is famous for holding investments for decades. These included companies like Coca-Cola, American Express, DaVita, Moody’s, and, within the last decade, Chevron and Apple, among many others. Many of these holdings have produced spectacular gains. It is a major reason he is one of the richest people in the world, even after giving away billions of dollars.

Greg Abel has apparently decided to be somewhat more proactive and do a little house cleaning. One of Berkshire’s holdings is Kraft Heinz. It was acquired in 2015 after Berkshire helped finance the merger of Kraft and Heinz, thinking synergies could be developed. These were both companies with market-leading brands; however, Berkshire’s investment is now 50% below what they paid, even after dividends. Over the same period, the S&P 500 has gained almost 300%. Investment success is not easy, even for the best. Apparently, not everyone thinks so.

Searching for Shortcuts

The Wall Street Journal recently published an article entitled “How Young Traders Use Fake Money to Practice for the Real Thing.” The article begins by describing a high school student who won a trading competition with a return of 2,000% in one month, putting his $100,000 of paper money into the stock and options of GameStop. The student reflected on his success: “It kind of encouraged very, very risky investment decisions… my intro to investing was basically gambling.”

The article mentions several Gen Z investors who use simulators and apps to practice trading, attempting to develop winning trading strategies to use with real money. The allure of easy money only seems to be growing.

In the same article, the chief executive of NinjaTrader, a futures trading platform, says paper trading “is not designed to encourage impulsive behavior but instead acts as a training ground to support learning, strategy refinement, and thoughtful decision-making.” Really?  — He failed to mention that the more users trade with real money on his site, the more his firm makes. No connection, I am sure.

The article also describes a young couple who lost $2,500 trading futures and had to scramble to pay rent. It never mentions that futures are one of the riskiest forms of speculating. Companies and large investors often use futures to hedge risk, but these young traders seem to think that they can trade with limited downside, liquidating positions with only 1 or 2% losses. What they don’t seem to understand is that the futures market can gap up or down on a news event, and the next trade can leave you with a $100,000 loss or more. You may now be in debt to the brokerage firm.

The article seems to be confirmation that young investors are looking for the easy way, and they sure don’t want to wait decades.

What A Concept

The good news is that even as markets become more about entertainment than investing, the economy is still fundamentally about companies that earn profits. A good analogy might be the growing popularity of sports gambling. Watching a Denver Broncos football game can be very simple or extremely complicated, depending on the experience you desire. You can now bet on almost any outcome, even while the game is being played. You can also listen to or read commentary for hours. You may also decide to boycott the entire Bronco experience out of principle. Or you can simply watch and enjoy the game. What a concept. You have choices, and the same goes for investing.

Greg Abel has decided that the investment outlook for Kraft Heinz no longer merits Berkshire holding the position. It probably has nothing to do with him having built a “relationship with the charts,” as one of the young traders in the Wall Street Journal article states. He simply believes the future cash flows from Kraft Heinz will not grow fast enough to meet Berkshire Hathaway’s desired rate of return. A trading app or simulator is about as likely to create wealth as betting on football games.

Observations on the Market No. 415