The Evidence Is In… For Today

Blink and You Missed It

The bear market lasted just one day, at its bottom declining by 21%. Despite the far-reaching evidence suggesting it would get worse before it got better, we witnessed a complete recovery within one month. Who predicted that? Last month played out like a Perry Mason episode where the final verdict hinged on that last piece of evidence (a 90-day tariff reprieve) you knew was possible but hard to predict. Will there be a retrial? Stay tuned.

In the case of our one-day bear market, the tariffs all but sealed a recession. The evidence was overwhelming—how could they not severely impact our economy, given that China, one of our largest trading partners, was targeted with the worst tariffs? It wasn’t difficult to join the negative prognosticators, seeing what everyone else saw: an economy in trouble. Just like a real trial, the opposing side (Trump) wasn’t finished testifying. Many companies had become attractively valued, so it took very little to sway the entire mood of the court. There is a point when it doesn’t matter how bad the story looks, “if the glove doesn’t fit, you must acquit” (the famous evidence that probably freed O.J. Simpson). In the market’s case, the bad news became priced in. So, one investor’s evidence of trouble is another’s proof that the worst is over.

Patience over Perfection

If you follow financial media, you know that Warren Buffett is retiring this year. He owns what is likely the best long-term track record in market history. However, analyzing the ‘evidence’ regarding Berkshire Hathaway could leave you wondering… why?

If you listen to our podcasts, you are aware that we are big fans of Union Pacific Railroad, but at a slightly lower price. While researching the 100-year-old company, we discovered that Burlington Northern, the railroad owned by Berkshire Hathaway, is the least profitable of the six major railroads.

Our latest episode also discusses Sysco, the food distributor. Berkshire Hathaway owns their competitor, McLane. McLane’s profit margins are half of Sysco’s.

BRK owns Geico, the auto insurer, but Progressive has been taking market share.

Kraft Heinz (26% owned by Berkshire) is another long-term holding that is only up 2.2% since 2012, while the S&P 500 has increased 400%. Fortunately for him, it pays a 5.8% dividend.

Coca-Cola (a $27 billion holding of Berkshire) has performed well overall, except that the stock declined by 17% from 1998 to 2010.

This ‘evidence’ might lead an uninformed investor to conclude that Berkshire Hathaway is just another company, not the outstanding performer it has been. If you haven’t picked up on it yet, ‘evidence’ is open to interpretation.

Warren Buffett excels at patience and discipline. He doesn’t need to buy at the bottom or even own the best businesses; he just relentlessly reinvests the dividends from his investments (both his privately owned and public companies) and ignores everything else. At the latest BRK annual meeting, he voiced his disapproval of tariffs but also maintained his commitment to holding stocks.

The Verdict for Investors

For long-term investors, price matters. When an investment becomes attractively priced, the best ‘evidence’ is what you are paying for a company’s cash flow, not what others think will happen next month or year. The next time the market declines by 20%, buy something. It’s easy to fall into the trap of prognosticating like everyone else, but you don’t have to pick the bottom, and it really doesn’t matter if it gets worse before it gets better.

Observations On The Market No. 407