To Our Business Partners

HAS BUFFETT LOST HIS TOUCH? 

Much has been written in recent months about Warren Buffett’s latest investment moves.  (Buffett is Chairman, largest owner, and primary manager of Berkshire Hathaway Inc’s. vast investment portfolio.)  In recent months, he has sold large amounts of stock, most notably positions in Apple and Bank of America.  And, perhaps equally significant, Buffett bought back NO Berkshire company stock in the open market during the past three months, which he had done every quarter since 2018.  This suggests that even Berkshire Hathaway is not reasonably valued.  Accordingly, Buffett has built the company’s cash holdings to record levels as a percentage of company assets.  Of course, many have been criticizing Buffett for “leaving gains on the table” by selling into a rising stock market. 
 
While we cannot pretend to know exactly what he’s thinking regarding selling, we can only guess his rationale.  One thing to keep in mind is that Buffett is likely viewing the investment landscape over a longer time frame than most investors.  After all, he’s been managing investment capital for nearly 70 years, in nearly every market environment imaginable! 
 
First, Buffett’s favorite measure of valuation is the ratio of total stock market value divided by Gross Domestic Product (GDP), which is the total value of all goods and services produced in the U.S.  The ratio currently stands at 200%, meaning that the stock market value is DOUBLE the amount of the nation’s economic output.  As a comparison, this far exceeds the ratio of 130% during the “dot.com” tech bubble of 1999, when stock prices were also extremely high relative to economic production. 
 
Second, yields on U.S. Treasury securities stand at 4.5-4.8% across the maturity range of one month to 20 years.  By comparison, for every dollar of stock price, corporations are earning roughly four-and-a-half cents.  Thus, the market’s “earnings yield” is 4.5%, which is roughly equal to what an investor can earn virtually RISK-FREE in 6-week U.S. Treasury Bills.  Other methods of stock market valuation also support the thesis that stock market returns could be below average in coming years.  So, the question becomes:  Why incur the additional risk of owning stocks when the investor is not getting any additional potential return?  
 
Buffett’s investment prowess has come into question in the past at significant market phases, especially in highly valued markets.  Is he out of touch with what’s driving the stock market higher?  Will he be proven wrong this time around, by being fearful when others are greedy? 

PORTFOLIO VALUATION 

See above.  We have some of the same valuation concerns in our small universe* of stocks.  Virtually nothing looks cheap in our estimation.

RECENT RESULTS

All the popular stock market indexes declined in October.  Smaller company composites were down 1-3%, while the large company indexes were off by 0.5% to 1.5%.  Year-to-date, large–cap indexes continue to lead, with the S&P 500 and the NASDAQ Composite both up about 21%, while the small/midcap indexes are up 8–10%.  Over the last 12 months, large cap indexes continue to dominate, up a whopping 38–40%, while the smaller company indexes are up 30–34%, coming off a low point from August through October a year ago.  The lack of broad participation by most stocks continues to be a concern.  Our group* of portfolio stocks is currently performing more in line with the small and midcap indexes. 

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.