Warren's Wisdom

By now you've heard that Warren Buffett plans to step down at the end of the year. 

We talk frequently about the stock market's ergodicity, the natural inertia to go from the lower left to the upper right despite some bumps along the way. The more someone trades, the more they are fighting that natural inertia other than proper asset allocation targets and mitigating sequence of return risk when relevant. Of course mistakes get made so those need to be corrected and company fundamentals change too for better or worse which may need to be addressed too. 

I try to hold on to companies and the narrower ETFs for very long periods, forever if it works out. I have quite a few names for clients that I've held for more than 15 years.

The names don't matter. The chart captures three ETFs and two common stocks with the Dow 30 in pink (leftover from another chart I was using for something else). The purple line went through a nasty drop in 2022. The best performer has had several nasty declines. I haven't sold through any of those drawdowns. 

Buffet said the last "45 days, 100 days" was nothing in the context of long term investing and holding on to strong companies and included in my chart, narrower ETFs. I don't agree it's been nothing necessarily. For anyone who made a serious behavioral mistake and did meaningful selling in early April, this was something. I can see the dip last August being one that most people forget about but I don't think that will be the case with the Q1 into April 2025 event. 

But, however long this lasts (maybe it's over, no idea), it will be one of those retracements just like the others on the chart that happened on the way to higher prices. When you look back at a chart of some stock that is up a bazillion percent in 20 or 30 years and think I wish I woulda, chances are that 20 or 30 years included at least a couple of eye-watering declines. 

There are countless, valid approaches to portfolio management but if you pick the right stock or niche, the fundamentals don't unravel and it continues to do what you'd expect it to do, why would you get out of the position? Maybe you trim a little for risk management but that is different than getting out completely. 

Pivot to Rick Rieder from Blackrock being interviewed by Barron's. Several of his comments echoed the conversation we've been having here for a long time. I don't know whether these have been long held by Rieder or recent opinion changes. 

People used to view bonds, particularly long-end interest rates, as the ballast for and protection engine in a portfolio. Then we lived through almost a full decade of things like negative interest rates in Europe and Japan and zero interest rates in the U.S. Now, though, people are rethinking their fixed-income allocation. They can get 6% or 7% yields in quality assets, without having to go out on the yield curve. That can serve as a great stabilizer in a portfolio.

I don't know why an individual investor would want the volatility associated with the long end of the bond market without some serious compensation above prevailing money market yields. Eighty basis points is nowhere near enough compensation.

I just don’t think being a hero in fixed income makes a lot of sense. My view is: diversify. I call it, “Make a little bit of money a lot of times.”

Diversify into different income market segments to avoid being done in by some random malfunction somewhere in markets. The Financial Crisis broke the commercial paper market and a product called auction rate securities. Commercial paper came back but auction rate securities did not. Getting caught with 5% in the next auction rate securities, if something like that ever happens again, would suck but would not be ruinous as opposed to maybe 20% in a segment like that. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.