We quote Warren Buffet in almost every edition of the “Crouch Connection”. I believe it might be helpful to revisit some of the reasons for our respect for his insights and common sense. He is one of the most wealthy people in the world and it is almost entirely because of his investment acumen.
Another of his most impressive feats was a memo he drafted and sent in 1975 to the chairman and CEO of the Washington Post, Katherine Graham, about problems looming with their pension plan. As a member of the Post’s Board of Directors, Buffett was concerned that continuing with the traditional style of investment management was leading to potential problems with the company’s ability to meet its pension obligations to its employees.
Much like some retirees, many companies manage their pension plans with a short-term focus attempting to avoid the ups and downs of the stock market and accepting returns that sometimes don’t even match the erosion of inflation. This was leading the Post and many other major corporations down a path of under-funded pension plans and huge lump sum contributions to maintain adequate fund balances. Buffett instead suggested accepting the inevitable volatility of the stock market in exchange for much better long-term returns.
Fast forward to 2013 and the subsequent sale of the Washington Post to Amazon founder Jeff Bezos. While the press theorized about the reasoning for Bezos’ interest in the Post and how he might impact the news in our Capitol city, the investment community was abuzz about the health of the Washington Post’s pension plan. Rather than a multi-million-dollar deficit in the pension fund, according to Fortune magazine, the Post pension plan had $1 billion more than it needed.
Mrs. Graham had taken Buffett’s advice and had invested the Post’s entire pension fund in stocks “emphasizing a business approach to security selection…treating portfolio management decisions much like business acquisition decisions by corporate managers.”
Obviously, we agree that well-selected stock portfolios offer the potential for better long-term returns than many other alternatives. Even if our short-term timing isn’t perfect (and occasionally it won’t be), stocks chosen carefully for their business prospects and reasonable valuations have ultimately been good investments and we believe that will continue.
BUT WHAT ABOUT NOW?
I continue to hear clients concerned that the markets have gone too far, too fast, or that valuations are too dear for us to invest in the current environment. Others worry that our political environment and global disturbances might cause some event that might upset the balance and cause the next correction. The media can offer hundreds of other reasons why the market is a dangerous place and why one should invest in some other product that will be “safe”.
We believe that staying focused on the news will, in most cases, lead to bad investment decisions. Instead, we believe that we should focus on portfolio construction that “emphasizes a business approach to security selection” in the effort to dampen the volatility of the overall portfolio. We believe that over the lifetime of most investors, the results should surpass most of the alternatives available today.
WHAT ABOUT THE MARKET TODAY?
Although listening to the media will give you plenty of reasons to keep your money in the bank, there are several data points that suggest we are approaching another burst of economic activity that may drive the markets even higher. Among comments from recent conference calls:
FedEx (9/19) “We continue to see moderate growth in the global economy. Our 2017 U.S. forecast is mostly unchanged and reflects solid consumer spending and a rebound in industrial activity. Internationally, recovery in capital spending is supporting higher global GDP growth and driving the best trade volume growth since 2011.”
Vulcan Materials (11/2) We currently see mid-single-digit growth in 2018 over 2017. The recovery in private construction activity remains strong across the vast majority of our portfolio. And public construction demand appears to be firming up with most market poised for low single-digit growth in 2018, a clear and positive contrast with the relative weakness experienced in 2016 and 2017.”
Tractor Supply (10/25) “Sales were strong throughout the quarter, and broad-based across all of our major product categories and geographic regions…net sales increased 11.6% to $1.72 billion…comparable store sales increased 6.6% versus a reported decrease of 0.6% last year.”
And from Zacks Investment Research:
(10/24) “Margin improvement is very good, but no company can hope to achieve sustainable growth solely on the basis of ‘squeezing more’ out of the existing revenue dollar; they need to earn more revenues. And that’s exactly what we are seeing all around in the Q3 earnings season, with notable momentum on the revenue front, both in terms of surprises as well as the growth pace. In the case of Caterpillar, Q3 revenues we up an impressive 24.6%.”
(11/1) “Unlike the large caps whose earnings outlook improved late last year and continued improving this year, small caps have been struggling on the earnings front, with earnings growth for the S&P 600 companies in negative territory in three out of the last four quarters. But this is expected to change, with the Q3 earnings season and beyond…we see that the expectation is for double-digit growth in each of the next two years…showing that the earnings outlook for small-cap stocks is at an inflection point, with growth expected to ramp up materially going forward. This will be a major change from what we have become used to seeing over the last couple of years. This should support and drive small-cap prices going forward.”
This bodes well for the thesis espoused by RJ Chief Market Strategist Jeff Saut that we are in the second leg of the secular bull market where “the equity markets transition from an interest rate-driven market to an earnings-driven bull market!” (10/27) and that “pullbacks are for buying because we believe this secular bull has at least another 10+ years left in it!” (9/5).
Again, there are plenty of negative nabobs out there to provide you with “the other side of the story” but we will let the media cover those. I will respond to one of their favorites – that the markets are too expensive…that valuations are at historical highs – by responding that I have personally researched this subject extensively and found that valuations have NEVER been helpful in determining the timing of a market top or a market bottom.
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”
- Warren Buffett
Having provided you with some of the “green shoots” that we have seen out there, Jeff Saut (10/27) and I do believe that there is a likelihood that we will see a correction at some point, possibly sooner rather than later, and that some cash would be nice to have on hand if that were to happen. Please give us a call if you would like any additional information or guidance. We always enjoy our visits with our clients!
Dave Crouch, Raymond James Financial Services, Inc., its affiliates, officers, directors or branch offices may in the normal course of business have a position in any securities mentioned in this report. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Dave Crouch and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. All investing involves risk. There is no assurance that any Raymond James is not affiliated with the entities or individuals mentioned herein.