Quick trivia: Who is famous for the saying, “It’s only when the tide goes out that you learn who’s been swimming naked”?? Ironically just last week Warren Buffett’s 58th annual “Letter to Shareholders” was reviewed by TGIF 2 Minutes, and, yes, Warren E. Buffett first famously uttered these words back in 1992.
The timing of his utterance was, as CEO of the insurance conglomerate Berkshire Hathaway, just following Hurricane Andrew when the inadequacies of the insurance industry were negatively exposed. Buffett was describing “the rosy appearances that can mask financial recklessness until the good times end.”*
Warren Buffett, the world’s 4th or 5th richest person, famously writes a Letter to Shareholders each year published around the end of February and featured in May at his annual meeting for shareholders on a farm in Omaha, Nebraska. His company, Berkshire Hathaway, has an amazing long-term record of rewarding long-term shareholders. Buffett is now 92½ years old and nearing his 60th annual go-around with the meeting and shareholder letter.
The letter has a mild cult following and is read by seasoned, experienced investors; younger, newer investors; company CEOs; and anyone who has a few extra minutes for down-to-earth reflections from a billionaire. This year’s letter was far shorter than past years – and thus to the point. Here are a few of the highlights:
More and more lately, perhaps as a result of the post-pandemic world, I am being asked for basic financial advice – from both young people AND those in the over-55 crowd. By the way, the over-55 crowd who ask this question are typically wealthy with comfortable lifestyles. The basic financial advice they seek includes the question, “Are we OK financially?”
A handful of smart people ask for further definition of “OK” and then ask the same question, “Well then, are we OK financially?” The answer comes down to super-basic elements, and thus today’s short edition of TGIF 2 Minutes.
…”Daddy, Why are we not eating my favorite fancy meals and brands of food?”
It is not quite Chef Boyardee and Ramen Noodles yet, but there is data reporting higher-end households shopping at lower-priced food stores (i.e. Walmart).* There is a lesson for kids and adults here. First a few more details.
Inflation is no joke; and can be the great equalizer. For even the highest-earning households, nearly everything is more expensive. Namely, food. In addition, during the pandemic households became accustomed to ordering out for food and meals, taking delivery, and cooking at home less. For those households who chose to cook at home more often, the ingredients were and are now often delivered or shopped for by a “shopper” and picked up curbside at the grocery store or delivered to the doorstep. Food and service costs have skyrocketed (partly the result of further increases in wages for basic hourly workers).
From the Archives of TGIF 2 Minutes – with an update on cash.
One of the most critical factors of long-term personal financial success is…. guess:
A) The markets
C) Interest rates
D) Stock selection
E) Income level
And the answer is… SPENDING. This fact is why a truly competent financial planner will spend the most time on discussing spending, both today and future projected. Spending can also be expressed as “lifestyle” or “the basics of food, shelter, and transportation plus lifestyle”.
However, the inevitable will happen. And YOLO (“You Only Live Once”) will creep in.
Recent news features the danger of the United States defaulting on its Treasury debt. Longer story short, the US Treasury is very, very, very, very unlikely to default, and “cooler minds” would be educating the American public about why this is the case. The explanation is beyond the scope of TGIF 2 Minutes. (Please note that none of the following is a political statement or meant to be.)
Of course, there are plenty of reasons why the US finds itself, once again, in this position. The last time it was this serious was in 2011 when Barack Obama was President. Then came the coronavirus in 2019 and responses by Presidents Trump and Biden. Entitlements and social program spending, along with eventually replenishing US defense spending, became and are still beyond expensive. As The Wall Street Journal notes, “…U.S. debt held by the public is now about 100% of GDP, up from 39.2% as recently as 2008 and 77.6% in 2018” and “…The cost of financing that debt is rising fast along with interest rates, and interest on the debt will take up an increasingly large share of federal revenue. Priorities… will be squeezed.”*
The country is witnessing a high stakes political fight that will likely play out over the next five months and feature the Republicans and Democrats in the US House of Representatives negotiating and attempting to call “chicken” on who gives in first, with trillions of dollars in the offing. The primary matters at hand are the government’s overdue and needed discipline on its spending cap – and determining how much debt is manageable for the country over the short- and long-term. The next generation of Americans, among others,is who should be watching most closely.
From the recent archives of TGIF 2 Minutes – especially worth a second look as the year 2023 unfolds. Inflation recently came in at a still very high 6.5%… which seems “low” only because several months ago inflation was at 9.1%. Shelter and services (including daycare) remain the areas with highest inflation; gas, autos, computers, and sporting goods saw slower rises in still high prices. Employment remains an oddly strong component of the economy – leaving the likelihood of a “soft landing” type of economic slowdown a possibility.
Sept 2022: It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?
What is in store for 2023? Is the stock market overvalued? In answer to the second question: perhaps yes, perhaps no. When most people ask, “Is the market overvalued or undervalued?” what they really are asking is, “Where is the market going next?”
Of course, no one knows for sure. But a bit of historical data can offer information for comparison. Below (top) is a chart showing how over-priced US growth stocks (yellow-ish line) have been over 100 years and how over-priced US value stocks (greenish-blue line) have been over the same period. It would seem that growth stocks are still over-valued. But look at the period for growth stocks between 1974 (the last time inflation was as high as it is today) and 1998. Can you say that it was obvious in 1992 that growth stocks were overvalued? Probably not.
Fast forward to 2023. What could happen next? See the bottom chart for more data.
Will the US officially enter a recession? If so, how bad, and how long will it be?
Will there be more bankruptcies related to cryptocurrencies and trading?
What will become of the unbalanced employment situation?
The list can go on and on. For as long as most experienced investors reading this post can recall, there have always been questions that economists (similar to the weatherman/woman) attempt to answer. Readers and investors who are newer or younger can learn over time that questions regarding the economy and government/fiscal policy are what make markets operate. Everyone is entitled to her or his opinion, especially in investing: