Tuesday, May 5, 2020
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Making mistakes and bailing on bad ideas is part of the process
One of the bigger, more controversial highlights from Berkshire Hathaway's annual meeting on Saturday was Warren Buffett's announcement that he dumped his billion-dollar stakes in four major U.S. airlines.
“The world changed for airlines,” he said while discussing potential long-term impact of COVID-19. “I don’t know whether it’s two or three years from now that as many people will fly as many passenger miles as they did last year. They may and they may not, but the future is much less clear to me.”
This news was met with mixed reviews and a bit of confusion as Buffett is famous for saying that his “favorite holding period is forever,” and that you should “never, ever bet against America.” Furthermore, he went on to discourage active stock-picking strategies and recommended investors with the time and money to park their money in a passively managed index fund.
However, nothing he did with the airlines is inconsistent with who he is and what he says. In fact, it actually helps explain how he thinks about risk and returns when it comes to stocks and the economy.
You have to dump the losers
First, Buffett sells stocks and he makes mistakes frequently. Even buying Berkshire Hathaway was a mistake. And Buffett said buying airline stocks “was my mistake.”
Successful investing is about more than just buying winners. It’s also about having the discipline to sell as information changes and the humility to know when you’ve made a mistake.
Second, holding a passively managed index fund, like an S&P 500 fund, isn’t about sitting on a fixed set of stocks into perpetuity. In fact, the S&P 500 has quite a bit of turnover. According to a study conducted by Innosight, the average tenure of a stock in the S&P was about 24 years and has been trending lower. Quartz observed that less than a fifth of the companies of the original S&P 500, which launched in 1957, remain in the index.
“50% of S&P 500 companies could be replaced over the next 10 years,” Bank of America said in a 2017 report about disruption. “Incumbent companies are facing shrinking lifespans, driven in part by a complex combination of technology shifts and economic shocks. Some of these are beyond the control of corporate leaders, but companies frequently miss opportunities to adapt or take advantage of change.”
Not all businesses and industries last forever. And instead of waiting for those stocks to zero, the folks at S&P will swap out those on the decline with those on the rise. Which arguably isn’t that different from how Buffett has managed Berkshire’s stock portfolio.
America’s opportunity lies in its ability to fix its flaws
Third, America isn’t defined by how long it hangs on to its history. Rather, it’s defined by how it’s embraced change and progress, and that means doing away with old ways. Especially the bad ways.
Buffett spent the first 45 minutes of Berkshire Hathaway’s annual meeting discussing missteps the country has had to correct over the past 244 years.
“It’s interesting,” Buffett said. “In 1776, we said ‘We hold these truths to be self-evident that all men are created equal, endowed by their Creator with certain unalienable rights.’”
“When you say the word ‘self-evident,’ that sort of sounds like you’re saying any damn fool can recognize that,” he continued. “But I don’t see how in the world anybody can reconcile liberty with the idea that 15% of the population was enslaved. And it took us a long time to at least partially correct that.”
It took nearly a century and a Civil War to begin addressing this massive hypocrisy. And there was more.
“I think it was self-evident to the 50% of the population that they were getting a fair deal for over half the lifetime of the country,” he said. “It took 131 years until women were guaranteed the right to vote for our country’s leaders.”
Buffett had even more to say about America’s dark history before he acknowledged that America was still a work in progress.
“It took us a long, long time, and it’s not done yet,” he said. “But I think it does give meaning to the fact that we are a better society with a lot of room to go.“
In other words, it’s not so much how great America is today. But rather, what makes America great is its ability to address mistakes and become better.
“What we wrote in 1776 wasn’t a fact, but it was an aspirational document, and we have worked toward those aspirations,” he said. “We have a long way to go, but I’ll repeat... never, ever bet against America.”
Investing is risky
In recent years, we’ve become accustomed to hearing Buffett celebrate America’s ability to emerge from crises. And so it was a bit depressing to hear him reflect on America’s mistakes.
But it all served as a reminder that good comes with the bad, and you can expect the unchangeable to change.
Similarly with stocks, we had become used to hearing Buffett blithely emphasize returns over risk. But amid the COVID-19, he’s clearly putting a spotlight on the risk, while downplaying the returns.
“Anything can happen in terms of markets, and you can bet on America,” he said. “But you got to have to be careful about how you bet, simply because markets can do anything.”
As my colleague Myles observed yesterday, Buffett’s tone has changed. “Buffett’s outline isn’t that investors should think long-term right now, but that they must think long-term. In other words, there aren’t many reasons Buffett can find to see the current situation as anything but challenging.“
And so while Buffett’s tone may have changed, we can’t say that he’s changed. Perhaps we’re just getting more insight into how the most successful investor in history thinks. And if we can learn from that, perhaps we all can become better investors.
By Sam Ro, managing editor. Follow him at @SamRo
What to watch today
Economy
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8:30 a.m. ET: Trade Balance, March (-$44.2 billion expected, -$39.9 billion in February)
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9:45 a.m. ET: Markit US Services PMI, April final (27.0 expected, 27.0 prior)
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9:45 a.m. ET: Markit US Composite PMI, April final (27.4 prior)
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10 a.m. ET: ISM Non-manufacturing index, April (37.8 expected, 52.5 in March)
Earnings
Pre-market
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6:30 a.m. ET: Regeneron (REGN) is expected to report earnings of $4.89 per share on $1.74 billion in revenue
Post-market
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4 p.m. ET: Pinterest (PINS) is expected to report a loss of 8 cents per share on $270.47 million in revenue
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4:05 p.m. ET: Beyond Meat (BYND) is expected to report an adjusted loss of 7 cents per share on $88.16 million in revenue
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4:05 p.m. ET: Disney (DIS) is expected to report adjusted earnings of 86 cents per share on $17.68 billion in revenue
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Other notable reports: Activision Blizzard (ATVI), Cheesecake Factory (CAKE), Electronic Arts (EA), Mattel (MAT)
Top News
Mnuchin to issue $3 trillion in debt after virus hobbles economy [Bloomberg]
UK economic shock to be 'deeper than anything in living memory' [Yahoo Finance UK]
United Airlines plans 30% cut to management ranks from October: company memo [Reuters]
Hertz prepares to file bankruptcy If Monday deadline is missed [Bloomberg]
YAHOO FINANCE HIGHLIGHTS
The cost of reopening the economy, in lives
Korean baseball's return is a bitter pill for American sports, but a win for ESPN
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