Month: December 2018

Get Me Through December … & Beyond

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This Week at MANIFEST (12/28/2018)

“Patience is genius in disguise.” — Various, including Hugh McManus

“A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefiting from the wealth building power of stocks.” — Christopher Davis

“You make most of your money in a bear market, you just don’t realize it at the time.” — Shelby Cullom Davis

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

““Is value investing dead? I don’t know. I don’t care. I don’t know when we will know. What I do know is that Warren Buffett says that growth investing and value investing are actually joined at the hip. (Tom O’Hara said this, too.) Valuation Investing is the blend of growth and value investing.” — Joel Greenblatt

Get Me Through December?

Eddy Elfenbein shared the unpleasantness update in this week’s Market Review at crossingwallstreet.com:

The numbers are remarkable. On Thursday, the S&P 500 closed at its lowest level in 15 months. In the last 12 trading sessions, the S&P 500 has lost 11.6%. The details are even uglier. Within the index, 423 stocks are now trading below their 200-day moving average. On Thursday, new lows beat new highs 175-0.

20 Years With The Value Line Arithmetic Average ($VLE). Some context. We’ve seen similar moments like this before. But there’s no denying that the December “candlestick” is in a league of its own … rare company. We’re approaching long-term “Oversold” conditions as suggested by the relative strength index (RSI) nearing 30 and relative long-term lows. We’re reminded that the trailing 52-week returns have dipped sub-zero a few times in the last few years — so this should not be regarded as something new or unusual.

Manifest Investing Median Return Forecast (MIPAR). It’s clear that the median (basically average) return forecast for the 2300-2400 companies in our coverage universe have SUDDENLY shifted to new levels due to the price drop. This could also happen from a breach of fundamentals — but that is NOT the case, here … at least not yet. Return forecasts are now at levels we haven’t seen since 2008-2009.

Source: https://www.morningstar.com/tools/market-fair-value-graph.html

Beyond December — A Hope For Fewer Potholes …

My take on all of this carnage? It’s different this time.

Yes, I said the words.

Bear markets and corrections are pretty unique despite all of our attempts to slap historical price chart overlays and compare factors, etc. The simple truth is that (1) the sample size will never be statistically sufficient for any material conclusions to be reached. [Yet the Rhinos will continue to try. Smile and nod at them.] (2) Markets are not rational.

Current conditions definitely qualify for a sedative or something stronger.

Look no further than the accompanying weekly chart of the Value Line Low Total Return Forecast to see how sudden the current price correction has been. We’ve not seen a change with this velocity or ferocity since 2008. You remember, right? With Christmas carols humming in the background, recall the names Bear Stearns, Lehman, Merrill Lynch and things like credit default swaps and neighbor’s houses in foreclosure.

Yes, there’s a mountain of uncertainty and an abyss of incivility inside the Beltway and a President who’s certainly disruptive. But the core problem with the status is virtually unchanged — ALL of the political posers persist in patching or ignoring potholes (healthcare, immigration, infrastructure, federal capital structure, failed nation building, sloped international trade playing fields, the ostriches and lobbyists related to real capital markets reform, etc.). The hypocrisy is gut wrenchingly prevalent.

I think the stock market is legitimately tired of the perpetual motion of Congressional Kick The Can Down The Road — and corporations are suddenly much more guarded about faith in consistency and less optimistic that the moving targets have abated. As the foot comes off the accelerator and taps the brakes (again) we might return to the recessionary conditions of 2015-2016. Much of the globe is already headed there.

Unattended potholes become sinkholes.

Like snowflakes, it’s different this time. It’s always different. Trying to allocate assets or imagine outcomes based on historical models (even when powered by artificial intelligence) is a neural niblick.

So we turn to a constant. A constant that survived and thrived through the 1970s, 1987, 1994, Y2K and the gasping throes of 2008-2009. That constant is to eschew the chaos. Focus on what matters. Simply put, INVEST BETTER.

We accept that markets are not rational. We refuse to be surprised when they convulse.

We take the words of Warren Buffett quite seriously when he longs for corrective opportunities “a few more times during his investing lifetime” and speaks unflinchingly of tracking excellent companies and waiting for them to be available at attractive prices.

I believe one of those moments may have arrived. We don’t often make “market calls” but we did write about back-up-the-truck moments back in November 2008 (a wee bit early) and March 2009 (squarely in the bullseye). This could be another Buffett Bonanza.

So … we think it’s prudent to do what we’ve done for DECADES. Discover excellent companies, BETTER COMPANIES. Buy those that are priced well. BETTER PRICES FOR BETTER RETURNS.

Hugh McManus likes patience and its genius-making potential. He also likes excellent companies trading near their 52-week or multi-year lows. We’re thinking Hugh must be beside his Irish self these days and hope to hear from him during next weekend’s Round Table. Ken Kavula is sure to be swimming in the pool of sudden small company opportunity. Cy Lynch is likely to admire the latest bear market which will become a future blip. Rest assured that we’ll be more focused on the long term perspective than any pusillanimous politicians and their potholes, meandering Rhinos or any of those annoying talking heads who focus on “how much your 401(k) LOST since breakfast today.”

We promise to remain focused on the discovery and sharing of the best ideas — the opportunities we’ve known for decades as BETTER COMPANIES at BETTER PRICES.

Merry Christmas to our favorite nation of focused and compassionate investors!

Best Small Companies (2019 Dashboard)

The status of the 2019 Best Small Companies can be tracked at: https://www.manifestinvesting.com/dashboards/public/best-small-2019

MANIFEST 40 Updates

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  • 26. Intel (INTC)

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  • Skyworks Solutions (SWKS)
  • Universal Display (OLED)

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Results, Remarks & References

Companies of Interest: Value Line (12/28/2018)

The median Value Line low total return forecast for the companies in this week’s update batch is 12.3% vs. 10.8% for the Value Line 1700 ($VLE).

Materially Stronger: Vishay Intertechnology (VSH), Office Depot (ODP), Kemet (KEM)

Materially Weaker: TTM Technologies (TTMI), Diebold Nixdorf (DBD), Western Digital (WDC), Plantronics (PLT), STMicroelectronics (STM), Micron Technology (MU), Cirrus Logic (CRUS), Lattice Semiconductor (LSCC), Celestica (CLS), 3D Systems (DDD)

Discontinued: Spectra Energy Partners (SEP)

Market Barometers

The thing very few people tell you about “overvalued” markets is that, occasionally, the fundamentals arrive to justify them. — Joshua Brown

Value Line Low Total Return (VLLTR) Forecast. The long-term low total return forecast for the 1700 companies featured in the Value Line Investment Survey is 10.8%, increasing from 8.5% last week. For context, this indicator has ranged from low single digits (when stocks are generally overvalued) to approximately 20% when stocks are in the teeth of bear markets like 2008-2009.

Timeless Perspective From Omaha

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A number of Manifest Investing community participants have recently forwarded this message to investment club partners, friends and family.  It’s a timeless reminder from 2008-2009, Warren Buffett … and we doubled down on it recently.

The following was excerpted from Bloomberg (11/21/2008):

Billionaire Warren Buffett’s Berkshire Hathaway Inc. slumped 32 percent last year, the worst performance in more than three decades, as the U.S. recession forced down the value of the firm’s equity holdings and derivative bets.

Most of the stock decline happened in the last three months as Berkshire posted a fourth straight profit drop amid sagging insurance results. The company still beat the 38% tumble of the S500, the 14th year in 20 that Buffett outperformed the benchmark. Just six of 1,591 (0.37%) U.S. stock mutual funds with at least $250 million in assets made money for investors last year, according to data compiled by Bloomberg.

“In 2008, there was nowhere to hide,” said Guy Spier, chief investment officer at Aquamarine Capital Management, which holds shares in the Omaha, Nebraska-based company. “Berkshire can’t escape the general fate of American businesses. What Buffett tries to do is ensure that Berkshire Hathaway does less badly than other companies.”

Buffett built Berkshire over four decades from a failing textile maker into a $150 billion company by buying out-of-favor stocks and businesses whose management he deemed superior.

Buffett Not Concerned

The stock plunge “doesn’t make any difference,” Buffett told Fox Business Network Nov. 21.

“It’s happened to me three other times,” Buffett said. “It happened when it went from 90 to 40 back in 1974, and it happened in 1987. It went down 50 percent in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times.”

=End of Excerpt=

It’s a perspective that has led to 20% annualized returns over multiple decades. Ignore it only if you’re willing to settle for a dimmer future.

Mark Robertson

Brkvsp5002008

I recently watched a 10-year retrospective on the financial crisis of 2007-2009.

Do you remember Buffett’s reaction to one of the most challenging market moments of his lifetime?

Answer: I hope I live long enough to experience a couple more of these.

Perspective matters.

Here’s what Warren Buffett says to do when the market tanks (CNBC, 10/10/2018)

“Don’t watch the market closely,” he advised those worried about their retirement savings at the time. “If they’re trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they’re not going to have very good results.”

… he recommends investors “get ice cream with their kids and say hi to a friend they haven’t spoken with in a while.”

 

And he’d appreciate it if you’d find the nearest Dairy Queen for the occasion.