In volatile times like these, it helps to take a long-term perspective. Warren Buffet (91) and Charlie Munger (98) have seen their share of global crises, commodity price shocks and economic cycles.
Christopher Rossbach, our CIO and portfolio manager of our World Stars Global Equity strategy, returned to Omaha for this year’s Berkshire Hathaway annual meeting. Buffett and Munger have said that all their best investment decisions are fuelled by caffeine and sugar, so Chris brought back boxes of See’s peanut brittle to help us along. He shares his reflections on this year’s annual meeting in our investment insight this month, Buffett’s Berkshire is Anything but Brittle.
Chris arrived back in London from Omaha as the current leg of the market sell-off gathered pace. We are at an important turning point as the global economy exits from the pandemic and the global recovery takes hold. Another of our favourite quotes from Buffett and Munger is that micro is what we do, macro is what we put up with. This year is all about macro, so we have to put up with it.
Of course, we expect the performance of equities to continue to be volatile in 2022. But we have to realise that the Fed is raising rates because US economic growth is strong and we have to recognise the difference between core and headline inflation.
Investors who spend all of their time worrying about inflation and rate rises are missing that we are in the midst of a robust economic recovery and that many leading companies will deliver some very strong numbers in the months and years ahead. Today reminds us of the early 2000s. Investors were hand-wringing over inflation and interest rate rises as we emerged from the dot-com crash, 9/11 and the subsequent recession. Companies were seeing strong demand but investors were not paying nearly enough attention to the strength of the underlying economy, the positive business fundamentals and the potential for many companies to create tremendous long-term value.
Amid all the talk about interest rate rises, we still hear little about the distinction between core and headline inflation. The significant headline inflation numbers are coming from higher commodity prices. The Fed is right to raise rates to more normal levels but we have to be clear of the distinction between headline and core inflation. The Russia/Ukraine conflict has had a big impact on commodity prices and we hope it can be resolved sometime soon. There will be a commodity supply-side response and a realignment of supply chains which will result in headline inflation falling quite quickly. The result will be core inflation that will be persistent but at much lower levels. Basing investment decisions on headline inflation could prove costly. Like Buffett and Munger it is far better and more profitable to take a long-term view and look at the underlying fundamentals driving corporate performance.
We do not believe in market rotation and, in the long-term, we do not care about it. So-called ‘growth’ stocks have been sold off as bond yields rise on fears of rising inflation. The trend has been exacerbated by the rotation into ‘value’ stocks, market laggards like financials, energy and airline stocks. For long-term investors, it should not matter While everyone else is piling into these ‘value’ stocks, the stocks we hold based on their fundamental quality and their prospects for real value generation over the long term, are getting cheaper and cheaper. It is a great opportunity to buy these digital and consumer ‘compounding global leaders’ that have been left behind by the rotation.
One of the biggest short-term issues this year is the difficult comparisons to last year. Of course, Amazon will not grow its billions in sales by 40% two years in a row. First-quarter last year it grew 41%, this year it was 9% and next year we expect 18% growth. That is still 22% a year over three years. The same is true for other digital stocks. That is why some of them are the cheapest stocks in our portfolio.
Last year the rotation lasted from November 2020 when we got the vaccines and people got excited about a strong recovery and rising rates, to August 2021, when the picture turned more balanced, companies did well but Omicron clouded the economic outlook. This year the rotation started in January and is ongoing but we expect it to reverse out again when things become more balanced again, company fundamentals come through, inflation comes down because we will not have 8% headline inflation forever, and the Fed moderates its stance based on the data.
Most importantly, ultimately a rotation into value stocks will not prevent businesses from getting disrupted. Value stocks might do well, but only because they have done so poorly. We do not see how they will do well or be sustainable for the long-term, because getting disrupted is still getting disrupted. Airlines are still a terrible business. Automobile makers are still a terrible business. Retail is still a terrible business. It is not going to change. Just because they are slightly less terrible and just because some of them will have survived and others will not, it does not make them any less terrible.
As with Warren Buffett and Charlie Munger, our approach is to take a long-term view. Now is the time for perspective, and to recall that volatility, short-term over-reactions and market rotation are all opportunities for long-term investors.