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| Photo by Christina @ wocintechchat.com on |
During the last year, trading apps have gained a ton in popularity. Without mentioning any names, one of the most popular apps, which is frequently advertised here on YouTube, increased its number of users by more than 50% during this period. With slick interfaces, gamification, and advertised as having no costs (although that is not true), these apps have been bringing in tons of newcomers to the stock market. If any of you are reading this post, I’d like to welcome you to the wonderful world of investing!
Welcome! However, a word of caution. Warren Buffett says that this is probably the fastest inflow of gamblers, people who day trade and expect to become rich through stocks overnight, that we’ve ever seen. Buying and selling 7 days puts and calls on Apple is not investing, that is pure speculation. And there are more gambling tendencies going on. Special purpose acquisition companies, or SPACs, have been gaining in popularity as of late too. A SPAC is essentially a listed shell company in which investors put their money, and this money is intended for taking an unknown private company public. SPACs go against pretty much everything that both Buffett and Munger have been preaching over the years. For starters, SPACs remove a key ingredient for good investing – patience. There’s a limited time during which the capital in a SPAC must be used, usually two years. Otherwise, the money goes back to the investors and the manager of the SPAC leaves without his bonus. Buffett says that if someone points a gun to his head and tells him that he must find a company to invest in two years, sure, he will find one. If that is a valuable company that will benefit the shareholders is, of course, a totally different story.
The casino-like tendencies don’t end here. During Berkshire’s annual shareholder meeting Buffett was also asked what he thinks about Bitcoin. He ehm .. “doged” the question, saying that his answer would upset 100,000s of Bitcoin holders and only encourage perhaps 2 Bitcoin bears. However, he has made his point about the cryptocurrency before, and his partner Charlie Munger still wasn’t afraid to make his view clear, as he said that “I think the whole development is disgusting and contrary to the interests of the civilization. And I’ll leave the criticism to others.” I’d like to add that in the chat on the live stream of Berkshire’s meeting, the only thing people were talking about basically were cryptos. Moreover, I’m getting a lot of spam comments on this channel from bots who are trying to fool people into investing with shady managers. What do you think is the best thing to talk about right now for these bots to lure in the uneducated investor? Well, it is cryptos. You know that old saying that when even the cab driver thinks it is a good idea to invest in something, it is time to sell? This is worse than that. The music may still be playing, but I for one would at least ask myself if it may be time to stop dancing.
Imagine being back in 1908 when Henry Ford’s Model T was first released. This was arguably the first car to reach commercial success, and people saw the automotive industry as one that would change the world as we knew it. During the century, it certainly did. The horse and carriage were abandoned for something faster, more comfortable, and perhaps surprisingly these days, something which seemed less dirty. In an article from 1894 in the Times, one writer estimated that in 50 years were the current trends to continue, the streets of London would be buried under nine feet of feces. No kidding. However, even though the automotive industry grew into the behemoth that it is today, it didn’t produce any great profits for the companies in it, nor did it produce any outsized returns for these companies’ shareholders. At Berkshire’s 2021 annual shareholder meeting, Warren Buffett brought up a list of companies beginning with the letters Ma that has been active within the automotive industry in the U.S. at one point or another. Out of these 40 companies, remember, these are only the ones starting with the letters Ma none exists anymore. They were all in an industry with great potential, riding a big coattail, but they failed nonetheless. If you think that Buffett is cherry-picking, you should check out the airline's industry, the statistics may be even worse there.
Peter Lynch is another famous investor with similar thinking. In his excellent book “One Up on Wall Street” he states that: “If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the carpool or on the commuter train – and succumbing to the social pressure, often buys.” There are exceptions of course, just because a company is in an industry with a lot of potentials it is not certain that competition will be able to steal all its profits. Just remember that competition in a capitalistic economy is brutal and that it is difficult to stay at the top, especially in crowded industries. Among the 20 most valuable companies from 1989, not a single one of them is still on the list in 2021. I’d say that the conclusion to this is that you’ll have to be careful about how much you pay for a stock, no matter how good the story surrounding it may be.
During this year, Buffett was quite straightforward about one thing – how he determines if a business is good or not. He stated quite frankly that Facebook, Microsoft, Google, and Apple are better businesses than Berkshire Hathaway. Why? Because they have higher returns on capital. Berkshire has some $187b in Property, Plant, and equipment (which is a line in the balance sheet) while Apple has some $37b. Despite the fact that Berkshire has invested effectively $150b more in its business in these types of assets, Apple earns a lot more. This is the power of Apple’sproducts and its brand. It invests less capital to achieve even more. For the quants out there, Buffett hints that to calculate a fair return on assets he would include two other lines in the balance sheet too– the Receivables and the Inventory.
If you think about it, this is what capitalism is all about– receiving a return on capital. Okay, so should you simply go out there and invest in the companies with the highest returns on capital? Well, it would be nice if it were that simple, right? The problem is that these companies don’t exactly grow on trees and, as a result, they typically command high prices(or multiples) in the market. Moreover, just because they have had great returns on capital in the past it doesn’t necessarily mean that they will have that in the future too. Remember from the last takeaway– competition is harsh. If you want to dig deeper into how one can find strong stock market companies with great competitive advantages.
Buffett states that the current monetary policies of ultra-low interest rates, combined with an aggressive fiscal policy of delivering stimulus checks to people, result in the most interesting movie in economics that him and Charlie have ever seen (and remember, they are 90 and 97 years old these days so they've seen quite a lot!). Buffett continues and says that since markets have been rising and electorates have been happy these policies are likely to continue. People have become truly numb to numbers. That the U.S. government debt exceeded $28 trillion for the first time on March 1 this year doesn’t mean anything to anyone. However, receiving a check of a few $100s does mean something to some. But, there’s no such thing as a free lunch and Buffett emphasizes that in economics, you must always ask: “And then what?”. Everything has secondary and tertiary effects here. Charlie Munger says that if you are not a little bit confused by what is going on right now you don’t know what is going on. As for advice to investors, Buffett goes on to say that you should acknowledge that you cannot really know what will happen in the future, and act so that you are fine either way. Only time will tell how this movie will end.
That was it for the investing takeaways that Warren Buffett delivered during the 2021 Berkshire Hathaway AGM. To be sure, I for one am looking forward to hearing what Warren Buffett and Charlie Munger have to teach us about investing when Berkshires annual shareholder meeting hopefully is returning to Omaha in 2022. Cheers guys! Hope to see you again real soon.