coronavirus

Which Came First? The Bargain or the Growth Stock?
graphic shows an image of a hen and an image of a basket of eggs both taped to a chalkboard

It’s a classic thought experiment. “Which came first: the chicken or the egg?”

Clearly, the egg came first; that’s where chickens come from! But, wait. Who laid the egg?…

There’s a similar conundrum found in our work. In business and investing, we like to look for strong companies—ones that spend wisely, save well, and try to build an enterprise that can remain durable across changes in the economy. Often, these companies must have a strong balance sheet (i.e., more cash than debt) in order to grow to the size of an industry leader.

Clients, in the early stages of the pandemic, we invested in some companies leading their industries. Our original investing thesis was that even if the virus took its toll and a worst-case scenario occurred, people would still need the staples.

People would still need groceries.

People would still buy meat.

People would still order prescriptions.

While we were sure these everyday items would be impacted by pandemic life, we also believed they would likely survive—in one form or another.

Now many of these market leaders have been able to use the resources of a market leader to continue to evolve and transform organically. They may seem like “boring” companies on the surface, but in times of challenge, they are acting like growth stocks: many have been the first-movers among their peers, making plans that could shift their whole industries.

And believe it or not, we bought some of these companies as bargains. So which came first?

It’s fun being us. Clients, we are always looking for opportunities. Are you seeing anything that we should be watching? Let us know. And when you want to know more about what this all means for your portfolio, call or write.

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Play the audio version of this post below:

Which Came First? The Bargain or the Growth Stock? – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Never the Same Normal Twice
photo shows the word "normal" highlighted in the dictionary

At the start of 2020, few people could have guessed the whiplash and lasting impact the novel coronavirus has caused. The pandemic has affected each of us in different ways, some minor and some profound.

“The return to normalcy” has been a stated goal for many individuals, leaders, and communities. And different people have different perspectives on the types of costs they are willing to pay in the interest of the return to normalcy.

But what is normal?

Some of you are reading these words on the screen of a cell phone. A few decades ago, this moment would’ve sounded absurd. Our website is available online: 50 years ago, the internet was still firmly in the realm of science fiction. Heck, a century ago, the notion of an electronic programmable computer itself was beyond imagination.

Many things that we take for granted in our lives, it turns out, are hardly “normal” at all: in the big scheme, our everyday circumstances would be new and alien to those who came before us. The routines of our daily lives, the things that feel so comfortable and natural to us, are often a product of a specific time and place in human history.

The oldest among us—just at the edge of living memory—were born in a world that would have found many of our habits and rituals unrecognizable.

Other things, however, they would recognize in an instant. Survivors of the 1918 influenza epidemic would have been keenly familiar with wearing face masks in public and witnessing the ongoing debate about their usefulness and appropriateness. Stories about overcrowded hospitals and overworked doctors and discussions about “flattening the curve” would not have been new (or surprising) to them.

It turns out that not only is our “normal” actually abnormal, but our “abnormal” is more normal than we might think.

Someday, hopefully in the not-too-distant future, we will be able to close the chapter on this pandemic and our lives will return to normal.

… Which is to say, they will be different, new, and unprecedented. Just like always.

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Play the audio version of this post below:

Never the Same Normal Twice – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Caps, Gowns, and the Coronavirus

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COVID-19 has caused shifts and pivots across organizations and even whole industries. Along the way, many folks have decided to delay or cancel what would’ve been some wonderful milestones: a long-awaited family trip, a wedding, a move across country.

Some families will still be wrestling with such decisions for the months—and maybe years!—to come.

A college education is a common enough savings category, but some are rethinking their investment goals with so many changes coming for institutions.

We realize it can be hard to get perspective right now. The stress of the upcoming school year is looming, and prospective students will be making huge decisions based on information that seems to keep changing.

We wouldn’t dream of suggesting the “right answer” for you or your family. Here, however, we’d like to offer a little distance on some of the issues at the heart of this topic.

Is it worth it? Schools are being forced to experiment with how they will structure classes and campus life, so as consumers, many families are questioning the value of the experience they’re paying for. To zoom out, we recommend remembering what a degree will mean for a person after they’re done with it.

Yes, we want students across the country to enjoy a safe, rich, and rewarding couple of years at school, but both the journey and the destination should be part of the equation.

One thing that the pandemic won’t suddenly change? The long-term value of a college degree.

“The lifetime payoff to earning a college degree is so very large, in health and wealth, that it dwarfs even high tuition costs,” writes economist Susan Dynarski. “College is an especially smart choice during a terrible job market.”

An education is not armor against all the problems ahead, but it may still be a sound investment and worthy savings goal for you or your family.
Clients, if you want to talk through this or anything else, call or write.

The High Cost of Low Interest

© Can Stock Photo / AndreyPopov

Savers might remember the 1990’s with great fondness. For most of the decade, money earned 4 to 6% in bank certificates and other safe and liquid forms. Even in the first decade of this millenium, at times there were interest rates above zero on deposits.

After the financial crisis that began in 2008, interest rates plunged. The Federal Reserve adopted a Zero Interest Rate Policy (ZIRP) in an attempt to spur economic activity. Some foreign central banks even went to NIRP, a negative interest rate policy. For most of the time since then, short term rates in the US have been close to zero. (Federal Reserve Bank St Louis)

After a tentative, brief return to rates above zero, the economic disruption caused by the coronavirus has slammed rates back to near nothing. Rates may stay lower for longer. Savers and investors are affected.

• The difference beween 5% and zero on $100,000 in the bank is about $400 in monthly income. Savers used to enjoy cash income on their balances, income that could make a difference.
• In order to get income returns on money, people face volatility in market values or greater risk of loss or reduced access to funds.
• The competition for income-producing investments creates market distortions, which may increase risk.
• Artificial stimulus for goods or services could result in lower growth later, when monetary conditions return to normal.

Against those challenges, low interest rates appear to benefit one group of people: borrowers. Many people have been able to refinance home mortgages to rates lower than they might have imagined years ago. But even this silver lining has a cloud around it: low mortgage rates may have increased home prices.

Bottom line, as with all of the challenges in life, the key is to make the most of it. We work to understand alternatives and strive to sort out how to balance the needs for income, and growth, and preservation of purchasing power. Finding the opportunity in the challenge is our goal.

Clients, if you would like to talk about this or anything else, please email us or call.

Can You See the Forest?

© Can Stock Photo / Elnur

The old saying, “Can’t see the forest for the trees,” refers to the difficulty we humans have in maintaining perspective, of keeping the larger context in mind. Our current challenges bring us reminders of this.

Recently we were discussing the prospects for investing in a food processing company. Market disruptions have knocked the cost of $1 of annual earning power down to $10 – an earnings yield of 10%. (Another way to say it: a price-earnings ratio of 10.) If one can purchase durable earning power in an enduring industry at valuations like that, the holding might be owned a very long time.

(No guarantees – there are a lot of assumptions in that last paragraph.)

A colleague asked us whether we were concerned about the impact of processing plant shutdowns. After agreeing that any shutdowns would likely be limited to a matter of weeks, this seemed to be one of those problems of perspective.

For none of the past few decades have the plants been shut down for a virus. Apart from the next few weeks, it seems unlikely that virus-related shutdowns will be much of a factor in the decades ahead.

The forest is that we humans will still need to eat in the future, and there is probably money to be made by meeting that need. The trees are the virus and the shutdowns and the disruptions. One of our key roles is working to see the big picture and striving to act accordingly. We need to be able to see the forest in spite of the trees.

Interestingly, the challenge of maintaining perspective may play a role in creating bargains. Investors who get too wrapped up in transitory effects may push prices to levels that don’t reflect the long term value. When current conditions fade, as they will, that value may become apparent. Again, no guarantees.

Clients, if you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Up In The Air

© Can Stock Photo / jefras

We have written before about the miracle of air travel. You can go from breakfast on the coast to lunch in the middle of the country, renting the use of an $80 million machine and the services of $1 million in payroll for just a couple hundred dollars.

It is no wonder that US passengers flew 57% more miles in a recent year than they had twenty years before. This record of growth included the disruption caused by terrorists on 9/11. Our commercial aviation system was used against us, to devastating effect. Dramatic changes in the flying experience resulted. But traffic volumes still grew over the long term.

The global COVID-19 pandemic has created a larger shock to air traffic volumes. Noted investor Warren Buffett, who had previously invested in four major US airlines, recently announced the sale of those holdings by his firm. Many are wondering what to think.

Our research and thinking will continue to evolve, but we do have thoughts to share.

  • Buffett had the luxury of selling out before news of his sales depressed the share prices. What we may choose to do today is a different set of choices than what could be done last month.
  • Although he is arguably the most successful investor in all of human history, he has proven to be wrong from time to time. (We treasure those moments when we were right and he was not– just ask us, we will tell you all about them.)
  • Buffett’s original idea, that he was buying $1 billion per year of earning power for an $8 billion investment in airline ownership, became obsolete. But perhaps the buyers of those shares have purchased $1 billion per year of future earning power for less money, $6 billion. No guarantees.

The future of air travel and participating companies is up in the air. But it seems likely to us that the miracle of air travel will sooner or later exert its charms over an increasing number of people from year to year. We are working to understand what this all means in terms of investment opportunities and challenges.

Clients, if you would like to talk about this or anything else, please email us or call.

Change: Lasting or Fleeting?

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The efforts to slow the spread of Covid-19 are reshaping our lives. Work-from-home (WFH), social distancing, and self-isolation mean big changes, with some unforeseen consequences.

We have been thinking and studying some of the impacts on society, striving to understand the effects on commerce and the economy. There are many unknowns.

Fewer people commuting means less traffic past the coffee shop, less wear on automobiles, emptier workplaces. When the virus has faded, will these effects be lasting, or fleeting?

Will work-from-home gain a permanent boost, reducing the long term demand for office space?

Do those who formerly stopped at the coffee shop everyday resume that habit when they begin commuting again?

After enjoying more free time from less commuting, will more people seek to live closer to their work?

“Dinner and a movie” has given way to carry-out, cooking from scratch, and streaming services. What happens when the crisis fades?

What is the future for movie attendance?

Does cooking replace some fraction of restaurant meals?

What effects will these trends have on commercial real estate?

There have been other effects, too. Online shopping got a big boost from mass retail store closings. Weddings, funerals, and other kinds of gatherings have been cancelled or postponed. Some people report an increased interest in improving their health; others talk about using food or alcohol to deal with stress. Are these changes lasting or fleeting?

After the 1918-1919 great influenza pandemic, the Roaring Twenties followed. Were exuberance and celebration a bounceback from the isolation, sickness and death of the pandemic?

We have many questions. What do you think? If you would like to talk about this or anything else, please email us or call.

Better Safe Than Sorry

© Can Stock Photo / Subbotina

2020 will certainly go down as a memorable year, between the changes in our every day lives and the economic and market developments. My years as caregiver for a person with an extemely fragile immune system has given me a sense of caution about the coronavirus. (Cathy continues to influence me!)

In the spirit of ‘better safe than sorry’ we are seeking some modifications in our work with you. The median age of our advisory clients is in the area of elevated risk, and many of us have other risk factors as well. Here are the things we can do to limit exposure and illness among us all:

  • Many service matters can be done by phone or email; most forms can be signed electronically. This reduces traffic in 228 Main.
  • Schedule appointments in advance, to minimize the chance to be in a crowded place.
  • One on one consultations can be done by phone at your option; we will soon be able to video conference if you prefer.

Of course I will meet with you in person if you need that. We work with you on vital subjects, and we want you to have what you need. For the present we see no reason to suspend face to face visits.

We are doing what we can in the shop to keep it safe, wiping down public surfaces and shared objects, making hand sanitizer available. Handshakes and hugs need to stay virtual for now, not physical.

The best thing that can possibly happen is for everyone to be laughing at me in a few weeks for the needless over-reaction. I desperately hope for that outcome.

Having some experience with respiratory failure leading to death, I’m just wary of a virus that can produce that in a slight fraction of cases in a period of a couple weeks. Thank you for humoring me on this.

Clients, if you would like to talk about this or anything else, please email us or call.

Flattening The Curve

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We have worked to understand as best we can the coronavirus. There are a lot of aspects to it: the health and safety of our family and friends, public health considerations, economic and investment effects. All this, while sorting through information and misinformation of varying quality.

Which of these are true?

“Most people experience negligible symptoms, or those of a typical case of the flu” or “The virus can cause rapid respiratory failure and death”?

“People who have no other health problems and are below age 60 have little risk” or “It is important for everyone to do what they can to slow the spread of the virus”?

“The experience of other countries should comfort us” or “The experience of other countries should concern us”?

Get your mind wide open, because all of these things contain some truth. Those who are below age 60 and healthy will likely only get mild symptoms with a low risk of death. But healthy people can spread it to at-risk people.

Do you have an elderly neighbor? A young cousin with asthma? Relatives with diabetes or cardiac disease? Are you around people that have organ transplants? Or being treated for cancer? No matter what course the virus takes in the weeks and months ahead, some people with those conditions are probably going to be struggling to stay alive. Not all will survive.

To protect ourselves and others, it makes sense to do what we can to slow the rate of infection. If cases spike up rapidly, hospitals will be overwhlemed, with catastrophic effects on care. (This happened in parts of Italy.) If the rate of infection is more moderate, health facilities have a better chance to stay ahead of the curve. It makes a difference on the death rate.

The experts call this moderating effect of slower infection rates “flattening the curve.” It’s a good thing.

The extremes are not where we want to be: the virus is not going to kill us all, but neither is it a big hoax. Clients, if you would like to talk about this or anything else, please email or call.