Up In The Air
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.
Security Selection Doesn’t Matter—or Does It?
One of the staples of conventional investing wisdom is asset allocation—the choosing of broad market sectors, determines investment outcomes. Supposedly, the selection of individual securities within each sector barely matters.
We will explain where the flaw is after a little history. The theory dates back to 1986 when the Financial Analysts Journal published a paper, ‘Determinants of Portfolio Performance.’ The authors concluded that asset allocation explained 93.6% of the variation in portfolio quarterly returns.
Since then, others have concluded that as much as 100% of returns are explained by asset allocation, that security selection doesn’t matter at all.
This version of reality is convenient for some financial planners, who are thereby relieved of the work of actually researching securities and managing portfolios based on that research. If it doesn’t matter what you own, only the category, you simply need to choose your pie chart of sectors and buy stuff to fill it up!
Here is the flaw: all securities are owned all the time, by someone. If you look at the aggregate of all investors (or many investors), security selection appears not to matter. But the individual does not own all securities – and the specific selection of what he or she does own has a huge impact on outcomes.
Investor A buys a security for $100, sells it later for $25 to Investor B. Investor B holds it while it recovers to $100. One has a 75% loss, the other a 300% gain. Security selection matters. In the aggregate, the security started at $100 and ended at $100. But that leaves out the loss for one and the gain for another.
One of Warren Buffett’s earliest investors put $15,000 in, back in the 1950s. Today his name is on the home of the symphony orchestra in Omaha, a beautiful performing arts facility he donated to the community. Security selection matters.
We offer no guarantees about the outcome of our work. But we believe the selection of individual securities is the biggest factor in those outcomes. If you would like to discuss this topic or anything else at greater length, 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. All performance referenced is historical and is no guarantee of future results.
Investing involves risk, including possible loss of principal.
Asset allocation does not ensure a profit or protect against a loss.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Peril or Opportunity?
Everybody talks about “the market” but each company in the market has its own story. We need to revisit this to understand the errors we perceive in a currently popular theory.
Some say that actions by the Federal Reserve and other central banks have artificially pumped up asset prices across the board, so there is no safe place to invest. When we look at the pieces of the market, however, a different story emerges.
Some sectors are far below their peak prices from many years ago. Many oil and natural resource companies are trading at only one-third to two-thirds of past high points. The financial sector has actually lost money over the decade ending July 31st.1
Within these and other sectors, we see opportunities. So we reject the idea that everything is too high to own.
At the same time, we know that there are distortions and potential bubbles in some parts of the investment universe. Even though we know the Federal Reserve will eventually get it right (because the markets force it to), we’ve described why we do not like current policy. We have also talked about the potential bubble we see in the bond market, and what might burst it.
Bottom line, the investment universe has rarely been this interesting. It contains both opportunity and peril, the potential for growth and stagnation. As always, we are studying hard to understand the pieces we should own. Please call or email if you would like to discuss your situation.
1As defined by Standard & Poor’s and calculated by State Street Global Advisors
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
It’s a Market of Stocks, not a Stock Market
In the financial press you hear a lot of talk about “the market”: the market is up, the market is down, the market is jittery, and so on. Sometimes they’ll cite a specific index, such as the Dow Jones Industrial Average or Standard & Poor’s 500, using them as shorthand for the stock market as a whole.
This is a generalization, of course. There is no single monolithic “stock market” that tracks the performance of all publicly traded companies. What happens with one company’s stock price may not be happening with others—even within the big indexes.
For example, the S&P 500 Index rose 19.81% in 1999: the peak of the dot-com bubble. According to Standard & Poor’s sector research, the tech sector of the S&P Index went up a whopping 98.27% that year while boring sectors like consumer staples and utilities actually went down. “The market” had a great year, but a tech-heavy portfolio fared much better than a portfolio invested in old economy stocks. The reverse was true the next year, when the tech bubble popped and S&P’s tech sector dropped over 40% while banks, utilities, and staples went shooting up.
We find S&P’s index to be a useful barometer for the stock market as a whole and are sometimes guilty of using it as a generalization for all stocks. But it’s important to remember that the index is still made up of individual stocks, each with their own story.
Sometimes when you average all of those stocks together some compelling stories can get lost in the mix. Some advisors recommend a broad-based index approach, hoping that overperforming stocks will balance out underperforming stocks. While there is a time and place for indexing, we would really just prefer to own the overperforming stocks and try to leave the others out of it. Obviously this is not really feasible—we cannot know in advance which stocks will do well. However, we believe we can try.
As contrarian investors, we are interested specifically in stocks that look like they have the potential to buck the trend of the market. When there’s a stampede, we prefer to be running the other way. So it’s little surprise that some of our favorite holdings may be up when the indexes are down (or, unfortunately, vice versa.)
At 228 Main, we often deal with generalizations about the market because of the broad scope of our writings. If you want to talk specifics, call or email us and we’ll see if we can help.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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