Where Are We & What To Do?
Between a bull and a bear market, and the Lesson of Buffett according to Michael Burry.
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Value Situations is NOT investment advice and the author is not an investment advisor.
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In its simplest form, value investing was a formula, but it had morphed into other things—one of them was whatever Warren Buffett, Benjamin Graham’s student and the most famous value investor, happened to be doing with his money.
Burry did not think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he thought Buffett could be copied. Indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. “If you are going to be a great investor, you have to fit the style to who you are,” Burry said. “At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules. . . . I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it’d be the most popular school in the world, with an impossibly high tuition. So it must not be true.”
The Big Short, Michael Lewis.
This issue of the newsletter is a bit different in that rather than presenting a new equity idea, I want to instead collect my thoughts after a tumultous Q1, and an even more volatile April following Donald Trump’s “Liberation Day.” After such a noisy April and as we enter the perceived lower return period from May to October (as the old “sell in May and go away” market adage tells us), I think it makes sense to take stock of where we are and how a fundamental investor might position oneself for the second half of the year.
To be clear at the outset, nothing in this post is intended to be a prediction, but simply an attempt to arrange and clarify my thoughts on the current market environment, in order to form a view as to what the right approach might be in this time of very high market uncertainty.
Amid all the noise and newsflow so far this year, two market-related stories strike me as being the most noteworthy for investors:
The End of American Exceptionalism; and
The retirement of Warren Buffett.
Firstly, the concept of the “End of American Exceptionalism” holds that a major, and indeed previously unimaginable regime shift is under way, with the central thesis being that America’s geopolitical and geo-economic dominance is now in decline due to the worldview and policies of President Donald Trump and his administration. This is purported to be manifest via a weakening dollar and an apparent rotation out of US assets into other markets, with Europe, Mexico, and Brazil among those jurisdictions benefiting from US market outflows:
Reams of news articles have been written about the end of American exceptionalism in recent weeks, and being neither a geopolitical or macro-economic commentator I don’t propose adding further to the debate here. However, I would say that while a rotation out of US assets alone isn’t confirmatory evidence that the US is in structural decline, it does suggest that for many investors, US assets appear to belong in the “too hard” pile for now, given the rolling economic and political uncertainty emanating from the Trump administration.
As a result, asset managers and investors generally are actively looking to other markets to diversify out of US risk and gain exposure to attractive non-US businesses that were previously overlooked given the market aura around US market darlings such as the Mag7. Furthermore, given the dominance of passive investing and the flow-driven nature of equity markets today, I believe this has positive implications for non-US equities over the next 2-3 years as some of this capital may not return to US markets even if a trade war does not play out.
Secondly, Warren Buffett’s recent announcement that he will retire as CEO of Berkshire Hathaway at the end of this year is also food for thought for investors in the context of both current market uncertainty and the structure of equity markets today. Buffett has long been regarded as having an uncanny sense of timing when it comes to markets, whether that be his investments in Goldman Sachs and Bank of America during the GFC, his 2016 investment in Apple, his exit from airline stocks in 2020 as the COVID pandemic hit, or his investments in the Japanese sogo shosha commodity houses prior to the inflationary surge from 2021 into 2022. And so his decision to retire now, something he previously indicated he would never do unless “something happened” is worth noting.
While the stated reason for Buffett’s retirement is unsurprisingly due to his age and physically slowing down, I can’t help but think whether there is an element of uncanny timing (whether deliberate or not) in him stepping down now, and what this might portend for other investors with regard to markets in the coming months.
It is fair to say that Buffett is retiring “on top,” with Berkshire now being one of only 10 public companies globally with a market cap in excess of $1 trillion, and an unmatched, 60 year compound annual return of 19.9%, or ~2x that of the SPX. Jason Zweig recently wrote an excellent piece in the Wall Street Journal that sought to explain how Buffett achieved this unrivaled long-term track record, which is worth briefly discussing here.
In summary, Zweig makes the case that there will never be another Warren Buffett for three key reasons:
Obsessive Focus - Buffett’s obsessive focus on stocks meant that he sourced and read copious amounts of information on businesses and stocks, at a time when information was much less accessible than today. Furthermore, being blessed with an exceptional analytical analytical ability and a prodigious memory in the pre-computer age, Buffett’s ability to focus and synthesize financial information gave him an advantage over other investors.
Era - Buffett often said he won the “ovarian lottery, ” being born at perhaps the most opportune time to be a stock market investor. When Buffett started out investing, markets were highly inefficient and fragmented, compared to the passive-dominated, flow-driven market of today. This meant that overlooked stocks were easier to find and also more likely to outperform, and so doing the work of fundamental analysis itself provided an advantage over most other investors at that time. This is arguably not the case today given passive herding.
Berkshire’s Structure - Buffett’s use of Berkshire as his investment vehicle gave him an inherent advantage over conventional money managers, with its permanent capital and insurance float providing a structural advantage in making investments and compounding these over very long periods of time without risk of capital withdrawals from investors.
I think Zweig is right in his assessment that there will never be another Warren Buffett, and reading his article I was immediately reminded of Michael Burry’s “Lesson of Buffett” as cited in the opening quote, which can be boiled down as “to succeed in a spectacular fashion you had to be spectacularly unusual.” Based on Zweig’s analysis, it is evident that Buffett was a highly unusual investor in his time.
Coming back to my thought of whether Buffett’s retirement might signal something important given today’s highly uncertain market outlook with a regime shift possibly underway, I think it should at least prompt us to consider the following question of what is necessary to succeed in modern equity markets? From reading Zweig’s article on Buffett's "unusualness," I think the answer to this might lie in a further evolution in what it means to be "unusual" for today’s market context, given the following: