“Cash is like oxygen. If you don’t have it for a few minutes, it’s all over”

-Warren Buffett

Good day 

I hope that you are enjoying a pleasant weekend and two things are on my mind as I put some thoughts together.

BERKSHIRE HATHAWAY 2022

Yesterday was the 2022 Berkshire Hathaway Annual Meeting hosted by Warren Buffett. It was held live for the first time since 2019. While I have been fortunate enough to attend in the past, yesterday I watched the livestream on my computer. The above quote is interesting. I guess you don’t think much about oxygen until you don’t have any and then it is all you think about.

The entire session was over six hours so hard for me to summarize in detail but here is what jumped out at me:

• Buffett and Munger (Buffett's longtime top lieutenant, Berkshire Vice Chairman Charlie Munger), have been critical of bitcoin for the longest time. Unsurprisingly, bitcoins were roundly denounced at the meeting. Buffett said that he would write a check for 1% stake in all the farmland in the US or for the same percentage in all the apartment houses in the country. But instead, if someone offered him all the Bitcoin in the world for $25, he wouldn’t take it. “What would I do with it,” he asked. According to him, assets must deliver something to someone to have value. Things cannot claim value only because someone else is willing to pay more for it. For example, a dollar can get you a cup of coffee or a piece of cake. A painting can deliver a transformative experience. But, a cryptocurrency can only be sold forward for a higher price and cannot really buy anyone anything in the general market.  Munger was more biblical in his pronouncements. He called bitcoin stupid and evil. Stupid because he expects its value to come down to zero, and evil because it can destabilize the US financial system. 

• 'Inflation Swindles Almost Everybody'. Buffett commented that inflation "swindles" equity investors. He later elaborated, in response to a question: "Inflation swindles the bond investor, too. It swindles the person who keeps their cash under their mattress. It swindles almost everybody." He stated that inflation also raises the amount of capital that companies need and that raising prices to maintain inflation-adjusted profits is not as simple as it may seem. He opined that the best protection against inflation is investing in your own skills. Later on, Buffett observed that massive economic stimulus during the COVID-19 pandemic is the major reason for high inflation today: "You print loads of money, and money is going to be worth less." Still, he also said that Federal Reserve Board (FRB) Chair Jerome Powell is "a hero ... He did what he had to do."

• Munger Slams Robinhood. Glad It's 'Unraveling'. Charlie Munger took aim at online broker Robinhood Markets, Inc. (HOOD),  Munger's list of indictments against Robinhood included "short-term gambling and big commissions and hidden kickbacks and so on."  Munger added: "It was disgusting. Now it's unraveling. God is getting just."  Robinhood's shares are down by 88% from their high in August 2021, amid a declining number of users and a bigger-than-expected loss in the first quarter. Additionally,  Robinhood is cutting about 9% of its full time employees.

• Buffett: 'We Have Not Been Good at Timing'. In reply to a question, Buffett said: "We haven't the faintest idea what the stock market was gonna do when it opens on Monday." As a result, he continued, neither he nor Munger ever have made an investment decision based on a guess about what the market or the economy might do. "We don't know," he added. Buffett admitted that "We have not been good at timing." On the other hand, he asserted, "We've been reasonably good at figuring out when we were getting enough for our money."

• On advice to young people (as several teens and twenty somethings asked questions). “Be exceptionally good at something”. If you are the best at what you do, you will be hard to ignore. Buffett also speaks about doing something you are passionate about.  Munger added that they know what they are not very good at and don’t spend a lot of time on those things.

I AM GLAD THAT APRIL IS OVER

It has been a challenging few weeks for global equity markets, with most having been relatively weak of late. I haven’t parsed all the data yet but April 2022 has been the worst performing April in a while.

There’s no one factor to blame, though inflationary pressures and the implications for central bank interest rate policy remain core issues. There are other challenges too, but those are not for today. Let’s focus on earnings now as that is what ultimately drives investment markets.

Prior to the beginning of the reporting season, the number of companies that had issued negative pre-announcements – announcing results ahead of when they were expected to report – exceeded the number of companies reporting positive pre-announcements by a wide margin. As a result, investors were quite cautious heading into the season, believing that companies were witnessing deteriorating demand, or rising costs, or worse yet, a combination of both.

Fortunately, the results reported thus far have been somewhat reassuring. Earnings growth for the broader developed markets is now expected to be over 10%, nearly double the original estimate at the start of the reporting season. Moreover, some of the upside to forecasts has been driven by margins, suggesting cost pressures have not been as severe as expected, at least not yet. Nevertheless, there are clearly some industries where labour, commodities, and other inputs are either in short supply or witnessing meaningful pricing pressures. This has led some companies to reduce their guidance for future earnings. But, on average, the results suggest that companies are still seeing decent levels of demand, particularly from consumers, and are finding ways to navigate through the cost pressures with a degree of resiliency.

The Technology sector is worthy of some discussion. Investors have been anxious about this cohort given its significance in the global market – it is the biggest sector and home to some of the largest stocks in the world. The group broadly benefitted from the global pandemic, with consumers and businesses spending more on hardware, software, and services for some time. As a result, the earnings and stock prices of many companies across the industry appreciated remarkably in recent years.

This year has been a starkly different experience. The sector has been among one of the weaker performers, partly in anticipation of a moderation in earnings growth. That has indeed been happening with the pace of growth nearing the average of the broader markets. On its own, it is a reasonable figure. But, it is a far cry from the 40% earnings growth witnessed at this point last year.

There is another important factor pressuring the technology space: anticipation of higher interest rates. Stock prices tend to be driven by a discount rate that is applied to a stream of future earnings, cash flows, and dividends. The rate that is used is heavily influenced by the level of interest rates. All things equal, a higher rate results in lower prices, and vice versa. Higher growth stocks, like some of those in the technology sector, are particularly sensitive because of the anticipated trajectory of their longer-term cash flows. As a result, it’s not surprising to see technology stocks under pressure in a year when bond yields have been rising and central banks are expected to raise rates rather forcefully. That said, the technology names that we own continue to be great values at current prices.

Overall, investors should be comforted to some extent by the earnings season that has unfolded thus far. It suggests the operating environment remains reasonably healthy from a demand perspective.

J. Todd Kennedy, CIM, FCSI

Senior Portfolio Manager

613-566-4582

toddkennedy.ca