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Tom Armistead
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I am a retired accountant, having spent the early years of my career in the insurance industry and the later part in the field of accounting. My insurance experience has given me the willingness to accept investment risk if I feel the return justifies it; also, an interest in applying risk... More
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Tom Armistead's Instablog
  • Buffett Says To Disregard Macro Opinions? 11 comments
    Mar 2, 2014 7:27 AM | about stocks: SPY

    From the Oracle's latest missive:

    Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")

    I'm sorry, this is sage advice, and at one time I lived by it. That was before 2008-2009. In the wake of that debacle, I always maintain an opinion on market level. I further remain alert for information on the accumulation of wretched excess in critical areas of the global economic and financial system. I want to know where tomorrow's equivalent of sub-prime or CDS is, how much of it there is, and how bad it is.

    I take my cue from Whitney Tilson. After the crisis, he remarked that he formerly had neglected the macro issues along the lines suggested by Buffett, but afterword he felt 25% of his time and energy should be directed toward that activity. Maybe 25% is high, but there is no reason ever to traverse a battlefield without knowing where the minefields are.

    During the financial crisis, I watched substantial holdings in the Vanguard S&P 500 Index fund go down 55% from their high. That wasn't as bad as it sounds, for the fact that I had an opinion on the worth of my holdings and didn't sell any of it.

    My discretionary portfolio was another topic. At the worst point in March 2009 I was looking at the same handle, but one less decimal place. I was down somewhere between 85% and 90%. As the situation played out, 2009 was a banner year for me, during which I had the first of several years of significant outperformance based on my willingness to make heavy use of leverage in a situation where my analysis called for rapidly increasing share prices.

    What I didn't know, and perhaps could not have known in 2008, was exactly how bad the quality of mortgages had become. It wasn't until I started reading the complaints filed by the likes of MBIA (NYSE:MBI) and Ambac (NASDAQ:AMBC) against the big banks that I saw the nature and extent of the egregious fraud perpetrated by our largest and most respected financial institutions. The entire basis of the financial system, which rests on assets such as mortgage loans, had been turned to quicksand. I correctly called the huge size and scope of the litigation against banks, but was unable to come up with a constructive way of investing in it. The point was, they were going to get away with it.

    We know that the Chinese are building up an incredible amount of bad loans, for which the risk has been passed off to investors through "wealth management" products. Wealth mismanagement would be more like it. In our own system, covenant-lite loans are making a comeback, and yield starved investors are being drawn into products containing these questionable assets. Who is holding the bag on loans made with farmland as collateral?

    As far as the integrity of the big banks, I long ago gave up on the issue. The rogue of the month series never got written. Why bother, it wouldn't give anybody any additional information. The latest is, the Gold Fix was fixed. For the love of God, fixing a fix. Can't we have an honest fix?

    As far as market level, my opinion is that we are on the high side of the midpoint, but there are still good quality US equities that will be profitable investments when viewed in the context of their future earnings. I'm beginning to suspect that the normal state of the market is valuations that are relatively high compared to the historic average CAPE or other metrics. The catch is, there's always a build-up of bad assets or political tensions somewhere which will precipitate the next serious market event.

    Buffett usually stays away from the minefields. But it seems like he always has to test where the edges are. There were those derivative bets, where he was guaranteeing a future level of the S&P 500. This year we get a confession, he got involved in a bad loan to an energy company. The decline in natural gas prices made the loan go bad, but the underlying cause was excessive leverage, with Uncle Warren as one of the co-enablers.

    Buffett is always able to write checks, and big ones, at market bottoms. Think back to 2009, there he was, making big bets on Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE). Of course he got the warrants, as well as the high rate of interest. Please keep that in mind, when listening to his sage advice about macro opinions. Emulate it, if you can. I'm conducting my investments in ways that ensure I will have dry powder at low points.

    One thing I know: I am never, ever again going to learn about something like the sub-prime and CDS mess by watching my discretionary portfolio drop a decimal point.

    Stocks: SPY
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Comments (11)
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  • pemdas1
    , contributor
    Comments (264) | Send Message
    You may not be as famous as Warren, but your advice is just as good.
    2 Mar 2014, 10:50 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6287) | Send Message
    Author’s reply » Thanks, I've learned from my experience - it's a good teacher.
    2 Mar 2014, 02:55 PM Reply Like
  • JYucca
    , contributor
    Comments (242) | Send Message
    Very nice article. Thank you. As for your final sentence, we can be watchful but never really know. It's hard to guess about what is being hidden from view. Too many people will swindle and lie when they feel immune to consequences. All we can do is to try to get out of the way of economic downturns. To do that without being scared away during good times will require ignoring most of the financial "news" and opinion.
    2 Mar 2014, 11:52 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6287) | Send Message
    Author’s reply » As we go along I believe somewhat less in Nassim Taleb's concept of the Black Swan, at least as far as financial markets. I don't buy into the head honchos of the big banks sitting before Congress with straight faces and saying the crisis couldn't have been predicted. With the information they had, it was inevitable.


    Where I wind up is to invest in non-financial US Equities that are traded on the NYSE and included in one of the S&P 400, 500 and 600 indexes.
    2 Mar 2014, 02:54 PM Reply Like
  • bbarberayr
    , contributor
    Comments (219) | Send Message
    I think that Buffet is mostly correct about ignoring the macro, but you are right that in 2008 it did matter. I suspect that now we have gone through this (hopefully) once-in-a-lifetime scenario, that it will be off the radar for another 70 years.


    The other nuance to Buffet is that he says to ignore the macro, but he kind of gets a read through on the macro by judging individual company stock prices and business prospects.
    2 Mar 2014, 08:00 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6287) | Send Message
    Author’s reply » As Buffett (famously) observed:


    On investing in 1973: "I feel like an oversexed guy on a desert island. I can't find anything to buy."


    On investing in 1974: "I feel like an oversexed man in a harem. This is the time to start investing."


    It seems like he gets at the macro one investment at a time, but always ready.
    2 Mar 2014, 08:47 PM Reply Like
  • Robin Hewitt
    , contributor
    Comments (5672) | Send Message
    In fairness to the Oracle, I suspect he may have meant the opposite of what you're attributing, Tom. People were buying without fear in the overvalued conditions of 2006-7 when market predictions were mostly rosy. In 2009, when macro predictions were glum, most people stayed away from the market out of fear.


    Those who did well were the ones who drowned out these predictions, held back from the market in 2006-7 when the wisdom was to buy then bought in 2009 when the wisdom was to avoid the market. I'm with Buffet on this one.
    3 Mar 2014, 12:50 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6287) | Send Message
    Author’s reply » From the 2013 10-K:


    "We continue to hold significant cash and cash equivalents earning very low yields. However, we believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to cash and cash equivalents."


    Buffett is a skillful politician and always says the right things. He is also a very skillful businessman and usually does things that will be extremely profitable when he becomes aware of them.


    I see a permanent macro attitude that opportunity is going to present itself (when others become fearful) and he will be prepared, just like a good boy scout.


    The insist on safety over yield language is new.


    Of course he was on CNBC with Becky Quick talking about how the Vanguard 500 Index is suitable for his wife in his will, which I interpret to mean buying the index and holding through is the safest mode of investing in his interpretation. Both my wife and I hold a good portion of our assets in the Vanguard 500 Index.


    I'm with Uncle Warren on ample liquidity and safety over yield...
    3 Mar 2014, 07:58 AM Reply Like
  • The_Hammer
    , contributor
    Comments (5141) | Send Message
    <During the financial crisis, I watched substantial holdings in the Vanguard S&P 500 Index fund go down 55% from their high.> Fortunately Tom u were able to take the short term pain unlike many others which sold out. Buffett talks brave but when u have a play money account worth probably 1/2 a bil. What about that retiree with 1/2 a mil. with no more earning power? Valuations are not outrageous but more than fairly valued imo. It is time for those that may be scared out in a difficult investing environment to reduce some exposure and hold some cash.
    3 Mar 2014, 08:46 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6287) | Send Message
    Author’s reply » Hammer,


    You hit it on the nose as far as size of portfolio and future earning power.


    I had ample time to think about that during and after the financial crisis. It's best to have it carefully thought out before the next crisis hits.
    3 Mar 2014, 09:03 AM Reply Like
  • cstauffer
    , contributor
    Comments (546) | Send Message


    I believe that Warren was sticking to his long-term narrative of bottom-up value investing in companies that he has a reasonably high level of confidence in their 10+ year ability to generate a growing level cash flow with an above average level of ROE. With that type of buy discpline, there is very little in terms of macro events that will do anything other than produce temporary market sell-offs which create the opportunty to buy or add to investments when they are on sale. I have a great appreciation for Warren's discipline that has proven its effectiveness over half of a century filled with its share of scary macro events.
    3 Mar 2014, 12:19 PM Reply Like
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