Buffett And Dimon Play The Long Ball

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by: Bill Ehrman

Warren Buffett's and Jamie Dimon's editorial in the WSJ, followed by their interview on CNBC on Friday, was another great learning experience from the best of the best for those wanting to learn how to successfully invest and create wealth.

The main thrust of their comments was that CEOs should end quarterly earnings forecasts and focus on managing for the longer term. After all, stock prices are discounted values of future earnings, so why do we put so much pressure on management to perform each quarter?

We have mentioned many times how we take advantage of out-sized market reactions either up or down to reported earnings slightly above or below consensus even though the long-term outlook has not changed. It is nuts, but this is another example of how traders react to sound bites rather than looking under the hood at all the facts. Unfortunately, investors are mesmerized, confused and frozen by these sharp market gyrations. But not us! Hence our tag line to "review the facts; pause, reflect and consider mindset shifts; do independent research; and invest accordingly!"

Buffett's and Dimon's concern is that management is so hell-bent on hitting their quarterly forecasts that they would hold off on the spending needed for technology, research and development, marketing, capital spending and hiring that are necessary to outperform longer term. A successful management team manages for the long term, is willing to suffer near term hiccups if it benefits the company's future results, and should be evaluated by its performance over five years, at least.

The market is pretty smart and puts higher valuations on those companies willing to invest for the long term. Just compare the valuation of Amazon (NASDAQ:AMZN) to Macy's (NYSE:M); Netflix (NASDAQ:NFLX) to CBS or Disney (NYSE:DIS); Amgen (NASDAQ:AMGN) to Bristol (NYSE:BMY); Nucor (NYSE:NUE) to US Steel (NYSE:X); JPMorgan (NYSE:JPM) to PNC; Honeywell (NYSE:HON) to GE to name a few, as well as all successful technology, research-intensive companies like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL). Successful management teams are always looking over the valley to invest for the future but with an eye on the present, too.

There are multiple parallel lessons to take away from Buffett's and Dimon's comments. A money manager should be measured by his performance over at least one or two market cycles rather than quarter-to-quarter. Governments should focus on long-term planning rather than year-to-year. Why not focus now on handling the long-term issues before they bite you in the ass? Sounds like healthcare, entitlements and infrastructure to name a few! China has it right with a 20-year plan while the US and most of the Western industrialized world is simply too short-term oriented.

All of this brings us back to what's happening today. Change is difficult, and there is tremendous resistance along the way. Even if you don't like Trump's delivery (we don't), his message on trade is correct. We wish he had shut up after the press conference and did not tweet against Trudeau/Canada. He offered to our trading partner that all tariffs, trade barriers and subsidies go away and that the borders be opened freely. Who could object to that? Well, it appeared that our trading partners did. But why? Because they are benefiting from our tariffs being less than their tariffs, their subsidies being more than our subsidies and their own protectionist/trade policies being more than ours. So why would they want change? Talk is one thing but it is time for them to accept/offer open, fair and reciprocal trade tariffs, subsidies and policies. It goes for China, too, and that includes protecting our IP.

Trump is playing the long ball willing to take some hits along the way to bring about the needed change that will benefit us in the future. We support his pro-growth, pro-business policies with America First - that should be his role as President. In fact, he complements the other leaders as he acknowledges that they have done far better for their people than our leaders have done for us over the last 20 years. Change is in order!

While we do not have a clue what will come of the face-to-face talks between Trump and Kim Jong-un, we are hopeful that this is the beginning of a dialogue between our two countries that will eventually bring de-nuclearization to the Korean peninsula. Whatever you think about Trump, his actions got us to this point, which no other President has done in recent years. Change is in order for the long-term benefit of North Korea and all of us. Let's hope for the best!

Let's briefly summarize what key events we will be monitoring this week besides the summit in Singapore:

  • We expect to hear more posturing from our G-7 counterparts but we expect them to come back to the bargaining table with hard proposals down the road. Don't be surprised to see some trade skirmishes along the way.
  • We expect the Fed to raise the Federal Funds rate by one quarter of one percent but be cautious about signaling more than one additional hike this year.
  • The ECB will not alter its bond-buying program and not offer a future date in 2019 that it will end.
  • Putin and Mohammed bin Salman of Saudi Arabia meet at the World Cup to discuss oil production. We expect the oil market to remain tight and prices to hang around these levels.
  • The BOJ will announce on Friday that it will maintain its overly easy monetary policy.
  • The US will formally announce its $50 billion list of tariffs that may go into effect.

We monitor all economic, financial and political events globally to test/challenge our core beliefs; to see if we need to refine our asset mix, regional emphasis and specific investments. Change is clearly afoot that will benefit the US and China over the next several years at the expense of the ECB, Japan and emerging market countries. Trump's policies have put us one step ahead of other G-7 partners. It does not hurt that the US is becoming energy independent. We expect to see a multi-year surge in domestic capital spending which will lead to strong gains in productivity that will hold down future inflationary pressures. Another major theme in our portfolio is to only own best in class with the strongest management teams, great prospects with rising returns and super strong balance sheets.

Paix et Prospérité has outperformed the markets since inception in 2013 by playing the long ball, correctly identifying longer term trends and looking over the valley while the pundits are preoccupied with the daily noise. Our portfolios are concentrated in financials, capital goods/industrials, technology, industrial commodity companies and special situations. We are long the dollar and short bonds.

So remember to review all the facts; pause, reflect and consider mindset shifts; look at your asset allocation and risk controls; do in-depth first hand research and… Invest Accordingly!