Here are five thoughts for Cinco de Mayo as you plan your year and think about the years ahead.
- 7 minutes with Warren Buffett
- Speaking of value, investment strategies
- Is this the best opportunity since 2008?
- Or is it since 1999?
- And finally, you can now choose a monthly Periscope instead of a weekly one, if you like.
Warren Buffett and what’s next
Warren Buffett made the news recently when Covid-19 closed his annual shareholder’s meeting to guests. As usual, the oracle has many quotable moments. The “magic of America” will solve Covid-19, assured the wise investor. My favorite quote is 7 minutes long, about farming next door to a crazy man. I hope you enjoy it half as much as I do! (1)
Speaking of value…
As our clients know, we believe the right way to invest is to diversify by strategy—how an investment decision is made. Over the past decade, some strategists have made more money than others. Some of the most recent big winners focus on companies with large expectations of future growth.
Another way to invest, made famous by Warren Buffett, focuses on “valuation.” Generally speaking, value managers buy companies at low prices. Often the lowest priced companies are smaller companies (small-cap stocks). These “small-cap valuation” managers are favorites among academics, including Nobel prize winners famous in our industry, and known simply by their last names, Fama and French. And, as Warren Buffett will tell you, they have been out of favor for the past few years.
The best opportunity since 2008
Over the past decade, smaller returns have been generated by small-cap, value investments in comparison to the S&P 500 index. And, recently, during the crash, these companies did worse, and by and large, are still inexpensive. More to the point, this could be the best time to invest since 2008. (2)
High-yield loans are made to small companies. During the past few months of Covid-19, investors sold a bunch of bonds, sending the yields super-high. In the past, this level of panic lead to a great reversal of fortune when these out-of-favor companies roared back and did better than the rest of the market. The last time “spreads” were this out of whack was 2008—and the market recovered in dramatic fashion soon thereafter. (2)
The best opportunity since 1999
Similarly, the same research firm found that prices for large cap growth companies compared to small cap value companies has not been this different since 1999. They think this is yet another reason to be optimistic because, after the dot-com crash, the small-cap value equities grew at a much faster rate than other types of equities.
The long and short of this story is that at different times, different ways of managing money work better than others. We never know in advance—but the signs look good that the value managers, like Warren Buffett, are due and could stage a comeback. (2)
Weekly or monthly, your Periscope
We are always looking for ways to improve. One of our clients asked us to send him a Periscope email monthly instead of weekly. We thought you might want that option as well.
If you’d like to receive a Periscope monthly instead of weekly, just reply to this email or look for the link, in every future Periscope, with subscription options. You may change the frequency of contact as you prefer.