For investors, it is nearly impossible to make sense of the daily news.
Consumer confidence is high, job growth (though slowing) is still strong, company spending on capital equipment has slowed and the Fed cut rates but is not panicked about a recession. Then suddenly our tweet-happy president, Donald Trump, announced new tariffs on China against the advice of his own economic policy team.
Stocks sold off on the news, bonds rallied, and the ten-year Treasury yield dropped below 1.74% on Tuesday. Despite the market’s big drop Monday, the indicated dividend yield of the S&P 500 is just about 2.0% which means, once again, stock yields are above the 10-year Treasury yield. This after the much-heralded earnings recession failed to show up and more than two-thirds of company management teams exceeded earnings expectations.
Add this into the mix. Over the weekend, Warren Buffett’s Berkshire Hathaway announced second-quarter operating earnings dropped 11%. However, since the legendary investor was a net seller of stocks during the quarter, net income rose and the company’s cash position hit $122 billion – equal to the GDP of his home state of Nebraska.
Berkshire’s businesses are showing evidence of soft demand for the consumer companies in the Berkshire portfolio. This flies in the face of economic data. How do investors react to this conflicting data?
Investing is about being mostly right. Just ask Buffett. He amassed a fortune by being patient and investing in great companies that, frankly, don’t always perform. IBM and Kraft Heinz are two recent examples. In fact, Berkshire’s total return has trailed the S&P 500 over the last five, ten and fifteen years. Still, it is hard to argue with his success.
Three Buffett-isms you should take to heart:
- “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” Periods of volatility are excellent opportunities to upgrade the quality of your portfolio holdings. Often, volatility is spurred by the kind of conflicting data we are seeing now. So be patient and choose wisely.
- “You only have to do very few things right in your life so long as you don’t do too many things wrong.” To my earlier point, investing is about being mostly right. If you are buying stocks that pay a dividend, you are effectively being paid to wait for things to turn around. Not to be underestimated, dividends grow over time, and the compounding of that accelerating income is a powerful contributor to total return.
- “Price is what you pay. Value is what you get.” Buffett attributes this advice to his mentor Ben Graham. And he has followed it his entire career. Hitting singles and doubles – waiting for value in other words – yields lower risk and better returns than swinging for the fences.
When the data are confusing or when stock valuations are high, don’t push it. Sit back and wait for your pitch. And remember to consider stocks with dividends – especially in times like these.