Farewell Frothy 2023
2023 was an unusual year in the markets, even while recognizing that most years are at least somewhat unusual. After a tough 2022, stocks subtly, then notably, bounced back in 2023, with the ‘ Magnificent Seven’ (Apple, Alphabet/Google, Amazon, Meta, Microsoft, Nvidia and Tesla) leading the way. When the calendar flipped from 2022 to 2023, the market changed, almost immediately, from preferring value-focused investments to growth-focused. Growth stocks went from big losers in ’22 to big winners in ’23 . The Magnificent Seven’s stock prices went down 30-50% last year and then up similarly in ‘ 23.
There is ZERO chance that those 2-year stock price changes accurately reflected the prospects of these giant, established companies all along the way. Instead, these dramatic changes in company/stock values had to do with the popularity, or lack thereof, of those stocks by short-term investors. This creates an opportunity for patient, long-term investors: if you are looking at a quality, highly-competitive company with strong financials yet other investors are running away from that company’s stock because of short-term reasons, you should do the opposite and at least walk (if not run) toward that company and buy its stock.
As we go into 2024, the Magnificent Seven will likely continue to lead the way if the market keeps moving higher, but they ‘ II also likely get hit hard if the market weakens. Diversification still matters!
Charlie Munger, partner and right-hand man to Warren Buffett at Berkshire Hathaway, died in early December, about a month short of his 100th birthday. Maybe being a wise investor gives one longevity as Buffett is 93 and still going strong. Munger was known as a very frank, thoughtful, focused, candid and brilliantly ‘simple’ person. He believed in investing in quality companies at fair prices and waiting patiently for their prices to rise …. and they did, sometimes astronomically.
Voices such as Munger and Buffett are very rare and priceless. They stay above the day-in/day-out market fray and offer rational perspectives particularly during irrational times. They can boil down complex ideas and concepts into simple, understandable principles.
During the Great Recession of 2008-9, Berkshire Hathaway bought heavily into companies such as Dow Chemical, Goldman Sachs and GE at ‘fue sale’ prices and enviable terms. Why did companies line up for ‘Buffett/Munger financing’? Partly because they felt they needed the money and partly because having the ‘stamp of approval’ of Munger and Buffett signaled these companies were stable and ‘safe’ . At times of trouble, this is very valuable and Berkshire is the gold standard due to its financial strength AND broad respect it commands.
Here are just a couple of Munger’s classic and timeless quotes: “The big money is not in the buying and selling, but in the waiting” and “It takes character to sit with all that cash and to do nothing. I didn’t get to the top by going after mediocre opportunities.” In other words – patience in waiting for and finding good investments are key elements to successful long-term investing.
Simplicity! Less is more! This is easy to understand but very difficult to execute. Human nature often tells us to do something different which often ends up being more complex and less effective.
Volatility is Rarely Your Friend
The bellwether of go-go stocks is the ETF AARK Innovation, run by Cathie Wood. It had a tremendous 2023 – up about 70%. Investors must be thrilled, right?! Well, yes, IF they invested at the
beginning of 2023 . Instead, if they invested, say, a year earlier (at the beginning of 2022), their investment would now be down about 44% (because ARKK was down 67% in ’22)! Volatility
generally works against you, sometimes dramatically as ARKK investors have found out. Further, say ARKK reversed its 2022 and 2023 returns and was up 70% in 2022 and down 67% in 2023, it would STILL be down 43% over the two years. Major volatility is a major problem, almost anyway you slice it. Lower volatility is both smoother and more rewarding long term.
The 4% Rule
On Wall Street, there is a generally accepted rule of thumb that retired investors can comfortably and safely withdraw 4 percent of their assets each year and not run out of money in their lifetime. With historically low interest rates in recent years, certain market observers determined 4% was too much to safely withdraw annually. Now, with interest rates higher, there are other commentators who believe the long-term sustainable withdrawal rate should be higher than 4%. It seems these ‘experts’ don ‘t factor in that a rule of thumb should be long-term in nature and
shorter-term changes should NOT affect the rule, right?! That’s the key to the rule of thumb! One must be somewhat flexible but not ever-changing their true north.
It’s been my experience with retired clients that a balanced portfolio of dividend-paying stocks and individual shorter-term bonds can generate income that will mostly, if not fully , ‘fund’ clients’ 4% needs. Thus, changing interest rates and volatile stock markets can be comfortably navigated while clients sleep well at night Simplicity is often the key to success, even when reams of data are available; reams that often trip you up.
Shocker: People Don’t Like Budgeting
Mint, a budgeting software product by Intuit, is being shut down due to lack of compelling economic value to Intuit. From what I understand, it’s a good product but consumers are not using it enough (and thus not willing to pay for it) to make Mint worthwhile to maintain. It’s like trying to convince kids to eat their vegetables. Though eating veggies, like budgeting, is ‘good for you’, people tend to avoid these things. Budgeting, in its best or most simple form, can be a very helpful and rewarding pursuit. However, it’s often made more difficult than it needs to be, or reminds people of the potentially poor choices they are making, and thus it’s often avoided. Perhaps a version of Mint can be
introduced one day that is more compelling and rewarding to users, a tall task but one that would be very useful to a lot of people.
Brian Weisman, CFA,CPA,CFP,CMA