Trump’s Trade Talk Tanks Equities!
Ah, to build, to build!
That is the noblest art of all the arts.
Painting and sculpture are but images,
Are merely shadows cast by outward things
On stone or canvas, having in themselves
No separate existence. Architecture,
Existing in itself, and not in seeming
A something it is not, surpasses them
As substance shadow.
- Henry Wadsworth Longfellow
In many ways, investing is very similar to building something, or planting seeds, kind of like growing a garden. On the building analogy, the goal is to continually improve the building until it is virtually flawless, essentially a Taj Mahal for all to admire and wonder. If you look at the portfolio of public holdings at Berkshire Hathaway, you can discover what I am talking about. Everywhere you look, there will be wonderful companies and businesses, with one holding more impressive than the next. When you look at your portfolio, you should have the same kind of feeling, one of confidence, knowing that the businesses you own a piece of are in large industries and are investing for the future. The reason why this is important is something you discover after many years of investing, and it probably happens to every investor. What prey tell is that?
The answer is that only after a lengthy period of holding these awesome companies do you discover which holdings performed the way you expected them to and which ones let you down. Disappointment is part of life, and it is certainly part of investing, and how one reacts to these challenges can determine performance over the next ten years or even longer. I bring this subject up because this week was one of those challenging periods for most equity owners, including myself. Specifically, without getting too deep in the weeds, quite a few holdings reported and one really took it on the chin. Many years ago, when looking at the positions, all were companies I felt quite confident about. I still own them today, and many have made multiples of the original investment, some far more then others, however. Interestingly, the one that got pounded has a great business, excellent leadership, scale, and has quite a history of generating wealth for its owners, in many different ways. The disappointing aspect of this is related to capital allocation. If you own ten or fifteen different positions, and each one has a 7-10 percent weighting, your results are going to be affected by position performance, but in an even way because the weightings on the holdings are so similar. If, however, one or two positions have 25-30% of the asset value, your performance is going to heavily depend on those holdings, quite obviously. Now, if those positions do very little, but one holding, which is weighted at one or two percent, explodes and becomes a five, ten, fifteen bagger or more (nice problem, I know), the opportunity cost of not having your big money in that out performer becomes quite large. Ten years later, you realize where you went wrong if money is tied up into holdings that just did not perform well. You are building this work of art with the idea that all of them will be spectacular, but reality dictates very few will. Importantly, the ones that don’t do well have to be analyzed to see what is going wrong and if they are still worth owning. Did something change in the business which makes it less attractive? Part of investing is also understanding what went right, and where mistakes were made. The reason why this is important is because investing is a journey and involves a long time frame. Maybe retirement is the priority, but there are ten years or more until the day dawns. Maybe you aren’t investing for yourself so much now, but for your kids or grand kids. We are building our masterpiece, and will take our bitter lessons to heart, and if we can learn from them, and use them to make better decisions in the future, the disappointment today will have been well worth it.
In the investment world, the absurdity of what President Trump tweeted about the status of trade negotiations with China became the central focus point every day. Reflecting this was a quote that we were only just one good tweet away from rebounding after getting taken to the woodshed every morning. You may have noticed the futures always being down last week (except for maybe one day). Just a little point to keep in mind, don’t think that investment success is going to be based on what President Trump tweets or does not. Yes, the trade talks with China will affect duty rates, balance of trade, ownership restrictions and intellectual property, among other items. However, over a long period of time, these kinds of issues usually get resolved, although we do concede that Mr. Trump is anything but a typical President. In the meantime, turning ones attention to opportunities to build your work of art is probably a better use of time.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.