Buffett not scared off by the macro

Some of the worst monthly market returns in history have occurred in the month of October, and I’m sure it will come as no surprise to you to learn that this year’s was one of them. The ASX200 fell -6.1% in October, its worst monthly performance in almost four years. The S&P500 fell -6.9%, emerging markets fell -8.8% and developed markets fell -8.0%.

And naturally, investors blamed a host of reasons for the sell-off: trade wars, higher rates, growth concerns, emerging market under-performance, falling global liquidity, economic cycle maturity, etcetera, etcetera.

While people always seem to see things with more clarity after the event, no-one actually knows the future or whether the selling will continue or abate.

One thing we do know is that stocks are now cheaper than they were a month ago. And that’s a good thing for future returns.

While the increasing prevalence of passive investing means more stocks get sold down in weak markets, most businesses are unlikely to be impacted by the macro noise in any case. Are customers really going to shop less at supermarkets because of a tweet by Trump? Will fewer customers visit the local pet store or stop taking their children to a childcare centre due to a trade war?

Furthermore, it’s more than likely the world will continue to move ahead, and October’s sell-off will be a blip in a long-term chart that moves from the bottom left to the top right. That’s been the trend over the long term and it is likely to be the trend in the future too.

You needn’t worry about short-term blips if you maintain a long-term view, provided you buy high-quality companies and don’t pay lofty multiples for them. These are companies with strong balance sheets, widening moats, high returns on equity and track records of profitability.

They ordinarily possess a capable management team that is aligned with shareholders, have a good corporate culture, and sell products or services which are unlikely to be disrupted. Such businesses can take advantage of economic turmoil and tend to recover quickly when economic prosperity returns.

Which, in case you’re wondering, always happens. 

Buffett a buyer 

You may have also seen that Buffett’s Berkshire Hathaway deployed billions of dollars during the third quarter this year, even before the October sell-off.

It shouldn’t come as a surprise as Buffett is a long term bull on America. When he has the chance to buy a good business (whether it’s a stock or the whole business) at an attractive price, he does.

Buffett doesn’t let macro concerns interrupt his investment process. One quote of his that I like summarises this neatly:

“Incidentally, the one thing I can assure you is that Charlie and I, to my knowledge or my memory, can’t recall ever making an acquisition or turning down one based on macro factors. We talk about deals when they come along, but whether it was See’s Candy, the Burlington Northern or whatever, we always bought these when general economic conditions were terrible.” ~ Warren Buffett

Provided he can buy investments where he believes he’s getting more in future value than he has to outlay, and with an adequate margin of safety, he’s investing. And you can do that, too.

Buffett and the other ‘Super Investors’ see volatility as their friend. They see weak markets and pessimism as the ingredients for higher long-term returns.

The ‘Super Investors’ are highly sceptical of market forecasts and they focus on the underlying businesses and the likely returns those businesses will deliver over the long run. The good news is that ultimately a company’s share price will follow a company’s earnings, and more often than not macro concerns are fleeting. Good businesses almost always recover.

“To give up what you’re doing well because of guesses about what’s going to happen in some macro way just doesn’t make any sense to us.” ~ Warren Buffett

“If you’re agnostic about those macro factors and therefore devote all your time to thinking about the individual businesses and the individual opportunities, it’s a way more efficient way to behave, at least with our particular talents and lacks thereof.” ~ Charlie Munger

Maybe it’s time to follow Buffett, Munger and the other ‘Super Investors’ and take advantage of macro concerns, thereby allowing you to fill your portfolio with high-quality investments.