My Confession and Thoughts on the US Stock Market

Have you ever noticed that the talking heads are all bearish whenever the US stock market turns even slightly lower. For example, today the major US indices were all lower……but by less than 1%. That didn’t matter. On CNBC it was all about how in the near term there will be a correction in the equity markets, but viewers should go ahead and buy stocks now anyway because they will only go higher in the future. I also find it interesting that CNBC can/does work the recommendation to buy stocks into EVERY story. I am not saying anything new. You readers already know what I’m talking about, but it still makes me chuckle because one of my central tenets is to avoid following the crowd. Not that being a contrarian is always the correct course of action, but as Warren Buffett says, “it’s a nice pond in which to fish”.

For the last year there have been many investors waiting on a pullback. (Of which I have been one). I thought it was interesting that CNBC reported several pension funds, such as Calpers for instance, fired hedge funds recently for being bearish…….and ultimately wrong. Does this mean the last few bears are being shot and everyone is turning bullish?!! Unfortunately not, but it does mean that continued under performance of some hedge funds will force them to employ greater levels of leverage (and make riskier bets) in order to make up some relative performance ground. Eventually global equities will correct, the when and how is the question.

On that front I believe some of my past comments have been misconstrued. I do not believe that equities are a massive bubble, destined to decline by 90%+. While I believe global equities to be artificially elevated by central banks and their low interest rate policies, the only true bubble I currently see is in the credit markets themselves. I just wanted to set the record straight, because I’ve received some interesting comments on the topic. I am expecting a correction, and my wife and I will buy stocks from our watchlist when such a correction materializes. Interestingly enough, I very nearly bought Visa (V) yesterday as the stock price pulled back following a disappointing outlook. I actually placed a buy order, but later canceled it. It was a mistake, but one I hope to rectify next week. I would like to give a shout out to my friends who did pick up a few shares today, including fellow blogger JC……good job following through buddy. Visa is one of those brands with a nice moat and steady pricing power. It’s not cheap, but it’s not expensive for what you’re buying. More and more I’ve been thinking Visa is an inflation hedge as well……which I hadn’t previously considered.

Last, but not least…..I want to share a dirty little secret with all of you readers. In public I’m a people watcher, but online I’m a comment reader. You know, one of those snarky people who read the comments at the bottom of the financial media’s “articles”, in order to chuckle at the silly things people say. Sometimes, the comments actually make sense too…….but it’s always a mixed bag. I particularly enjoyed the comments on this article today on Yahoo Finance.

Do you like to read other people’s comments online, or eavesdrop on their financial conversations? I know I shouldn’t, but there are worse vices out there :)

 

My Thoughts/Valuation on Mattel, and a Few Quotes to Learn By

Mattel’s stock hadn’t been on my radar in quite some time, because I thought it too expensive. The stock has been getting slammed in 2014, down about 24% year to date. Obviously, it has underperformed the S&P 500 by a wide margin. Clearly, it’s not wise to buy a company’s stock just because it’s down sharply……..but as Warren Buffett likes to say, the new low list “is a great pond to go fishing in”.

Typically, purchases for my portfolios fall into one of two categories. Either they are “cigar butt stocks ” (marginal businesses that are selling for less than their liquidation value or working capital), or they are powerful global brands such as our holdings in Coca-Cola or Johnson & Johnson which I like to hold in perpetuity. My recent purchase of Mattel’s stock was a play on their powerful brands. This purchase was relatively small because I believe the share price will go lower, along with the broader market, and I hope to buy many more shares. When the long awaited correction will come to the broader market is anyone’s guess, but Mattel’s shares appear to represent a good relative value compared to the broader S&P 500. Click HERE to read my complete valuation article on Seeking Alpha.

 

A Few Quotes to Learn By

Additionally, I’d like to share two quotes from Warren Buffett that I think succinctly explain how he feels about a given company’s management, and why he handles his managers the way he does.

Whenever I read about some company undertaking a cost-cutting program, I know it’s not a company that really knows what costs are all about. Spurts don’t work in this area. The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’ any more than he wakes up and decides to practice breathing.” ~ Warren Buffett from Carol Loomis’ 1988 article The Inside Story of Warren Buffett.

….We don’t go into companies with the thought of effecting a lot of change. That doesn’t work any better in business than it does in marriage.” ~ Warren Buffett from Carol Loomis’ 1988 article The Wisdom of Salomon?

Warren Buffett is highly praised as an investor, but in my opinion he doesn’t get enough credit for being a great manager. Part of what makes him a great manager is that he delegates responsibilities and then supports the managers that are in charge. It doesn’t always work out, of course, but there is something to be said for a manager who is confident enough in themselves to delegate. In my opinion the best managers also “ read/understand” people extremely well. Here too Buffett seems to get high marks.

What are your thoughts on Buffett’s “hands off” management style? Do any other married folks out there read true brilliance in the second quote…..at least when it comes to marriage?

Purchased This Week

It’s hard to believe another week has come and gone, but the facts are undeniable. Geopolitics stole the show this week. With the Israel/Palestinian conflict heating up and the Ukraine/Russia continuing to burn. The biggest tragedy this week was the death of nearly 300 innocent people when their jumbo jet was shot down by a surface to air missile over the war ravaged eastern Ukraine. I’m sure you all saw the headlines this week. Though half a world away, my thoughts and prayers are with the families. Continue reading