Friday, November 20, 2015

The Year of Uncertainty

A recent headline for an article at CNBC: 
Warren Buffett is having an unusually bad year 

Excerpt: “Warren Buffett has seen shares of his Berkshire Hathaway fall more than 11 percent this year. Even worse, Berkshire shares have underperformed the S&P 500 by more than 10 percent.”

There is always uncertainty regarding the future economic outlook, but 2015 seems to have more than usual.

The U.S. Central Bank, the Federal Reserve, commonly referred to as the “Fed” continues the Zero Interest Rate Policy and markets gyrate as they try to predict the first Fed interest rate increase, and more importantly, the speed at which they continue to raise rates.  Interest rates have a powerful influence on economic activity and asset pricing. 

For a time in the past, it seemed that “energy” was in short supply and prices would rise. That changed dramatically this year as the price of energy (oil, gas and coal) dropped by 50%.  Not because of market conditions, but simply because of government actions. (A price war between government controlled oil companies—OPEC. Sort of the mirror image of the 1970’s.)

US politics continue to be a concern, although the recent change of leadership in the US House of Representatives seems to have postponed a standoff on the Budget—at least until the next President is elected. 

And, now the ugly face of radical Islamic terrorism has shown itself again. Who knows what the next government action will be in response?

Notice most of the uncertainty is about what governments (US and International) are doing or about to do.  Most economic activity over the long run can be predicted by a study of history and the use of intelligent logic. But, when you throw government actions into the equation, it becomes very unpredictable in the short run.

Back to Buffett. His mentor Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”   In other words, in the short run, markets will fluctuate by the popular sentiment of traders buying and selling for short term profit, but in the long run, it will be corporate earnings that determine the value of investment portfolios.

Solid companies, that are well capitalized, well managed and who have leading market shares in their areas of operation will do well in the long run.  Holding ownership positions in these companies during periods of uncertainty, up years and down years is a sound strategy. Buying them when they are cheap is also a sound strategy.  Knowing when they are “cheap” can be a bit more of a challenge.

Hold on as we may see more certainty as important meetings of the Fed and OPEC are scheduled for December.