warren buffett

Focus on the forest - not the trees

In a recent articlewritten by Warren Buffet, there is wisdom to be shared as he compares our financial plans with a forest.

Your financial plan is comprised of many parts. This would equate to what Buffett calls the “economic trees.” In other words, let’s not get to caught up on any one investment.

“A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty,” Buffett writes.

He won’t get every investment right. Neither will we. Berkshire holds a substantial position in Kraft Heinz (KHC), whose shares recently tumbled after the company delivered poor results and slashed its dividend.

But, if we review the portfolio as we’d view the forest, we find a diversity of trees, wildlife, and plants. It’s a work of beauty. Your portfolio is built from the bottom up. Like the forest it’s very diversified, and it is created with your financial goals in mind.

As Buffett opines (and we agree), “I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”

That said, how did the 19.8% drop in the S&P 500 Index (September peak to Dec 24th trough) sit with you? With your input, we do our best to gauge your tolerance for risk. If you found yourself fretting over the volatility, let’s talk.

On the other hand, if you slept soundly, it would suggest your investment mix in relation to risk is on target. “The whole is greater– considerably greater–than the sum of the parts.” We feel the same way about your financial plan.

Let’s say that you had had theforesight to see the oncoming explosion in the federal deficit, one that is up 40,000% over the last 77 years.

“To ‘protect’ yourself,” Buffett said, “You might have eschewed stocks and opted instead to buy three ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200.” Compare that to the performance of the S&P 500!

What is this nation’s secret sauce? The answer is complex and difficult; yet, the overarching theme lies in front of us.

The experiment called the United States has birthed and attracted the best and the brightest. Freedom and opportunity are its calling cards. Today, we are the wealthiest nation on Earth, and we continue to ride the wave of innovation and enjoy the benefits.

But, is that wave about to crash on the shore?

A recent piece by Morgan Stanley entitled, Millennials, Gen Z and the Coming ‘Youth Boom’ Economy, complements Buffett’s optimistic viewpoint. The population of the Millennials will overtake the Baby Boomers this year, and “Gen Z, born between 1997 and 2012, will overtake the Millennials as the country's largest cohort by 2034,” it said. For the U.S. economy, “The demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of ‘youth jolt’ that the Baby Boomers were famous for.”

Sure, we can’t know when the next recession will ensue or some of the challenges we’ll face as a nation in the coming years. Yet, as Buffett sums up his annual letter, “Over the next 77 years, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky–gloriously lucky–to have that force at our back.”

Bright start to the new year

First, let’s go back to December. A headline in the Street.com summed it up well: "Dow Gains on Last Day of Worst December Since the Depression." Even a 7% bounce in the final week of the year didn’t prevent a performance that was compared to the early 1930s.

When the S&P 500 Index touched its bottom on December 24, the broad-based index of 500 large U.S. companies had shed 19.8% from its September 20 peak. We were barely 0.2 percentage points from officially entering a bear market.

Market turmoil in the fall and December’s action were especially ugly. Steep market corrections are not something we look forward to; they are impossible to consistently predict, but they come with the territory.

As I’ve repeatedly said, your investment plan incorporates the unexpected detours. The disciplined investor, who divorces the emotional component from the investment plan, chooses the best path to meet his or her long-term financial goals.

That said, 2019 has been much better:

  • A flexible Federal Reserve has taken its finger off the rate-hike button,

  • The economy continues to expand, albeit the pace has slowed, and

  • We’ve been treated to headlines saying t he U.S. and China are making progress toward a trade agreement

There are no guarantees a deal will be inked, but a March 4 headline in the Wall Street Journal summed up recent sentiment:

"U.S., China Close In on Trade Deal"
Both countries could lift some tariffs imposed last year, and Beijing would agree to ease restrictions on American products.

A trade deal that pries open Chinese markets to U.S. products and services, protects U.S. intellectual property rights, and ends forced technology transfers (and one with strong enforcement provisions) would not only benefit the U.S. economy, but a deal between the world’s largest economies would sweep away one cloud of uncertainty that has plagued investors.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisory resource.

Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch MTD: returns: January 31, 2019—Feb 28, 2019 YTD returns: Dec 31, 2018—Feb 28, 2019 *Annualized **in US dollars

Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch MTD: returns: January 31, 2019—Feb 28, 2019 YTD returns: Dec 31, 2018—Feb 28, 2019 *Annualized **in US dollars