It’s been a tough month for investors. As of yesterday, roughly half of the stocks in the S&P 500 have fallen into bear markets, with declines greater than 20%. International stock markets have fallen dramatically, with the losses accelerating on the heels of the latest Asian currency “event”.
We’ve seen stuff like this before. There is a worthwhile lesson in considering how a pair of history’s greatest investors have dealt with this kind of thing in the past.
On the surface, Warren Buffett and David Tepper don’t have a lot in common. One runs a diversified conglomerate and reinvests the insurance premiums into both long-term common stock positions and outright acquisitions of great companies. The other manages a hedge fund and aggressively trades in the markets each day.
But they have something in common that is worth considering today: Both Warren Buffett and David Tepper know that volatility is where returns come from and the losses of today set up the outsized gains of tomorrow. They’ve “lost” some money on the way to earning tons of it.
In the summer of 1998, there was a currency crisis that originated in the far east and eventually wound its way around the globe, culminating in the devaluation of the ruble and the blow-up / bailout of the first systemically risky hedge fund in history, Long Term Capital. Both Buffett and Tepper took quite a beating during this so-called “Asian Contagion” event.
As Nick Murray explains, Warren Buffett was down quite a bit that summer.
A very large sum of money, wouldn’t you say? Now what, you ask, does it represent?
It is roughly how much Warren Buffett’s personal shareholdings in his Berkshire Hathaway, Inc. declined in value between July 17 and August 31, 1998. And now for the six billion dollar question. During those forty-five days, how much money did Warren Buffett lose in the stock market?
The answer is, of course, that he didn’t lose anything. Why? That’s simple: he didn’t sell.
Warren Buffett has found himself the corporate elephant he’s been hunting.
Berkshire Hathaway, the conglomerate run by the billionaire investor for the last half century, has agreed to buy Precision Castparts Corp (PCC), a US engineering company, for $37.2bn.
Under the terms of the deal, Berkshire is paying $235 a share in cash for PCC, and the $37.2bn valuation of the deal includes PCC’s debt.
The acquisition of the Oregon-based company is Berkshire’s biggest yet, eclipsing the $26bn paid for a controlling stake in Burlington Northern Railroad in 2009.
Mr Buffett said:
I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports. Berkshire’s Board of Directors is proud that PCC will be joining Berkshire.
South Korean steelmaker Posco could scrap plans for a $12-billion project it had agreed to set up in Odisha a decade ago, following a new law that makes it costlier to source iron ore for the plant, a company spokesman said.
The 2005 project to set up a steel plant was billed as India’s biggest foreign direct investment at that time but it has encountered a series of delays. The company waited about a decade to acquire land for the proposed 12-million-tonnes-a-year steel plant, owing to opposition from local tribal groups.
Due to a mining law enacted in March, the company will now also have to buy a mining licence in an auction. Initially, the Odisha government had promised to help the company secure the licence for free.
The new law could raise costs for the company at a time when a global steel glut is depressing prices. “We will have to see how our costs will be, whether it will be viable,” said Posco’s India spokesman, I G Lee. “We will take a final call only after the auction details are out.”
Asked whether the company could skip the auction and withdraw from the Odisha project, Lee said: “Yes.”
Through the past two years, Posco and ArcelorMittal, the world’s largest steelmaker, have scrapped a number of other projects in India, citing difficulties in acquiring land and mines. Another withdrawal by Posco could dent Prime Minister Narendra Modi’s ‘Make in India’ manufacturing push.
So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that’s keeping him awake at night.
This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren’t allowed to record any of it. No audio. No video.
Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: “Real threat.”
That’s how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend.
1. Wall Street — Carl Fox: “Money’s only something you need in case you don’t die tomorrow.”
Why it’s so good: Don’t fool yourself, money matters in this world. The first half of the quote has you thinking it’s merely another romantic observation on how money isn’t everything in life, or that money can’t buy happiness. However, the sentence does a complete 180 in the second half. By the end of the quote, you realize money is quite important since you probably won’t die tomorrow. You have future financial needs that you’ll need to pay, so you better start preparing for them now.
2. Fight Club —Tyler Durden: “Advertising has us chasing cars and clothes, working jobs we hate so we can buy s— we don’t need.”
Why it’s so good: Rule number one is not to talk about Fight Club, but this quote is too good to skip. Lost in our consumer-driven economy, we tend to lose track of what’s really important in life. Instead of reducing our dependency on a job we hate, we try to find happiness in material things being thrown in our faces every day. Before you know it, you’re living in an oversized house stuffed with expensive ignorance. You’re spending every paycheck trying keep up with the Joneses, who truth be told, aren’t that happy themselves and have the debt to prove it. Think about what makes you truly happy in life before spending money.
3. Boiler Room — Jim Young: “And there is no such thing as a no sale call. A sale is made on every call you make. Either you sell the client some stock or he sells you a reason he can’t. Either way a sale is made, the only question is who is gonna close? You or him? Now be relentless, that’s it, I’m done.”
China’s benchmark stock index is down for its fourth session of the past five, in spite of — perhaps even because of — efforts by Beijing to prop up the market.
The Shanghai Composite was 3.2 per cent lower in mid-afternoon trading, while the tech-heavy Shenzhen Composite had lost 5.8 per cent.
The Shenzhen index is now up just 36 per cent for the year, down from 122 per cent less than a month ago. Shanghai’s 2015 gain has been trimmed from 60 to 13.6 per cent. The two indices combined lost roughly $3tn between a peak on June 12 and the start of this week.
The latest falls are all the more significant because in recent days policy makers in Beijing have stepped up their efforts to stabilise the market, which is dominated by retail investors.
The central bank has allowed its own balance sheet to support stocks, 21 securities brokerages have pledged to use their own funds to buy and hold shares, and initial public offerings have been suspended to avoid new listings diverting appetite for the secondary market.
The world’s 20th richest person, Prince Alwaleed bin Talal, has pledged to give away $32 billion (28.8 billion euro) of his fortune in the years to come.
The money would be used to advance intercultural understanding, eliminate diseases, develop communities, and empower women and youth, Alwaleed said during a news conference in Riyadh on Wednesday. He also stressed he owes his wealth to Saudi Arabia, so that country will be a priority of the windfall.
As part of the Giving Pledge campaign, in which the world’s wealthiest people are encouraged to give most of their wealth to philanthropic causes, about 200 individuals all around the world have promised to give away more than half of their fortune, including Bill Gates and Warren Buffett, who have donated more than $46 billion.
“It is a commitment without boundaries. A commitment to all mankind,” said Prince Alwaleed.
The Saudi magnate is standing for a “better world of tolerance, acceptance, equality and opportunity for all.”
The total donations from the late King Abdullah’s nephew have reached $3.5 billion since the 1980s. The donations to charity will have nothing to do with any of the future projects of Kingdom Holding Co., a diversified investment holding company based in Riyadh of which Alwaleed is the CEO, the prince told reporters. Kingdom Holding managed to raise billions of dollars through Twitter, News Corp and Citigroup investments, in which the prince holds stakes.
Its early in this potential correction, but let me remind you of Buffett’s interesting (1997) comments:
“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?
Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?
These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
“I love reading Warren Buffett’s letters and I love contrasting his words with his actions,” he began. Lest anyone think it was a put-down, he quickly added, “He’s a very wise guy.”
But wise or not, Mr. Loeb had a few critical things to say about Mr. Buffett. “I love how he criticizes hedge funds, yet he had the first hedge fund,” Mr. Loeb said.“He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself.”
The total market value of stocks traded across the globe hit a record $74.7 trillion at the end of April, helped by the gusher of money flowing into financial systems under monetary stimulus by major central banks.
Combined global market cap, based on data from the World Federation of Exchanges and stock indexes worldwide, roughly matches the size of the world economy for 2015, or $74.5 trillion, estimated by the International Monetary Fund.
Monetary easing has propelled stock prices to historic highs in Japan, the U.S. and Germany. Lately, Chinese shares are surging in light of additional easing measures.
The global stock market cap peaked at $64 trillion in October 2007 and declined before setting a new record in November 2013. The market cap topped GDP in 1999 during the dot-com bubble and again during 2006-2007, before the financial crisis.
The percentage of total market cap relative to the world’s GDP is seen as an indicator of market overheating. Closely followed by U.S. investor Warren Buffett, it is also known as the “Buffett index.”
The kind of stock craze seen before is absent in the current market, says Yoshinori Shigemi of J.P. Morgan Asset Management. But concern is mounting over stock market rallies led by easy money policy.