Buffett, Bull Market Extremes, and Russian Gas

A computer company can lose half its value overnight when a rival unveils a better product, but a chain of donut franchises in New England is not going to lose business when somebody opens a superior donut franchise in Ohio. It may take a decade for the competitor to arrive, and investors can see it coming.

-Peter Lynch

We continue learning from Warren Buffett…

As I mentioned yesterday, there’s a great website called The Buffett. It’s filled with quotes from Warren Buffett filtered by subject matter.

Today’s about how to narrow down a list of stocks to research and the advice Buffett would give to any new investor…

Buffett Wisdom Continued…

Do You Have Advice for the Individual Investor to Help Them Narrow the Stock Universe?

Warren Buffett:

They ought to think about what he or she understands. Let’s just say they were going to put their whole family’s net worth in a single business. Would that be a business they would consider? Or would they say, “Gee, I don’t know enough about that business to go into it?”

If so, they should go on to something else. It’s buying a piece of a business. If they were going to buy into a local service station or convenience store, what would they think about? They would think about the competition, the competitive position both of the industry and the specific location, the person they have running it and all that.

There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do.

A computer screen doesn’t tell you anything. It might tell you about P/Es or something like that, but in the end, you have to understand the business.

If there are certain businesses in that mall they think they understand and they’re public companies, and they can learn more and more about them… We used to talk to competitors. To understand Coca-Cola, I have to understand Pepsi, RC, Dr. Pepper.

Charlie Munger:

And Cott. Cott is the one you have to understand more than anything else. [Note: Cott is a Canadian company specializing on low-priced, private-label soft drinks.

Source: BRK Annual Meeting 1998, www.thebuffett.com

What Advice Would You Give to New Investors?

Warren Buffett:

I think you should read everything you can. In my case, by the age of 10, I’d read every book in the Omaha public library about investing, some twice. You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water – take a small amount of money and do it yourself. Investing on paper is like reading a romance novel vs. doing something else. You’ll soon find out whether you like it. The earlier you start, the better.

At age 19, I read a book [The Intelligent Investor] and what I’m doing today, at age 76, is running things through the same thought process I learned from the book I read at 19.

I remain big on reading everything in sight. And when you get the opportunity to meet someone like Lorimer Davidson, as I did, jump at it. I probably learned more in that four hours than in almost any course in college or business school.

Charlie Munger:

Sandy Gottesman, a Berkshire director, runs a large, successful investment firm. Notice his employment practices. When he interviews someone, he asks: “What do you own and why do you own it?” If you’re not interested enough to own something, then he’d tell you to find something else to do.

Warren Buffett:

Charlie and I have made money in a lot of different ways, some of which we didn’t anticipate 30-40 years ago. You can’t have a defined roadmap, but you can have a reservoir of thinking, looking at markets in different places, different securities, etc.

The key is that we knew what we didn’t know. We just kept looking. We knew during the Long Term Capital Management crisis that there would be a lot of opportunities, so we just had to read and think eight to ten hours a day. We needed a reservoir of experience. We won’t spot everyone, though – we’ve missed all kinds of things.

But you need something in the way you’re programmed so you don’t lose a lot of money. Our best ideas haven’t done better than others’ best ideas, but we’ve lost less. We’ve never gone two steps forward and then one step back – maybe just a fraction of a step back.

Charlie Munger:

And of course, the place to look when you’re young is the inefficient markets. You shouldn’t be trying to guess if one drug company is going to have a better pipeline than another.

There won’t be any scarcity of opportunity in your life, although there will be times when you feel that way.

Source: BRK Annual Meeting 2007 Tilson Notes, www.thebuffett.com

“The Pull of the Powerful Bull Market”

The Wall St. Journal reports that “big stock-market gains are leading a number of investors to abandon defensive positions taken to protect against a market downturn, the latest sign that many doubters are shedding caution as the long rally rolls on.”

The article goes on… “I haven’t seen hedging activity this light since the end of the financial crisis,” said Peter Cecchini, a New York-based chief market strategist at Cantor Fitzgerald. “It started in late 2016 and accelerated in the second half of the year.”

This is yet another red flag. Of course, stocks could run higher.

But it’s important to understand what the implications of this decade low hedging activity means…

Without hedging in place, big investors could panic to sell their positions and limit their losses during the next market correction.

If so, this could intensify any drop-in prices. In other words, the market could fall more than it otherwise might because these big investors don’t have downside protection in place.

Surveys at Bullish Extremes

The WSJ reports,

The American Association of Individual Investors survey of its members shows the most bulls and the fewest bears since the end of 2010.

Investors Intelligence’s survey of financial newsletters is even more positive, with the highest number of bulls since the start of 1987. Investment-bank surveys say record or near-record proportions of fund managers are holding more risky portfolios than usual.

Russian Gas to the Rescue?

This an interesting note out of London… Given all the political rhetoric from both sides about Russia here in the U.S.

The Times out of London reports that Russian gas could be on its way to Boston.

From The Times,

Russian gas that was imported to Britain late last year could be coming to the rescue of ice-bound Americans as freezing weather in the northeast of the US sends prices soaring…

Much of the gas will have originated in Siberia, where Russia has just opened an LNG export terminal at Yamal, a project targeted by US sanctions…

The northeastern US has been hit by blizzards and freezing temperatures in recent days, driving up gas demand. That has sent prices in the region soaring well above prices in Britain and made it worthwhile for traders to ship the gas across the Atlantic.

Prices in the northeastern US have spiked above $100 per million British thermal units (mmbtu) and remained at about $20/mmbtu yesterday. Gas in Britain was trading at about $7/mmbtu yesterday…

Much of the southern US continues to enjoy plentiful, cheap gas supplies, with prices of less than $3/mmbtu, thanks to domestic shale gas. However, there is limited pipeline infrastructure to take it north, leading to huge regional variation in prices…

If the shipment does remain bound for the US, it could reignite the political controversy over the destinations of gas from the Yamal project, which is operated by a company that was targeted by US sanctions in response to the Ukraine crisis.