Wow, it feels like a lot has happened in the two weeks since my last post. The markets have sold off almost another (20%) after the ~(8%) decline in February. In this post I will briefly chronicle how I am thinking about reacting to the corona pandemic and the impact it is having on financial markets and the economy. I also found a new fantastic investing resource that I wanted to share, so you will have the chance to use it during this period of challenge (and opportunity).
A New (to me) Investing Resource
I was recently listening to Patrick OShaughnessy’s (Twitter: @patrick_oshag) Invest Like the Best podcast with Dan Rasmussen of Verdad Capital (episode here). They had a really great discussion about investing during crises. Dan provided an exposition (human Ferrari style) on the historical performance of factors in relation to periods of disruption and a bunch of other fascinating points.
[By the way, if you find Dan interesting to listen to, and are looking for more quality podcast time while you are in quarantine, I also recommend the February 17 episode of Capital Allocators. If you are on an android device, I also recommend the google podcasts app. Perhaps unsurprisingly, Google is good at organizing and indexing podcast data for search/retrieval.]
The new resource I want to share was mentioned by Patrick in the intro to his show. It is called Koyfin. Koyfin is a charting and financial data software suite (at least that is how I would describe it).
The simplest way to describe it is probably: “a free, Bloomberg-lite.” In the interest of disclosure (yet again), I’m a full-time practicing attorney, not a professional investor. I’ve never leased a Bloomberg before. So if you are a big, still solvent, hedge fund manager, you may be unimpressed.
If you want to check it out, here’s a link. I am definitely going to be using it on this blog (starting with this post), so you can get a feel for some of the features.
Markets in Turmoil
Turning back to the stock market, things have sold off pretty hard so far in March. Here’s a chart of the major U.S. indices:
As you can see, the S&P 500 is down almost (18%) and the DJIA is off (26.33%). This was surprising to me, but it looks like the QQQ’s have held in there incredibly well.
Buying The BBB’s
These broad indexes, however, are not reflecting a lot more damage in certain sectors of the market. For example, travel-related stocks like Marriott, Booking, Expedia, or Hyatt are down a much more than the index.
Banks and financials have really been smoked by the cratering of rates (and probably discounting severe economic retrenchment due to the virus and the measures employed to try and limit the loss of human life)(great timing on that WFC buy in the Fun Fund…eh?).
I have been buying a some $BRK.B for certain of my accounts (and for a couple of family members). Here’s a chart comparing BRK and two “Berk-a-likes” that I also follow, to the S&P in March:
Berkshire is not off as much as the SPY in March, but it started from a cheaper position. The S&P 500 CAPE (a price/earnings multiple using 10 years of earnings to smooth economic volatility in earnings, like we are probably about to see on the downside) is still only down to just below 22x. If memory services, that is still above the 80th percentile of historical observations (i.e., it has been cheaper over 80% of the time, going back to like 1880). Markel is down more and Boston Omaha has been smoked, but it came into the period trading at a very high valuation.
Here is a neat Koyfin chart tracking their price to book ratios over time (back to the GFC/2008). BOMN hasn’t been around long, so it goes back to inception. Here’s the chart:
As you can see, Berkshire is trading right at 1.0 times book value and Markel is at a small discount. Boston Omaha is trading at a small premium now, but it was trading below book prior to their announcement of a buyback program earlier this week.
Now, all of this is based upon 12/31 reported book values, so they are almost certainly a bit lower now, but that is always the case with value measures that use historical data (which I much prefer to “estimates” for many reasons, including better performance in the academic literature that I’ve read). Importantly, this lag in book value versus the real-time price would also have been the case at the bottom of the GFC, when BRK.B and MKL both last got down to around 1.0x P/BV.
If you didn’t know all three of these entities are in the insurance business (among other things). Most insurers write policies, take in premium payments, and invest the money in bonds that basically match the estimated time frames for paying out claims.
They get to keep the amount by which the investments exceed their costs and the premiums they eventually pay out. So, it does make sense that they would get hammered when interest rates tank. I suppose they could also have more exposure via business interruptions or other claims via their insurance or reinsurance, depending upon what they wrote and how policies are interpreted.
Berkshire, Markel, and BOMN (BOMN is much more aspirational at this point, especially with respect to the insurance operations), however, invest a relatively large portion of their premiums in equity of businesses. The model also differs from normal insurers by being able to “flex” insurance premiums written up or down with the perceived ability to make a profit, because the company/conglomerate is not just in the insurance business, hopefully, reducing the institutional imperative to just “grow the company” (less confident about this one for Markel…seems premiums have largely just marched up over time and one of the Co-CEOs just basically “does insurance and ILS”, as opposed to being a more general capital allocator).
So, the expected returns from the equity investments they can now make has increased due to the crash in my opinion. This is in stark contrast to most insurers who are forced to plow new float/funds into ~1% Treasuries. Berkshire also at least $120 billion in cash that it can deploy into this environment (my dude has been issuing 0% Euro-denominated bonds too…while people wrote articles screaming about him holding cash), which will likely be enhanced by the imprimatur of Berkshire and Buffett, especially with respect to the “merchant banking” type of deals.
I think Markel and BOMN also have some advantages. I am generally very skeptical of the people who invoke Buffett (more then generally because the reputational status is going to attract scam artists), but I think these two MIGHT have the goods.
If this is a one year or less economic interruption that is very severe in impact, but short in duration it should be high times for rational, patient, permanent capital. No revenue for 2-6 months? Well, these guys should be able to get comfortable with that for a price. It is kind of what their shareholders signed up for.
I think MKL and BOMN may also be able to do more deals, because it seems much of the opportunity may be in smaller and mid-sized businesses, related to the most impacted industries (like hospitality and travel). It would be hard to see Berkshire do too much in that space, although who knows? What if he takes down like Starbucks or AirBnB or Disney or something. BRK has bought a big business from the Pritzkers before (see, Marmot (the family controls Hyatt Hotels).
So, I am (slowly) implementing a “BBB strategy”: Berkshire (and the berk-a-likes) Below Book (or close enough). It should provide nice returns, as the “anti-fragile” gain from stress. I will also sleep like a baby at night.
The Fun Fund and Asset Allocation
So, I’ve got about 18% of the Fun/Implosion account in cash (the relative allocation to cash has shot up as all the stocks, other than $CAG which has been a beast, were decimated). I do have some ideas for that cash; stuff that I’m watching, but I think I can be selective ($Googl @ ~$500 sounds nice).
As far as asset allocation, as of March 5 (as reported in my last State of the Stash update) my trend following and valuation focused accounts (bulk of assets) were out of stocks to the extent I allow. The net result is that I am about 55% in cash/bills including all my accounts. Based on the policy I use, I won’t change anything about that until we get a positive price trend and/or cheap stocks (in the broad indices).
I will try and post some more updates if anything changes (I probably need to do some posts regarding positions I own when earnings come out). In the meantime, thanks for reading. I hope you and your families stay safe through this troubling time!