Daily Economic Update: February 26, 2024

Stocks will start the week coming off record highs.  The week ahead will feature PCE and the first revisions to 4Q2024 GDP.  Speaking of GDP, the NY Fed Nowcast forecast remains at 2.80% (real GDP for 1Q) while the Atlanta Fed GDPNow will be updated Tuesday.

The highlight of the weekend was the Berkshire Hathaway annual shareholder letter .  The letter starts with Buffett highlighting the impact Charlie Munger had on both his success and that of Berkshire Hathaway, calling him the "architect" of the company, a nod to Munger's love of architecture.  Buffett goes onto credit Munger with what was arguably the most important change in his investing philosophy, stating: "Charlie, in 1965, promptly advised me: “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.”   For more on Munger, see here.

As for the rest of the letter, here are what I consider to be the highlights:

• Buffett opens the letter by basically differentiating investors from speculators (a topic we covered here) whereby he believes in attracting "lifetime" shareholders as opposed to those locking for lottery tickets.
  
  
• Buffett also takes a jab at so called economic experts in the following lines (discussing his sister Bertie as a typical investor): "She is sensible – very sensible – instinctively knowing that pundits should always be ignored. After all, if she could reliably predict tomorrow’s winners, would she freely share her valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbors showing its location. (again a topic we covered here).
  
  
• Buffett never misses a chance to bemoan accounting standards, "So sanctified, this worse-than-useless "net income" figure quickly gets transmitted throughout the world via the internet and media. All parties have done their job - and legally, they have."  Lamenting the mark-to-market accounting requirements impact on Berkshire's GAAP earnings.
  
  
• Buffett remains optimistic about the power of investing in U.S. based equities and the patient approach to investing, avoiding the noise. (we talked about optimism here and noise here)
  
  
• Buffett describes his continued investment philosophy in terms of owning businesses with strong fundamentals that can deploy additional capital at high rates of return in the future, he pulls no punches that he can't predict the winners and losers, but he hopes he can select a few of these business that are run by "able and trustworthy" managers.  Later in the letter he points to Coke and Amex as two such companies where patience has paid and how these two wonderful decisions can outweigh the many other mediocre decisions Berkshire has made over the years.
  
  
• Buffett states his realization that the size of Berkshire today makes it nearly impossible to double the net worth of the company in the near future stating "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire...outside the U.S., there are essentially no candidates..."
  
  
• Buffett believes "Berkshire should do a bit better than the average American Corporation, and, more important, should also operate with materially less risk of permanent loss of capital.  Anything beyond "slightly better," though, is wishful thinking.  (Buffett is known to recommend passive index investing as being an acceptable strategy for most investors).
  
  
• Buffett lays out two investing maxims: (1) Wall Street will market whatever foolishness that can be marketed and will do so vigorously - they want activity (2) "Never risk permanent loss of capital" - you will be rewarded if you make a couple of good decisions during your lifetime and avoid serious mistakes.  Or to quote Munger: "Never interrupt compounding unnecessarily".  (In my opinion both of these maxims are clearly drawn from his mentor Benjamin Graham, you can see the groundwork laid in these Graham quotes: (a) "Nearly everyone interested in common stocks wants to be told be someone else what he thinks the market is going to do. The demand being there, it must be supplied."  and (b)  "In the old legend the wise men finally boiled down the history mortal affairs into a single phrase, "This too will pass". Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY"
  
  
• Buffett as usual is very patriotic throughout his letter.  He refers to the things like the "American tailwind",  Berkshire's "allegiance..to our country", and Berkshire's goal to be "an asset to the country - and to help extinguish the financial fire [referring to any situation where the U.S. hits a financial disaster]".  Buffett also discusses the increased ownership stake in Occidental Petroleum, his ownership of railroads and energy assets all in patriotic terms.
  
  
• Buffett describes Berkshire as having "extreme fiscal conservatism" as a corporate pledge, holding a sizeable cash and T-Bill position and always being prepared for a period of economic paralysis while also never wanting to inflict permanent damage on any of their investors.  (I feel like you can see how engrained Ben Graham's margin of safety concept is in his thinking - always having a buffer that allows you to render an accurate forecast of the future as unnecessary.)
  
  
• Buffett concludes the letter, where he started with reference to his sister Bertie, imparting this piece of advice as it relates to the patient approach to investing: "in 1980...Retaining only the mutual fund and Berkshire, she made no new trades during the next 43 years. During that period, she became very rich..." "Millions of American investors could have followed her reasoning which involved only the common sense she had somehow absorbed as a child in Omaha"

In addition to the above, the letter provides an overview of Berkshire's core rail, energy and insurance businesses and an overview of the three managers who are responsible for overseeing Berkshire's business day-to-day.

On the week ahead:
Today: New Home Sales, Treasury Auctions 2Y and 5Y notes

Tue:  Durable Goods, 7Y Auction

Wed: 4QGDP (1st revision), Inventories 

Thur: Jobless Claims, PCE, pending home sales, Fedspeak

Fri: ISM mfg, construction spending

XTOD: The ridiculous images generated by Gemini aren't an anomaly. They're a self-portrait of Google's bureaucratic corporate culture. The bigger your cash cow, the worse your culture can get without driving you out of business. And Google's cash cow, search advertising, is one of the biggest the world has ever seen.

XTOD: This shall now be known as the Paul Graham Rule - absolute monopolies endanger themselves - they lose the self correcting imperatives of competition. Now layer on the greatest Innovator’s Dilemma in the history of business. $GOOG needs  @elonmusk  level course correction!

XTOD: Working in finance has completely ruined me. Literally got paid an amount that a few years ago I would have literally shed tears of happiness over, and it just feels like it's never enough.

XTOD: A Harvard professor asked millionaires how much more money they'd need to be 10 on the happiness scale.    Here's how each group answered:    $1 mm: Double  $2 mm: Double  $3 mm: Double  $5 mm: Double  $10 mm: Double    Folks, the hedonic treadmill is real

XTOD: Absolutely. I receive 5X the number of inquiries per month that I can consult with. Other advice-only advisers (non-asset management or product sales) have similar backlogs. The issue here isn’t people looking for advice, it’s people who are looking only for advice and don’t want to be forced into an AUM relationship or similar.

XTOD: If you were funded, with no strings attached, to pursue your obsession for 2-3 years, what would you pursue?   I wish their were more programs that funded this sort of thing. 

Nothing as infectious as someone’s passion coming awake after a long slumber

XTOD: “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.”    — Steve Jobs 

Diversity of focus leads to average results.  

One way to create advantageous divergence is to focus all of your efforts on the one or two best opportunities in front of you.  

A question to ponder:   What would it look like if you organized your life to maximize focus around the biggest opportunity you have?   What would you stop doing?

https://x.com/paulg/status/1760416863824077048?s=20

https://x.com/altcap/status/1761745085954195797?s=20

https://x.com/d_rose92/status/1761053918660902929?s=20

https://x.com/khemaridh/status/1761429060800987589?s=20

https://x.com/Rick_Ferri/status/1761452230396301572?s=20

https://x.com/patrick_oshag/status/1761410523277525046?s=20

https://x.com/ShaneAParrish/status/1761390820630945880?s=20