Deglobalisation influence investors decision on betting on index tracker funds
At the recent Berkshire Hathaway annual meeting it sometimes felt like Warren Buffett was trying to square words with actions. The Oracle of Omaha insisted that the best place for retail investors to put money in is an S&P500 index fund. But he also told shareholders that his company had sold 16 times as much stock as it had purchased in the last month, including dumping the entire airline asset class. And he admitted that while you could still bet on America, you are going to have to be careful how you bet.
When you look closely at his actions, he is still following the same strategy that he has employed throughout his career. It is an approach built on two things: first, value investing, which basically involves the forensic examination of corporate balance sheets; and, second, a belief not so much in America as in American companies and their ability to export their particular brand of capitalism abroad. Both of those pillars still hold much wisdom for investors who want to understand where markets — and the real economy — are heading.
Mr Buffett learnt the skill of value investing from his former Columbia Business School professors David Dodd and Benjamin Graham, whose book, The Intelligent Investor, he memorised. They argued that investors should buy companies that have steady profits, low price-to-earnings ratios and very little debt. Following that logic, it is no wonder that Mr Buffett isn’t buying much stock. Corporate debt doubled between Mr Buffett’s bullish buying spree after the 2008 financial crisis and the end of 2019.
Meanwhile, P/E ratios are not providing a true market signal when asset prices are being driven mainly by US Federal Reserve interventions. Many companies have stopped giving earnings guidance amid this historic downturn. Some people might respond that the Fed’s actions are the market signal. By that they mean that share prices will from now on be driven by the supply of money that central banks pump into the economy, rather than by the relationship of stock prices to corporate earnings. But as Gavekal Research co-founder Charles Gave wrote last week, everyone in Japan in the 1980s thought the correlation between the Topix and the country’s supply of cash and cash equivalents would last forever, too. But the value of equities there stopped tracking the money supply in 1990.