Apprise’s Five Favorite Reads for the Week of May 1, 2022

Recent Market Performance and Berkshire Hathaway Shareholder Meeting

Ouch. So far, 2022 has not gone well for investors. The S&P 500 Index closed at an all-time high on January 3^rd – the year’s first trading day. Since then, things have gone downhill. Through April’s end, the S&P 500 Index was down 13.3%. Meanwhile, the tech-heavy Nasdaq dropped more than 19%. The Nasdaq is down 21.3% from its November 19, 2021 closing high, putting it in bear market territory.

Experienced investors have seen both corrections and bear markets before. While this isn’t anything new, it may feel a bit worse than you remember. Why? It’s not just your imagination. It’s hard to find a safe place for your investments. The first quarter’s best-performing asset class was the S&P 500. It fell 4.6%. According to data from Bianco Research, that’s the worst quarterly result since 1980.

A Look at Returns

Since then, it’s gotten even worse. Let’s look at the returns of different asset classes through April 29^th:

In short, the market has left investors with nowhere to hide. The first quarter marked the first time since 1994 that even the best-performing asset class was negative. Investing when stocks are down is hard. It’s even more difficult when everything falls.

Diversification across asset classes sits at the core of our investment approach. We recognize that over short periods that all asset classes can move in the same direction – up or down.

Even the most dedicated long-term investors can find periods like what we’ve experienced this year challenging. This feels even harder since it follows such a strong multi-year period where stocks did so well, and it felt a lot easier to make money in the market.

What Can Investors Do?

But, as we’ve seen in the past, this too shall pass. Difficult periods always have. Unfortunately, we can’t make any short-term calls on exactly when that will happen or how fast any recovery will take place. Trying to forecast the market is a fool’s errand.

In trying to weather this storm, it’s best to remain focused on your long-term goals. Remember that it’s not about beating the market. It’s about positioning yourself to live your desired lifestyle now and in the future. Staying committed in times like this may not be easy, but times like this are when real money can be made.

Let’s look forward not back and think of brighter days in the future.

A Visit to Omaha

As you may be able to guess from the picture accompanying this week’s blog, last week I ventured to Omaha – via Kansas City – for the Berkshire Hathaway annual meeting. (I own shares of Berkshire in personal and family accounts. Shares are also held in some client accounts.) It was the first time I’d attended since 2016 and the fourth overall.

Despite the market turmoil, the timing was great. It gave me a chance to see some old friends, make some new ones, and talk with other investors. We discussed the markets and our businesses. We also shared investment ideas. While being around many like-minded investors always raises the possibility of falling victim to confirmation bias there are many ways to approach investing. You can find many differences in the approaches taken by different investors even if they fall in the same broad class. Attendees of Berkshire meetings fall into the broad class of value investors. But there are numerous types of value investing and many ways to measure value.

Unlike in the past, I didn’t try to write down every word Buffett and Munger said. Instead, I focused on trying to capture the points that resonated the most with me. If you’d like a copy of my notes, please send me an email. I’ll be happy to share them with you. You can also watch a replay of the meeting.

Berkshire Shareholder Meeting Highlights

I’d like to share some of the highlights before getting to this week’s favorite reads. The biggest difference in this year’s meeting compared to others was that Charlie and Warren took fewer questions than in the past. Only 22 in all. The answers were longer. You can tell that they have both aged, which slows them down a little. At the same time, it’s clear that they remain mentally sharp. And Charlie can still make everyone laugh with his one-liners.

1. Stewardship of client assets.

In his opening remarks, Warren Buffett said something that rang true for me as well. He estimated that Berkshire has about 3.5 million shareholders. Warren talked about how the idea of losing permanently other people’s money – people who trust us – is something we don’t want to consider. He said how he would die psychologically if that happened. While we can’t predict anything with certainty, he and Charlie wake up every morning knowing they want to be safe and be a good partner to you and your money.

This comment rings true for me as well. This point is communicated on Apprise’s website which says the following: “At Apprise, we believe it is an honor to work with clients and help them plan for and manage their financial future. We believe in stewardship of wealth and fully embrace our duty to always put our clients’ interests ahead of our own.” I don’t like seeing client account balances fall no matter what the market conditions are. Of course, temporary declines are much different than permanent ones.

But this is a long game rather than a short one. The focus needs to remain on the long term. Falling markets provide the opportunity to purchase assets at cheaper prices. Those who regularly add money to the market get to buy more shares at a cheaper price. This allows for greater gains if/when the market recovers. Even if you have reached retirement – or are close to retiring – you have many more years of investing left. A falling market can be scary to such investors but overreacting to market downturns can cause permanent destruction of your capital.

2. Market timing.

Warren said he never has had any idea what the market will do on a given day. Berkshire doesn’t buy or sell based on what the market or economy will do. In 2008, they spent $15-$16B at a really dumb time. If he’d had any sense of timing, he’d have waited another six months. Totally missed March 2020. They are not good at timing. But they are reasonably good at knowing what things are worth. They haven’t figured out any deep insights into the economy either.

3. What to do in the current inflationary environment.

This person asking this question was fishing for a stock idea. Not surprisingly, Buffett and Munger do not provide stock ideas. While I didn’t anticipate the answer he gave, I thought Warren’s answer provided some good suggestions, especially for those of us who have kids. The best you can do is be exceptionally good at something. The best investment is anything that develops yourself. It often has something to do with education. Figure out what you’d like to be. Find somebody who does it well and determine what makes them good. Stumble into what you really like doing. Decide what you’re good at. Develop skills people are willing to pay for. Decide what will benefit society. Then do it. After that, the rest of it doesn’t matter. They can’t take it away from you.

4. On fostering a long-term ownership structure like Berkshire’s.

Warren: The ideal shareholder group is the one they have now. They don’t want anybody different than they have now. They do not need to woo new shareholders. He would ask any company making shareholder presentations, which of the existing shareholders are you trying to get rid of? If you start lying, you’ve got a big problem. If you have a culture of lying, processes don’t matter.

Charlie: Berkshire’s culture will last a long time. The rest of corporate America is quite different. It’s getting more different each decade.

Warren: If you set the wrong precedent at the top, you’ve got a real problem. It will only deteriorate.

5. Comments on market volatility and speculative behavior.

Buffett and Munger criticized what they view as “gambling” in the stock market. Warren discussed how short-term price swings in the market present buying opportunities for Berkshire. He said, “Sometimes markets do crazy things. That’s good for Berkshire not because we’re smart…but because we’re sane.” If you want evidence of this, look at the 52-week high and 52-week low for almost any stock. To me, it’s hard to imagine that the value of any company changes as much over 52 weeks as that range would indicate.

(As an aside, I have held shares of Berkshire since 1998. The “B” shares I hold were first traded in 1996.)

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This week’s first article provides some additional thoughts and insights related to the current market environment.

Here are the links to this week’s articles as well as a brief description of each:

1. It’s OK to Be Confused Right Now.

As noted above, it’s a difficult market right now. This article opens with a great quote from Charlie Munger. It was his response to a question about the pandemic and subsequent economic recovery. He admitted, “If you’re not a little confused by what’s going on you don’t understand it. We’re in uncharted territory.” It’s always hard to figure out what drives the stock market and economy in any environment. If you look at all that’s going on, you will get a lot of mixed signals. That makes it hard, if not impossible, to understand the ramifications. Check out the article to better understand why it’s so easy to be confused by the markets right now.

2. 100 ways to slightly improve your life without really trying.

There are almost always ways we can make our lives better. Some of them don’t take much effort at all. You’re bound to find at least a couple of suggestions that will work for you. Here are some of my favorites:

• If possible, take the stairs. I get annoyed when there aren’t steps I can use.
• Every so often, search your email for the word “unsubscribe” and then use it on as many as you can. We get added to too many email lists we don’t need to be on.
• Buy a bike and use it. Learn how to fix it, too. Biking is one of my favorite outdoor activities.
• Don’t look at your phone at dinner. We try to keep everyone in the house from doing this.
• Keep your children’s drawings and paintings. Put the best ones in frames. My wife did this. We have several on the walls by the steps down to our basement. I see them several times every day.

3. Op-ed: Here’s why you should open a Roth IRA for your kids.

Do you want to help your kids get an early start on saving for retirement? Would you like to help them form healthy money habits? You could answer both questions in the affirmative by starting a Roth IRA for them. If your child has earned income, they can start a Roth IRA. If you’re in a position to do so, you can contribute on their behalf. Just remember that you can’t contribute more than their earned income. You also can’t contribute more than $6,000 a year. If you have a business, consider having your child help you. Perhaps they can assist you with things like filing or straightening the office. Your child’s tax rate will be low – perhaps even 0%. Under current law, as long as the rules are followed, any growth in the account won’t be taxed either. Say your 15-year-old child has $2,500 of earned income this year. If the account grows at an annualized rate of 8% until she reaches age 60, it would be worth almost $80,000. If it stays invested until 70, it would be worth more than $172,000. This example also shows the value of compounding. The longer your money remains invested the more it can grow. As the sum grows larger, the growth in value gets even bigger in absolute dollar terms.

4. How Covid Stole Our Time and How We Can Get It Back.

I admit this one may be hard to read. It puts our lives in context. The author assumes that we live 90 years – I use 95 when preparing financial plans for clients. Then he looks at what he refers to as depressing math. For example, consider how much time you have with your kids. The bulk of it all takes place before they go away to college or move out. That time dwarfs what we have after that. To me, there was one silver lining to the dark cloud of covid. It meant that all four of our children lived at home during a time that they would have been away from home much more. During the first several months of covid, we made Saturday night game night in our house. My wife and I enjoyed that “bonus” family time. It brought our kids closer together. It allowed us to see them in a different light, too. The article shares some things to think of as you contemplate your future. We still have the power to set our future course. The equation can change. We can spend more time with those we love. We can spend more time doing what we love, too. I hope this article inspires you to make some positive changes. Identify your priorities. Make them part of your financial plan.

5. “If You’re Getting a W-2, You’re a Sucker”.

When I speak to new prospects, they often say things like, “I think I’m paying too much in taxes. Do you have any suggestions that can help me lower my tax bill?” If your income comes from a W-2, the likely answer is you probably can’t. When you get a W-2, there are not many available deductions. In 2017, the changes they made to the tax law, placed severe limitations on your ability to itemize your deductions. That means that, for the most part, your tax return will report your wages, any interest or dividend income, and the standard deduction. You might be able to itemize if you pay enough mortgage interest. But if you refinanced during the pandemic to a lower rate, then you probably can’t. If you have a side business or work for yourself, you have much more flexibility when it comes to taxes. There are more retirement accounts. Plus, you can write off or deduct business-related expenses.

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Phil Weiss, CFA®, CPA

Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.

Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.