Warren Buffett Is Right

Good Morning,

Stocks posted weekly gains Friday, while Federal Reserve Chair Janet Yellen suggested that she may raise rates this month.


While leaving just enough wiggle room in case conditions should change, Yellen said Friday that economic improvements of late will be a big part of the discussion at the March 14-15 Federal Open Market Committee meeting.


Recently, a slew of top Fed officials indicated that tighter monetary policy may be coming soon.  Market expectations for a March rate hike have skyrocketed to 81 percent, according to the CME Group's FedWatch tool, on the back of hawkish rhetoric and solid economic data.


The market has an excellent track record for predicting rate increases and will most likely get this one right.


Furthermore, markets seem to be applauding a raise as stocks have risen to record levels since the U.S. election fueled by expectations of tax reform, deregulation and government spending. The three major indexes posted their best day of 2017 on Wednesday, notching fresh record highs as global stock markets have also been rallying.


Donald Trump delivered his debut address to Congress this week which although quite “Presidential” was light on policy detail and big on rhetoric.


Trump restated his key campaign themes, issuing a rallying call for the "renewal of the America spirit." Wall Street will have to keep waiting on specifics of the plans for tax cuts, infrastructure investment and regulatory reform that have helped drive a global rally since the November election.


SnapChat’s IPO was a resounding success this week. As stated before we would certainly not be buyers but the 44% surge on open is a bullish sign for the overall market. Interestingly, a high school in Mountain View, California, made millions from the IPO less than four years after investing $15,000 in the company. They cashed out 24 million…..


Nevertheless, a declining user base and a lacklustre monetization plan suggest a "greater fool theory" in which the stock's price is determined by irrational expectations.


No wonder S3 Partners LLC, a financial analytics firm, says short interest in the photo-app maker is liable to reach $1 billion within a week, particularly if the rally continues. The contrary bet won’t be cheap, either, with the cost to borrow shares likely to start at 25 percent and rise.


“We expect that 10 percent to 20 percent of the initial offering will be shorted in the first week of trading, which roughly translates into $500 million to $1 billion of short interest right from the start”


Let’s not forget that Twitter surged over 70% at open from IPO price. That investment hasn’t seemed to have worked so well...



Warren Buffett sent his annual letter to shareholders this week and took questions on CNBC for 3 hours.  Along with more prosaic investment suggestions, the head of Berkshire Hathaway offered advice on how to leverage fear.


He also praised the US’s “miraculous” economic achievements and the country’s “tide of talented and ambitious immigrants”. He railed against asset managers and suggested investors should utilize low cost ETFs. He  also suggested that there is simply no other better long-term investment than in the common stock of high quality businesses.


He even went so far as to say that  "Measured against interest rates, stocks actually are on the cheap side compared to historic valuations,"


"But the risk always is interest rates go up, and that brings stocks down.” He also stated that he had invested about $20 billion in stocks since shortly before the election.


"If interest rates were at 7 or 8%, then these prices would look exceptionally high," Buffett said. The Federal Reserve most recently raised its benchmark rate in December, to a range of 0.50% to 0.75%.


Although we tend to avoid making any type of suggestion as to the valuation of the  “overall market” and choose to focus on individual businesses, we would tend to agree with Buffett’s suggestion. We would also agree with this statement he made in his interview:


When asked: "Wait, it's too late for me to get in. I've missed it. We're past Dow 20k, now I have to wait for the pullback." What would you say to someone like that?                       

Buffett: Well, I would say they don't know, and I don't know. And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-- is a terrible mistake.


I must say buffett’s comments were a breath of fresh air in what has been the most hated bull market of all time. Investor pessimism is soaring and everyone is unhappy:


"Money managers are unhappy because the majority of them are lagging the S&P 500 and see the end of another quarter approaching."


"Economists are unhappy because they do not know what to believe. This month's forecast of a strong economy or the ramblings of the disenchanted telling them all is not well. They ponder and are vexed when looking at the pros and cons of any proposed changes by the current administration."


"Technicians are unhappy because the market refuses to correct."


"Investors are unhappy because they are nervous over the bombardment of political ramifications to economic policies that are unknown. They fear new highs as if it were a disease as they are constantly reminded by the skeptics that they could give it all back".


"The public is unhappy because they can't figure out what is going on. The political stage says one thing but the stock market is saying another. They sit frozen in place and wring their hands wondering if the stock market can really go higher."


"The skeptics are unhappy because everything tells them to be wary of the market, yet the rising indexes continues to prove them wrong time after time."


As one market participant astutely observed, the ONLY people that are in the pilot's seat are those that have participated in this historic bull market. Which seat are you in?

Thought of the Week

"Our expectation is that investment gains will continue to be substantial – though totally random as to timing – and that these will supply significant funds for business purchases," -Warren Buffett

Stories and Ideas of Interest


  • The Singularity will happen within 30 years. Softbank’s CEO says by then a single computer chip will have an IQ of 10,000  and your shoes will have a higher IQ than you. Hurray for progress!


  • Netflix is thinking about how to entertain AIs. In 50 years, CEO Reed Hastings isn’t sure if his customers will even be human. At a certain point, when algorithms designed to represent our behavior are dictating our consumption, the real-life viewer—you—might start to get lost. That could be what Hastings is driving at here, as Inverse pointed out. Would entertainment be tailored to the person, then, or to the AI?


  • The need for exponential growth kills innovation. Silicon Valley’s obsession with it is damaging a generation of startups. It used to be that successful, upcoming companies would show a prudent mix of present-day profits and future prospects, but such a mix is now considered old-fashioned and best forgotten. Now it’s all potential, all the time.


  • Scraping by on six figures? Tech workers feel poor in Silicon Valley's wealth bubble. Big tech companies pay some of the country’s best salaries. But workers claim the high cost of living in the Bay Area has them feeling financially strained. A tech worker, enrolled in a coding bootcamp, described how he lived with 12 other engineers in a two-bedroom apartment rented via Airbnb. “It was $1,100 for a fucking bunk bed and five people in the same room. One guy was living in a closet, paying $1,400 for a ‘private room’.” “We make over $1m between us, but we can’t afford a house,” said a woman in her 50s who works in digital marketing for a major telecoms corporation, while her partner works as an engineer at a digital media company. “This is part of where the American dream is not working out here.”


  • Every successful relationship is successful for the exact same reasons. One man set out to create the definitive guide to a long and happy relationship by interviewing people that have been married for at least 10 years. The response was overwhelming. Almost 1,500 people replied, many of whom sent in responses measured in pages, not paragraphs. It took almost two weeks to comb through them all, but he did it. And what he found stunned him…They were incredibly repetitive. This is a great guide. Check out all definitive 13 principles and remember:  “What I can tell you is the #1 thing, most important above all else is respect. It’s not sexual attraction, looks, shared goals, religion or lack of, nor is it love. There are times when you won’t feel love for your partner. That is the truth. But you never want to lose respect for your partner. Once you lose respect you will never get it back.”


All the best for a productive week,

Logos LP