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We're a team of investment advisers committed to protecting the financial future of our clients.
We're a team of investment advisers committed to protecting the financial future of our clients.
Most of us have likely hear the news that Charlie Munger, Vice Chairman of Berkshire Hathaway and partner to Warren Buffet for the past several decades passed away yesterday at the age of 99. Munger would have been 100 years old on January 1, 2024. Berkshire, originally a textile manufacturing firm, was transformed under the leadership of Buffett, one of the most successful investors of all time. Since Buffett took control in the mid-1960s and joined by Munger during the latter part of the 1970s, the stock of the company has shown a remarkable track record, significantly outperforming the S&P 500, a benchmark index representing larger publicly traded stocks domiciled in the United States.
The investment philosophy of Berkshire Hathaway, which focuses on buying high-quality companies at reasonable prices, has paid off handsomely. Berkshire Hathaway’s portfolio consists of a diverse range of businesses, including insurance, energy, transportation, and consumer products. This has helped it weather economic downturns more effectively than many other companies.
Although regarded as one of the best investors ever, Buffett, Munger et al have been under some criticism over the past few years as some have questioned Berkshire’s value-oriented approach as the economy transitions to one that relies more on technology and services rather than manufacturing. Perhaps as a result, Berkshire has returned 68.27% to its shareholders over the past five years as compared to the S&P 500’s 80.86%. But let’s extend the performance to include a longer period of time.
As you can see from the chart below, Berkshire Hathaway’s investment strategy has been quite successful over the long haul. In fact, over the past 30 years, Berkshire Hathaway is up over 3,000%, nearly double the return of the S&P 500.
The conclusion that one can draw from the performance of the stock of Berkshire Hathaway is that periodically an investment approach (style) can go in and out of favor. However, if that analysis is well-founded and if you have the discipline to adhere to it over the peaks and through the valleys, your probability of success increases. Berkshire Hathaway tends to invest in companies with wide moats (competitive advantages), strong management teams, and those that produce consistent earnings. This has set them apart from many others. As Charlie Munger said “I think that a life properly lived is just learn, learn all the time” which is fundamental to a successful investor but also to a well-rounded person. It is something we aspire to as well.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
The strength of consumer spending and household balance sheets has been a bright spot in an otherwise challenging market and economic environment. These factors have helped to keep the economy out of recession and have bolstered corporate earnings, but they have also kept inflation hotter than the Fed might otherwise like, resulting in higher interest rates. For investors and savers, recent consumer data are a reminder that staying the course, and not overreacting to short-term news, is still the best way to build and preserve long-term wealth. What should investors know about the state of consumer finances as market and economic uncertainty continues?
Consumer finances both affect the economy and markets and are affected by them. In the U.S., consumer spending makes up 68% of all expenditures each year, forming the foundation of overall economic activity. How consumers feel about their personal financial situations can thus have an important impact on economic growth, and vice versa. When times are difficult, such as during a recession, consumers naturally tighten their belts which can lead to a spiraling economic slowdown. On the other hand, when the economy and job market are strong, consumer sentiment improves. This in turn supports corporate revenues and profits, spurring hiring and wage increases which can drive further consumer spending. Ideally, this then supports financial asset prices and valuations.
The economic swings since 2020 are proof of this – from the sudden collapse in consumer spending during the pandemic to the surge in activity during the subsequent rebound – driven in no small part by government stimulus. Fortunately, despite high inflation rates over the past two years, consumer spending has continued to support the economy. This is partly because the average household balance sheet has never been stronger. The Fed's latest Z.1 report on the Financial Accounts of the United States shows that household net worth climbed to a record level of $154 trillion in the second quarter. This measure includes household assets such as stocks and bonds, bank deposits, defined benefit entitlements, real estate, and more, as well as liabilities such as credit card debt and mortgages.
Of course, the cost of debt has increased as interest rates have risen over the past year. While the 10-year Treasury yield has fluctuated over the past few weeks, it has been hovering near the highest levels since 2007, even briefly surpassing 5%. This is challenging for those individuals and businesses with new loans or mortgages with average rates above 8%. The silver lining is that many households were able to lock in low rates over the past few years, especially immediately following the pandemic. According to the Federal Reserve Bank of New York, 14 million households refinanced their mortgages during this time and saw an average drop in their monthly payments of $220.
The chart above summarizes the positive net effect on household net worth. It also shows that net worth has more than doubled since the prior 2007 peak. This has occurred despite the never-ending challenges investors faced along the way, including market pullbacks, geopolitical crises, economic slowdowns, problems in Washington, and more recently, inflation, Fed rate hikes, and more. This is a reminder that having a long-term focus has historically been rewarded, regardless of how worrying the short-term headlines may be.
The bottom line? Household net worth has returned to historic highs this year as markets have risen and the economy has been stronger than expected. This is a reminder that all investors should maintain a long-term perspective rather than focus on daily market swings.
Over the last decade, geopolitical tensions have been on the rise and as a result, deglobalization has become a buzzword in both political and economic spheres. We have witnessed the disbandment of NAFTA in 2020 by President Trump as well as a deterioration in trade with China. Next came the CHIPS and Science ACT signed into law by President Joe Biden on August 9, 2022, which provided $280 in new funding, aimed to bring domestic research and manufacturing in the semiconductor industry back to the United States, which has historically been outsourced to China and other eastern countries. As you can see from the chart below provided by Bank of America, it is the first time in over a decade that the United States is importing more from Mexico than it is from China. In our opinion, this illustrates the seismic shift in how the United States will be conducting business in the future, and who we align ourselves with economically. Although, from an input perspective, we will miss China’s labor costs, we believe bringing manufacturing back home will be fundamental in the growth of America, especially the middle class.
Global Foundries, a leading local semiconductor manufacturer recently had earnings in which the CEO, Thomas Caulfield was quoted saying “Although the global economic and geopolitical landscape remains uncertain, we are collaborating closely with our customers to support their efforts to reduce inventory levels, while growing long-term partnerships.” We also have Intel, another leading semiconductor manufacturer planning to build a $20 billion plant in Ohio, in addition to pledging $100 million toward educational partnerships, once again aimed at bringing manufacturing jobs back to the United States. Both companies acknowledge the need to reduce reliance on foreign manufacturing to reduce the risks to our national security.
We believe we will continue to see investment in bringing corporate manufacturing back to the U.S. which could add to short-term inflationary pressures, but in the long-term reduce U.S. involvement in global conflicts and help rebuild the middle class. The loss of the middle class over the last few decades, coupled with the “death” of the pension, breed social discourse, which could in turn lead to a black swan event in the stock market. We believe bringing jobs back home is key to a better America, both economically and socially.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
