In today’s Exponential Investor…

  • How to outperform the market
  • Gold and Japan
  • Long lasting change?

That’s what he called it.

The most significant market event of the year.

The legendary investor and guru Robert Kiyosaki (think Rich Dad, Poor Dad) made that claim last week, and it wasn’t about coronavirus or the Fed’s response.

In the last couple of months, Warren Buffett disclosed to remarkable trades.

They represent a wild departure from some of his most famous principles and mantras.

Don’t bet against America is one…

Buy fantastic companies is the other…

These principles have been repeated by him and his disciples for decades.

But no longer.

Warren has made two big bets which both represent fundamental departures from those axioms.

Firstly he bought into brokerages and trading firms in Japan, which counts as ‘betting against America’.

Secondly, he bought Barrick Gold. It’s a miner, dependent on the price of gold, not a company with a durable brand and a wide defensive moat or competitive advantage.

Together these constitute a fundamental shift in Buffett’s thinking.

They followed a related sale of huge stakes in American banks, which have formed the bedrock of his portfolio for fifty years or more.

The question we need to ask ourselves is quite simple really. Is he right, or has he lost his way?

Since the 1960s, Buffett has been the world’s most successful investor

And he reminds us to think in decades with our investments.

But he’s been right by holding onto companies like Apple, Coca-Cola, and American Express.

Bastions of American growth and resilience.

He has outlined many times the fundamental ways in which high quality businesses deliver outsized returns in the long-term. Compounding a high return on equity plus reinvestment of dividends over periods of 20 or 30 years, to be specific.

That’s what’s given him such an astonishing record of outperforming the market.

Since the mid 80s (as far back as Koyfin will let me go) Berkshire Hathaway’s stock (blue line) has returned 18,814%, while the S&P 500 (red) has given investors a ‘measly’ 1,742% in the same 35-year period.

Source: Koyfin

Whatever made him stray from his long and firmly held strategy must be pretty significant, right?

Well, if you’re wondering whether the market response to Coronavirus is rational and reasonable, I would say that here is your answer.

After all, Buffett’s favourite metric of whether stocks are overvalued (market cap to GDP) has surge to record highs, with GDP plunging while stocks burst through to record highs.

Source: LongTermTrends

It’s an extraordinary sign of excess.

I would guess that at least part of the reasoning behind his move towards commodities lies in the extreme overvaluation of the American stockmarket.

As I have occasionally said before, always be short extremity.

And what has extremity and excess been met with? Complacency, apparently!

Here are some recent headlines…

Source: Motley Fool

Source: Fox Business

Source: Market Watch

Complacency and short-termism – the opposite of what Buffett has preached for so long.

“Do not take yearly results too seriously. Instead, focus on four or five-year averages.”

It’s odd to see people dancing on his grave in such a way.

It feels premature.

I guess as a towering figure in the industry he, gets a lot of scrutiny and attention, but don’t count him out. The race isn’t over yet.

And it’s very interesting the things that he has gone towards.

Gold and Japan.

Buffett has said “Predicting rain doesn’t count, building the ark does.” and in a period where it doesn’t take a genius to point out that US stockmarkets have drifted gently away from their moorings to reality, the focus must be on what we should be doing to protect ourselves.

To ram home the exercise in confirmation bias, it is nice to have Warren’s backing as in this newsletter I have repeatedly urged you all to delve into the glimmering world of precious metals and miners, while Japan has also cropped up a few times as a place of great interest.

Sony was my first investment after all, and I lived there for a brilliant six months. And its stockmarket is doing far better than you think.

Here’s an eight-year chart of Japan’s Nikkei 225 (blue), the S&P 500 (red), FTSE 100 (orange) and Hong Kong’s Hang Seng (gold). Contrary to common belief, Japan’s major index has matched America’s since 2012, and put ours to shame.

Source: Koyfin

As it happens, I am currently reading a lovely and excellent book on Japan called Bending Adversity, by David Pilling, and had already planned to make it the next book I reviewed for you all.

With Shinzo Abe leaving his post mere days after breaking the record for the longest serving Prime Minister since the war, there is a lot of interest in Japan. The three arrows of Abenomics haven’t delivered incredible returns.

However, inflation did return to enduring positivity after four years of persistent deflation, and the economy grew for seventy-one months in a row under his stewardship, two months shy of the post-war record.

And meanwhile, Japanese companies came into the crisis year of 2020 with far more cash on their balance sheets, making them much more resilient than other countries especially America, and they also traded on significantly lower valuations.

The question remains though, whether Buffett is just hedging against short-term extremities, or whether this is a sign of a lasting change in his strategy?

Well, in his own words, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Or, “I never attempt to make money on the stockmarket. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

Finally, “Our favourite holding period is forever.”

So the signs are that he has seen a great epochal shift in the world of investment, away from equities and away from America. He doesn’t do things half-heartedly, let’s put it that way.

For those of us who advocate gold and like the look of Japan, having Buffett endorse this world view is phenomenally reassuring and inspiring.

Obviously though, it’s up to each of you to decide whether Buffett has latched onto the big trend for the next decade or whether he is, as they say, the last bear capitulating.

I would say, to adapt his own famous phrase, don’t bet against Warren Buffett.

All the best,

Kit Winder
Editor, Exponential Investor