Focus on the Forest - Not the Trees

As you know, your financial plan is comprised of many parts. This would equate to what one of the greatest investors and CEO of Berkshire Hathaway, Warren Buffett, calls the “economic trees.” In other words, let’s not get too caught up on any one investment.

“A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty,” Buffett writes.

He won’t get every investment right. Neither will we. Berkshire holds a substantial position in Kraft Heinz (KHC), whose shares recently tumbled after the company delivered poor results and slashed its dividend.

But, if we review the portfolio as we’d view the forest, we find a diversity of trees, wildlife, and plants. It’s a work of beauty. Like the forest it’s very diversified, and it is created with your financial goals in mind.

As Buffett opines (and we agree), “I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”

“At Berkshire, the whole is greater–considerably greater–than the sum of the parts.” We feel the same way about your financial plan.

The American tailwind

Warren Buffett is bullish on America.

We’ve endured the cold war, the divisiveness of the 1960s, the war in Vietnam, OPEC’s oil embargo, double-digit inflation, soaring interest rates, a rising federal deficit, the tragedy of 9-11, the war on terrorism, the financial panic of 2008, the ensuing Great Recession, falling home prices, and more.

The experiment called the United States has birthed and attracted the best and the brightest. Freedom and opportunity are its calling cards. Today, we are the wealthiest nation on Earth, and we continue to ride the wave of innovation and enjoy the benefits.

But, is that wave about to crash on the shore?

A recent piece by Morgan Stanley entitled, Millennials, Gen Z and the Coming ‘Youth Boom’ Economy, complements Buffett’s optimistic viewpoint. The population of the Millennials will overtake the Baby Boomers this year, and “Gen Z, born between 1997 and 2012, will overtake the Millennials as the country's largest cohort by 2034,” it said. For the U.S. economy, “The demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of ‘youth jolt’ that the Baby Boomers were famous for.”

Sure, we can’t know when the next recession will ensue or some of the challenges we’ll face as a nation in the coming years. Yet, as Buffett sums up his annual letter, “Over the next 77 years, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky–gloriously lucky–to have that force at our back.”

Bright start to the new year

Last year, market turmoil in the fall and December’s actions were especially ugly. Steep market corrections are not something we look forward to; they are impossible to consistently predict, but they come with the territory.

Your investment plan incorporates the unexpected detours. The disciplined investor, who divorces the emotional component from the investment plan, chooses the best path to meet his or her long-term financial goals.

That said, 2019 has been much better:

• A flexible Federal Reserve has taken its finger off the rate-hike button
• The economy continues to expand
• Unemployment rates continue to drop

10 years gone

On March 9, 2009, the Dow Jones Industrial Average closed at 6,547. It marked the bottom of the last bear market. On April 30, 2019, the Dow finished the day at 26,592 less than 200 points from its highest peak.

The bull market turned ten years old in March. How much life is left in the bull? We are in the latter stages of the cycle, but much will depend on the economic fundamentals going forward. With the Fed on hold, inflation contained, and the economy moving forward, the fundamentals are currently sound.

But never discount volatility. Stocks seem to take the stairs up and the elevator down.

In the spirit of the celebrating the last ten years, let’s look at a partial list of the worries that temporarily sidelined the bull, but didn’t sideline those with a long-term view:

The European debt crisis…Greece... global growth worries…U.S. growth is slowing...China is slowing...the dollar is too strong...Japan earthquake/tsunami/nuclear disaster...U.S. debt downgrade...fiscal cliff...Obama will be re-elected...Trump will get elected...Hillary will get elected...the Fed will end bond buys...Fed will start hiking interest rates...falling oil prices...Ebola scare...Russia invades Ukraine...North Korea...ISIS...Syria...Brexit...trade tensions...acrimony in D.C....and stocks have risen too quickly.

Shorter-term risks never completely abate. But Warren Buffett’s message has been consistent.

“It's never paid to bet against America. We come through things, but it’s not always a smooth ride.”
 

This information was compiled from Horsesmouth.

Investment Advice and Financial Planning offered through Financial Management Inc. Financial Management Inc. utilizes multiple custodians and firms throughout the industry. 

Financial Management, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.