2023 Q4 Commentary
Author: J. William Waltman, Jr., CFP®, CPA
Bears Became Bulls In 2023
After a dreadful 2022 in the financial markets, many were expecting things to get worse in 2023 as the much-anticipated economic recession finally arrived. This narrative made a lot of sense as several recession indicators were flashing yellow, if not red, as the Federal Reserve (“the Fed”) pushed through a series of aggressive interest rate increases to bring inflation down. This bearish consensus, along with the attractive yields offered on money market mutual funds, led to many being underinvested in stocks as 2023 began. And then the much-anticipated recession never arrived. The economy continued to expand, unemployment remained low, and inflation began to recede. Further, late in the year the Fed communicated to the market through their “dot plots” that they expect some interest rate reductions in 2024 in response to falling inflation and a slowing economy. This was the green light for a significant rally in both stocks and bonds with the S&P 500 ending the year on a nine-week winning streak. Bears coming into 2023 closed out the year as full-fledged bulls wanting a piece of the action. Another valuable reminder about the dangers of investing according to a forecast.
Strategy
As we enter the new year, we are once again inundated with numerous forecasts of what the year will hold. While these can be entertaining, they can also be hazardous to your financial health if taken too seriously. Current Wall Street consensus is that the Fed has likely engineered a “soft landing” for the U.S. economy by bringing down inflation, without throwing it into an outright recession. In addition, the markets are bullishly pricing in five to six Fed interest rate cuts in 2024. It seems sentiment has flipped quite a bit from the bearish leanings of early 2023.
As readers of our work well know, we aren’t in the prediction game. Rather, we remain focused on constructing diversified and resilient portfolios designed to weather a myriad of possible outcomes. For our more income focused clients, we increased fixed income exposure early in the fourth quarter of 2023, which should provide greater income in future years. As the year progresses, we will continue to weigh the risk/reward setup of various asset classes and attempt to allocate your precious capital in an efficient manner.
Finally, many of you know we hold Charlie Munger and Warren Buffett in very high regard. They are arguably the most successful investing duo in history. Sadly, Charlie passed away at the age of 99 in late November 2023. As a brief parting tribute to Mr. Munger, we would like to share a few of his famous quotes from the excellent book, Poor Charlie’s Almanack, which we cannot recommend highly enough. May he rest in peace.
We appreciate the trust you place in us and wish you and yours a happy, healthy, and prosperous 2024.
Charlie Munger Quotes
“A great business at a fair price is superior to a fair business at a great price.”
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”
“If you have competence, you pretty much know its boundaries already. To ask the question of whether you are past the boundary is to answer it.”
“We are partial to putting large amounts of money where we won’t have to make another decision. If you buy something because it is undervalued, then have you to think about selling it when it approaches your calculation of intrinsic value. That is hard. But, if you can buy a few great companies, then you can sit on your ass. That is a good thing.”
“For many of our shareholders, our stock is all they own, and we are acutely aware of that. Our culture of conservatism runs pretty deep.”
On what happens when Buffett’s gone?
“The key is having good businesses. There is a lot of momentum here. I don’t think our successors will be as good as Warren at capital allocation. Berkshire is drowning in money, we have great businesses pounding out money. If the stock went down, Berkshire could buy it back. There is no reason to think it will go to hell in a bucket, and I think there is reason to believe it could go on quite well. I would be horrified if it isn’t bigger and better over time, even after Warren dies.”
“Opportunity comes to the prepared mind.”
“There are a lot of things we pass on. We have three baskets: in, out, and too tough. We have to have a special insight, or we will put it in the “too tough” basket.”
“People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There has always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.”
“I think that every time you see the word EBITDA (earnings before interest, taxes, depreciation and amortization) you should substitute the words “bullshit earnings.”
“An institution that uses sloppy accounting commits a real human sin, and it’s also a dumb way to do business.”
“We are exceptionally goosey of leveraged financial institutions. If they start talking about how good risk management is, it makes us nervous.”
“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time, none, zero.”
“Envy is a really stupid sin because it’s the only one you could never possibly have any fun at.”
“One of the great defenses if you are worried about inflation is not to have a lot of silly needs in your life, you don’t need a lot of material goods.”
“Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent.”
From the Wall Street Journal on being asked in 2016 by an acquaintance which person, in his long life, he was most grateful to.
“My second wife’s first husband. I had the ungrudging love of this magnificent woman for 60 years simply by being a somewhat less awful husband than he was.”
The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. PYA-24-03
