by Jason Bodner

March 15, 2022

Current events are so volatile that it’s anyone’s guess what comes next. That makes it hard to feel confident as an investor. And when my confidence gets rattled, I look to history and wisdom for clarity.

Often, I look no further than to Warren Buffett, perhaps the best all-time investor. He bought his first stock at age 11. He was rejected by Harvard Business School and his father-in-law said he would fail.

I guess he showed them.

You might think Buffett was wired different than the rest of us, but I believe we all possess the same skills he has. He just has better control and understanding over his impulses. And unmatched patience.

When markets go haywire, Buffett seems calmer than ever, and if markets get oversold, he’s downright giddy. When he invests, he buys shares of a business. If he was willing to pay $100 for a share of future decades of ownership, why would he sell those shares for $75 a few days later? Buffett thinks like this:

“If I bought a farm for $1,000,000 because it’s a great business, would I sell it a few weeks later just because the best offer was $750,000? Absolutely not! I want to own it for years to come as an asset.”

So, when markets fall to obscene levels, he buys big. Occasionally he is vocal about it, like the time he wrote this Opinion piece in The New York Times after the market was down about 40%.

Here’s the headline:Buy American I am

Here’s what the Dow Jones index looked like when he wrote that article:

DJW Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When markets decline, Buffett will read poetry and apply the verses to the markets. For instance, in his 2017 letter to shareholders, Buffett evoked the Rudyard Kipling’s 1895 poem “If”:

“When major declines occur,” he wrote, “they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s “If”:

If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.

With that mindset, let’s look at markets through Buffett’s eyes. Intermediate-term, things look grim. The Big Money Index (BMI) is choppy, continuing its six-month sideways action, indicating indecision:

Big Money Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The major indexes continue to feel pressure. While stock selling (left) is at the highest level since the pandemic lows, it’s only a third of the March 2020 selling.

ETF selling (right) looks more significant, but it too is only about half the pandemic’s selling levels:

Big Money Stocks-ETF Buy and Sell Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The story behind that choppy BMI is a below-surface big rotation. We can see money flows in and out.

Here we see big buying in energy stocks since January. We also see a recent surge of Utilities buying:

BigMoney Energy vs XLE

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Sir Isaac Newton said that for every action, there is an opposite but equal reaction. Here we see the outflows. Tech (left) has seen substantial selling since November, intensifying this year. We also see a similar pattern of dumping of discretionary shares (right):

Technology vs XLK Discretionary vs XLY Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This action is defensive. Investors hate uncertainty and move to safety when it comes. When war threatens, commodities often surge while utilities offer stability and potential dividend income. And with recession and inflation fears, rosy growth outlooks must revise lower, which hits areas like tech. Also, logically, if we all spend more on gas and food, we have less to spend for discretionary items.

The bad news is that many markets look grim and for good reason. Russia is aggressively invading Ukraine and kicking the hornet’s nest in what was once relative peacetime. Oil and gas prices are hurtling higher. Other commodities like nickel are literally through the roof – necessitating exchange closure for a while. With a poor outlook and dismal media rhetoric, like I said: investor confidence is hard to come by.

But again, Buffett reminds us of the power of taking the long view. When he bought his first stock in the spring of 1942, things looked worse, much worse. He bought $114.75 of Cities Services Preferred (which no longer exists). Had he gotten scared out of stocks and moved to cash, today’s purchasing power of that cash would be about $1,725. But the value of his stock would have been worth $606,811 three years ago, when he wrote his January 31, 2019, letter to investors. He also pointed out that had he invested just $1,000 in a simple S&P 500 fund then, it would be worth $5.3 million today.

Keep in mind that he would have had to endure calamities like World War II, the Atomic Age, the Vietnam war, the oil crisis, vicious inflation, a housing crisis, 9/11, and a pandemic along the way.

If you’re like me and have been investing in great businesses to grow your long-term wealth, you’re likely hurting now, like me. But here’s my view: When I paid $100 for a share of a company, I thought it would be worth $10,000 many years from now. If suddenly today, someone can pay $50 for it, should I sell it?

The answer is clearly no.

I wanted to put that hypothetical theory to the test. I looked at a gloomy time in my history, 2008.

This is what the SPY (S&P ETF) looked like – a huge decline from 2007 to 2009, then a recovery:

Big Money Index Chart Small

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Had I bought 25 top outliers then, investing January 1, 2010, this is what would have happened:Map Portfolio VS SPY

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The model portfolio would have returned +590% to date vs. the SPY returning +367%: a 60% better return. A Simple buy and hold outliers in a bleak outlook.

Fear is high and emotions are raw. Buffett agrees that not everyone has the psychological and emotional requirements to be a successful investor. Part of that is knowing not to overreact when stress hits, but that’s when things look interesting (even delicious) to a contrarian.

Times are tough today, but in 20 years we might look back on today as a gift. It’s our choice how to see it.

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Messy Geopolitics of Global Energy

Income Mail by Bryan Perry
U.S. Natural Gas Prices Could Rally Big by 2023

Growth Mail by Gary Alexander
Beware the Ides of March (Again)

Global Mail by Ivan Martchev
Nickel’s Monstrous Short Squeeze

Sector Spotlight by Jason Bodner
At Times Like This, What Would Warren Do?

View Full Archive
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About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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