The Rights of Shareholders? An Owner Is an Owner

Photo of Warren Buffett surrounded by reporters with microphones

Photo courtesy of AP

Clients, the hallmark of our investment strategy is ownership of companies whose outlooks are favorable, in our view. A share of stock is a piece of the action: ownership of a fraction of an enterprise.

We have owned businesses in very old lines of work, like manufacturers of farm equipment. And we’ve owned companies in new lines of work, like cloud services. We’ve been in airlines and autos, software and chipmakers, miners and medicine.

Owners have rights. We elect directors. We receive our share of dividends paid. We get annual reports—and have the right to attend shareholder meetings.

Most of us pay little attention to the trappings of corporate governance, with one exception.

Held in Omaha where its long-time leader Warren Buffett was born, Berkshire Hathaway hosts one of the largest annual shareholder meetings on the planet, with tens of thousands of people descending on the city for the festivities.

Each spring, information about Berkshire subsidiaries and the products and services they offer is shared during this corporate tradition. You can buy everything from insurance to ice cream treats. Visitors learn about companies as diverse as railroads and homebuilders.

Did we mention? Shareholders also happen to get discounts at Nebraska Furniture Mart, Borsheims, and other retailers.

For many years, Buffett himself and key leaders would entertain questions from shareholders for hours, before conducting the business of the annual shareholder meeting itself. Some say that Buffett is among the most successful investors in the history of the world: when he stepped down as CEO of Berkshire at 95 years of age, his longevity also became cemented in his legacy. He’s not alone in that in Berkshire history, either: the late Charlie Munger, long-time vice chairman, passed at age 99.

Buffett, Munger, Buffett’s descendants, and other individuals and entities have owned a vast swath of the voting control of the company over the decades.

But here’s the thing: an owner is an owner. Even a single share of stock entitles the holder to certain rights. Shareholders may inspect select corporate documents, beyond those already published and available to the public. They can nominate and send in votes to elect members to the board of directors.

And they’re allowed to participate in the annual meetings.

This spectacle of Omaha is a powerful reminder of the meaning of ownership. It’s getting a piece of the action—and being part of something bigger.

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Clients, if you have an interest in attending or taking advantage of other opportunities, you’ll need shareholder credentials. A form to order those should be included in Berkshire’s Annual Report, or you can stay tuned for more details from us in the weeks ahead.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Companies mentioned are for informational purposes only, and this communication should not be considered a solicitation for the purchase or sale of their securities.

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Building a Deep Bench: Lessons from the Dugout

It takes all kinds. Really, literally. A versatile team is made from a variety of strengths. Here’s a little glimpse at some of the players we like to see in a balanced portfolio.

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A Luck-Proof Mindset

“Who knows what is good and what is bad?” What an ancient parable has to teach us about getting a “luck-proof” approach to investing: a message from Caitie this week.

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Buying, Selling, and the Third Thing

When to buy, when to sell—some believe those are the most important decisions when selecting investments.

But far more consequential for our clients? The portfolio management protocols we use to manage your positions, all the things we might be doing in between the first purchase and the last sale.

This is called rebalancing.

Textbook rebalancing means periodically restoring a holding to a set percentage of the total portfolio value. This means adding shares when prices are lower and paring back when prices are higher. You may see these many, smaller transactions in your accounts when we go through our quarterly trading cycles.

Rebalancing is not about jumping in or out of a position. You may notice over time that we’re generally aimed at buying low and selling high within single holdings. The goal of this discipline is to try to improve overall returns of any holding across the long run—no matter when exactly we got in or when we get out.

Even clients with tenures as short as six or seven years may see holdings where the “net dollars invested” goes negative: as in, the holding has yielded more cash from the sales along the way than ever went into the purchases. And this could be true for shares that might still hold substantial value at the end of their ride.

What may be even more worthwhile, however, are those cases when our timing was “off” in the first place: when to buy. As an example, more than a decade ago our research indicated that copper production was likely to be short of global needs for many years. We identified a copper producer that was, at that time, down by two-thirds from its all-time peak. A bargain, we believed—but then it became an even better bargain.

That is to say, the stock fell. And fell. And fell.

Our outlook did not change, however. We still saw merit in our estimation about the state of copper production globally. So we bought, and bought, and bought in our rebalancing process.

By the time the stock recovered to our original purchase price, we had taken out more than we had ever invested on behalf of clients. Even a misidentified “bargain” can become a historical gain in a portfolio.

The search for good companies to buy is key to what we do. Sorting out when to eliminate a holding is also important. But the work in between—setting and adjusting our percentage allocations and rebalancing periodically to restore those allocations—is where we hope the true value of our work might emerge.

Rebalancing is a great example of the type of activity we mean when we talk about “ongoing portfolio management” and “investment research,” the things that go into our ongoing advisory work.

Rebalancing can help try to mitigate an otherwise disappointing selection, as our average cost per share declines when we add less expensive shares. And it can help us make sure we book profits if we happen to get in on a shooting star. No guarantees either way, but our protocols and discipline have the chance to make both more likely.

Clients, if you would like help reviewing your overall returns by holding in AccountView, call or email us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

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Sorting Out Wants and Needs

We’re big fans of making the most of things. But it takes a little perspective to learn how to prioritize our goals. What are our very next needs? What are the wishes that can wait?

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Sometimes the Right Move Is to Stop and Breathe

by Billy Garver, Chief Compliance Officer

When Hope or Hype Ride High: Time to Ring the Bell?

By Mark Leibman, Advisor

Our long study of “the market” has taught us that it’s more of a market of stocks, less of a stock market. Each company has its own story and charts its own path. People often use the broad market averages as a shorthand, a quick way to check how things are doing, generally: “the market” might actually refer to the companies listed on the Dow or to ones in the S&P 500, for instance.

But our work is aimed at picking our spots, looking beyond any one average. We’ve talked about this before in more detail, about what it means to invest in the broad market averages or indexes versus what we’re trying to do at 228 Main.

Part of our approach is about spotting the patterns. We keep an eye on parts of the investment universe that seem to run in long cycles. For instance, since 2015, the largest investable companies have dramatically outperformed smaller companies, with more than twice the gains in general. (The biggest of the big are all over the news these days, with hopes and/or hype of AI dominating the chatter.)

A similar thing happened in the 90s, when internet stocks dominated. Their run ended with the “Tech Wreck,” in 2000. Back then, while the big tech stocks got crushed, other parts of the market did much better. In the years that followed, smaller companies did a far better job of delivering gains. In fact, smaller companies outperformed from the market peak in 2000 until about 2015—seemingly, when the current cycle began.

Notice how we’ve said nothing so far about “timing the market.” A strategy that requires precise timing is not sustainable. In fact, it’s impossible: we can’t pretend to know ahead of time the exact right day to change course.

Instead, there is so much potential advantage in preparing for the inflection point, rather than predicting it. We can assemble the building blocks that may be most useful in whatever part of the cycle comes next. After all, the next part of the cycle is always on its way.

Clients, you know I’ve had a lifelong obsession with the markets. Our research team, to this day, is informed by a quest to seek the best bargains and a general principle of avoiding stampedes. It is these things that can potentially help set us up for life on the other side of the trend change, once it happens.

What’s got our attention? The research team at 228 Main is noticing high valuations in the big company indicators like the S&P 500. Market value seems to be concentrated in the biggest companies, perhaps in a way we have not seen since the 2000 inflection point. And we are finding possible bargains in smaller companies, and value stocks, and in other geographies around the world.

They say nobody rings a bell at the turning points… but consider it rung. We believe we’re close enough, that we’re far enough into inflection point territory, you could say.

As a result, our portfolios right now are reflecting diversification that will hopefully make greater sense in the months and years ahead. The future is going to be different than the past, even though we humans tend to believe current trends and conditions will persist.

Owning the 500 or the biggest U.S. equity funds may provide a very different experience in the years ahead. A decade or so of outperformance, megacap versus smaller companies, will sooner or later come to an end.

We believe it’s a great time to rethink the tactics that have worked so well for the past decade. No guarantees, of course. We have a crystal ball, but it does not work. Instead, what has tended to serve us well are the enduring principles we use in our work: avoid stampedes, look for the bargains, own the orchard for the fruit crop.

This is a call to think about it, not a call to buy or sell anything. And second opinions are always available at 228 Main.

Clients, call or write if you or anyone in your life would like to talk more about this.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

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Changing the Recipe

There are many ways to get the job done. Whether the job is getting dinner on the table or investing for retirement, rarely does it ever come down to an ultimatum, something like, “If you can’t stand the heat, get out of the kitchen.”

What if you just need a different recipe?

Join Billy for a walk, as he shares his thoughts about how to switch things up in this week’s message.

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Family Matters

We’ve had plenty of conversations recently with people in their working years. It’s reminded us of a basic fact: family dynamics and money can create a lot of angst for people of any age. The issues of aging may be about universal to the human experience, but the particulars have to be navigated family by family.

We’ve seen these topics from many angles. They are pertinent for aging couples, vital for singles. Couple dynamics usually involve one taking care of the other; when there is no “other” in the household, that support system must be found elsewhere.

When the dynamics in a family start changing, it can feel concerning for those in the younger generation, too. The questions we’ve fielded are as varied as the families:

May an adult child or someone else do business on behalf of a parent who is not able to?
Are there sufficient resources to take care of the health needs of the parent?
Is there a plan to be sure assets are titled properly and headed where they should be in the event of death? How do we avoid spending unnecessary time, energy, taxes, or legal work when the time comes?
What are the roles of Medicare and Medicaid?
Should we be aware of any scams or elder abuse that could be a threat to a parent?
Who makes health decisions on behalf of a parent who is not able to?
Where is the information survivors would need to settle a parent’s affairs?

The ideal scenario is that a family goes into any major event with clarity, already: that the senior generation’s plans and intentions are already made known, that they’ve communicated their wishes regarding health care principles and the ultimate disposition of their estate. And sometimes we arrive at a big moment and need to work with what we have.

If you are concerned about a parent, an initial call can help us understand your questions, point you to resources, explain how things might work, or make plans for a meeting with the parent.

If you are a parent and would like to make sure your plans and intentions are carried out, let’s talk.

In all cases, better communication usually reduces stress. Assets are the result of years or lifetimes of work and effort. We believe that planning to make sure they do as we intend is one way to respect that work and effort.

Call or email to get a conversation started: any moment can be the right moment to start.

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Aiming for Progress, Not Perfection

What is your favorite part about the Olympics? Is it a specific event that always catches your eye, a striking outfit?

For us, it’s hard not to be blown away by the perfection among so many of those athletes.

Watching the events, we may forget how much time and effort these athletes put into their trades. We only see the polished, precise versions of the routines, or the absolute fastest times or highest heights!

We aren’t there to watch them struggle on their way to perfection. We don’t see how many hours the athletes trained, the things they had to sacrifice. Sometimes it’s good to remind ourselves that we aren’t going to get it right the first time. We are going to fall; it’s just a part of life.

The thing that sets us apart, though? What we do after we fail.

Olympic athletes don’t throw in the towel if they have a couple bad days at practice… and we shouldn’t either. We get back out there and try again!

Maybe some of us are not happy with the amount of money we have saved so far for retirement. Instead of giving up on the idea of saving all together, we can formulate a new plan. We can analyze the budget, start reallocating cash, take advantage of IRA contributions. We can take the time to invest in ourselves and our futures.

Maybe some of us have little ones at home and are starting to think about saving for their college education. We don’t have to save as much as we can, as fast as we can. There are investment options to help you contribute at your own pace, while putting the money to work to take advantage of that potential growth.

While the Olympics is a competition, saving for retirement or a life-changing event is not. We are all on different journeys, with different resources, at different points in our lives. There is not one perfect plan for all investors.

One thing we can learn from the Olympic athletes is their power of flexibility. (While of course they are physically flexible, we are talking about their mental flexibility.) If their practice routine isn’t working for them any longer, they will change it. We can do the same thing with our financial plan!

Setbacks in life are part of the journey. If we gave up when the going gets tough, we wouldn’t get to enjoy the fruits of our labor. We won’t sell out when the market is low, just like we won’t sell ourselves short when we don’t stick the performance every time.

We keep our eyes on the prize and keep moving forward.

If you are going through something right now and you didn’t get it right the first time, that’s okay. You can always try again next time. We aim for progress, not perfection. Progress—that’s how we truly go for the gold.

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The Rights of Shareholders? An Owner Is an Owner