At the start of this year, we review W. Buffett’s latest letter to his shareholders, the market situation in the USA, China and other geographies, and conclude with a few practical considerations.
W. Buffett’s principles
In his letter to Berkshire investors for the 2023 financial year, W. Buffett recalls his main investment principles following the death of his partner C. Munger:
- Seek out investments that are economically sound, fundamental and sustainable.
- A fundamental investment rule: Never risk a permanent loss.
- Avoid serious mistakes.
- Don’t try to predict the market prices of major currencies.
Berkshire does, however, hold a position in cash and U.S. Treasuries well in excess of standard investment principles. This stance is also in line with Faber’s postulate that the next decade could be the slowest in a long time.
United States
Today, it’s hard to justify premiums and prices for the “Magnificent 7” (which make up over 25% of the S&P’s value), except with buzzwords around artificial intelligence. According to R. Dalio, we can expect a “significant correction in these stocks if generative AI doesn’t live up to the expected impact”. In particular, Invidia and Microsoft have the most important applications in AI, but they are also very overvalued (double-digit) according to A. Damodoran; Tesla would be the most expensive for R. Dalio with Alphabet and Meta comparatively more affordable. He reckons that in 10 years’ time, these stocks won’t all be at the top, and that there may only be 2 left, while flexible industrial players could see their advent. In terms of money and debt, it seems that the only way out is to continue printing money.
Concerning the US market in particular, the key question is whether, beyond high valuations, we are in a bubble. On this subject, a post published by Ray Dalio, Bridgewater’s founder, on Februar 29, 2024 provides us with principles that are highly applicable to the current situation: in particular, he considers that a bubble is made up of high prices under unsustainable conditions (indebtedness) and naïve, speculative bullish sentiment. In conclusion, on the basis of the overall bubble criteria, we find ourselves in the middle (52nd percentile), lower than in past bubbles (such as the 1920s or 1990s), even taking the mag-7 into account. In terms of the current situation of US stock prices, we’re around the 73rd percentile” for Ray Dalio, so close to historical valuations that are 25% more expensive.
China
-We’ve experienced a year of declines on the Shenzhen and Shanghai stock exchanges, and Hong Kong has been strongly negative (-14%) in 2023. It is currently the cheapest of the major stock markets.
Fortunately, the effects of this stock market crisis have been very limited. There has been no distribution of public money as in the USA, which has not led to a strong recovery in China. However, a high savings rate and low interest rates could encourage the Chinese to reinvest in the stock market.
As far as relations with China are concerned, cooperation can take many forms, and can coexist with competition. Leaders can practice “coopetition” according to Ray Dalio, i.e. balancing cooperation and competition, in order to advance common interests in specific areas, despite the lack of alignment in other areas.
According to Damodaran, political influence does not make it possible to consider oneself a shareholder in Chinese securities; investors are merely providers of capital. Considering Vanguard’s and iShares’ assets under management and the limited influence of proxies, this lack of control and voice may not be comparatively serious. On the other hand, the problems of debt and opacity are critical in some companies, and political risk is not about to go away.
Other markets
- There’s no positive news from Germany. To put it mildly, its economic machine was based on exporting premium cars to China and importing cheap gas from Russia.
- Emerging markets still more attractive than the US.
- India’s potential should not be overlooked. An emerging markets ETF can provide adequate coverage.
- Latin America, far from conflict zones, could do well in 2024, according to Faber (whose asset allocation, not recommended, is 25% in stocks, 25% in gold 25% in real estate, 25% in cash/bonds)
In practice
With the declines in China, the start of the year looks to be a good entry point for investors. India is also covered with Emerging Markets (Emerging Markets: Latam to a lesser extent and China predominant with an EM ETF).
AI is poised to transform roles and boost performance across all functions. This could lead to less passivity, more individualization and lower costs for retail wealth management, but we’re not there yet. In the meantime, the passive approach is best suited, even for a representative of individual stock valuation and stock picking: According to Damodoran, ETFs allow us to avoid Fear-of-missing-Out and recognize our inability to predict. He concludes: “buy an ETF and get back to your life”.
Sources
Are We in a Stock Market Bubble?, Linkedin, Ray Dalio, 29.2.2024, Are We in a Stock Market Bubble? (linkedin.com)
BERKSHIRE HATHAWAY INC. SHAREHOLDER LETTERS 2023
Can India, Indonesia and Saudi Arabia be the next great economies? Jan 4th, 2024, The Economist
Fourth Quarter Review — with Aswath Damodaran | Prof G Markets, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjti9O168iEAxVQ9gIHHVHEAi0QwqsBegQIDxAF&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DCX7Ng70IEwc&usg=AOvVaw1QNBXXHPsL3tC-dU26kwHC&opi=89978449
Gen Al is set to shake up asset management, Financial Times Europe, Markets Insight, Mohamed El-Erian, 15.2.2024
Les actions chinoises sont clairement sous-évaluées, Swissquote Magazine, mars 2024
Singapore DBS, Investment Strategy | Overview (dbs.com.sg)
WEF, Davos, diverse conferences
Guide Finances 