Current Market Conditions And Two Stocks I Just Bought

Hey, The Investor’s Podcast Network Community!

After a brutal December where stocks nosedived, it seems the market has slightly rebounded. As investors, we tend to have recency bias, and with the S&P500 trading at 2,900 as recent as September, it looked appealing when it was trading at 2,500 just a few weeks ago. Don’t be fooled. Overall, the stock market should be perceived as “less expensive” rather than “cheap.” To provide context, by historical measures such as Warren Buffett’s Yardstick, Schiller P/E, and Tobin’s Q, we’re still in the 90th percentile of the most expensive stock markets.

That being said, I did take advantage of the temporarily less expensive stocks to add to two of my positions. The first was Southwest Airlines, which I bought at $44.60 per share. Not only was the market generally negative, Delta Airlines also updated their guidance and took down the entire airlines sector with their slightly more negative outlook. As Billionaire Howard Marks said when Preston and I interviewed him on The Investor’s Podcast, “you always have to ask yourself if good news is truly as good as they appear, or if bad news is truly as bad as they appear.” I don’t think the news is as bad as they appear for the airlines sector, but only time will tell if I’m right.

One quick thing I would like to add about the airlines sector is that it’s very cyclical. Right now, it looks cheap and is trading at a very low multiple because we’re likely near or close to a peak in the economy. The cyclically adjusted earnings are lower than today; just as when the economy tanks and airline companies make very little money, the sector is not as expensive as it looks.

If you would like to learn more about investing in the airline industry, make sure to check out our Mastermind Discussion from Q4 2017 recorded after Warren Buffett took major positions in the sector. Preston is pitching Delta Airlines and I’m pitching Southwest Airlines.

I used much of the same logic when scrutinizing the bad news for Markel Corporation, which is another position I added to at $1,025 per share. Markel is often referred to as “Baby Berkshire” because it’s a very well-run insurance company that uses float and profit to invest in undervalued securities and operating businesses. Markel’s stock price recently took a hit with the rest of the market, and the drop in the stock price was accelerated by inquiries from the authorities on their loss reserves in one of their subsidiaries. Looking into the details of the investigation, it seemed like the market was overreacting — even if losses were indeed recorded wrong, it would not justify the negative sentiment on the price of a company that I expect to grow book value by 8-12% annually for the foreseeable future.

Whenever you value insurance companies, you’re often looking at the Price to Book Value as the securities are reported at market value. For instance, in early January, Berkshire Hathaway appeared to be trading at 1.26 Price to Book Value, which seemed very cheap and a good time to enter the stock. If you did that, I think you bought at a good price. But please keep in mind that the Price to Book ratios you see on different financial sites are typically calculated using the last reported quarter’s book value. In other words, you’ll be looking at a lower stock price, but it would be compared to the outdated book value. In this case, it’s the book value reported on 30 September 2018. This was a time when Berkshire Hathaway’s book value was higher, as its stock portfolio was priced in line with the rest of the more expensive stock market.

Fast forward to early January where the stock market is down and Berkshire Hathaway’s biggest position in Apple is down by 30% — the adjusted Price to Book is closer to 1.4. Again, this does not mean it’s a bad time to buy. If anything, you get Warren Buffett’s portfolio at a better price, but it shows the importance of looking through the numbers when you invest.

I did not add to my position in Berkshire Hathaway though I found the stock price relatively attractive. It’s already, by far, my largest position and I’m very humbled by the fact that I’m often wrong. Furthermore, I believe in diversification even with the best investment ideas I have.

If you want to learn more about the process of how Preston and I value individual stocks, you can check out our free Intrinsic Value Index or our latest intrinsic value assessments attached in this email.

I hope you have a wonderful rest of the week.

Your Friends,