Why Top-Performing Fund Managers Are Still Buying These Stocks
IMPORTANT: Please read the disclaimer before continuing.
In my previous article, I talked about how expectations of the market play an important role to influence stock prices. We also discussed how the stock market is always moving ahead of the economy.
It’s been almost 6 – 8 months since macroeconomics became the favourite topic among investors.
Every other week, investors are being fed news about the latest oil prices, interest rate hikes, housing prices, shipping rates, and inflation data. We’re in the information overload phase.
It’s an incredibly tough time to invest.
Some investors believe the worst is yet to come. Some believe the worst is past us.
This is understandably so because while lumber prices and USA ISM Purchasing Managers Index are down, oil prices continue to break all-time highs. This is just part of the increasingly complex macro-environment we are in. It’s hard to read the “expectations” of the stock market.
Why did a bear rally happen despite worsening data? Why didn’t the S&P 500 index drop despite oil prices going up in the past week? I don’t have the answers.
Then, how should investors behave and act?
Most of us are paralyzed right now. When I speak to investors, I sense fear and uncertainty. Nobody wants to talk about how their portfolio is doing. We don’t know how or when this inflationary environment will end. Yes, reading macro and understanding it is important. But let’s not forget how long-term wealth is being created.
Buying great businesses with strong management teams is going to make you more money over a long time horizon.
A few days ago, I was reading a blog update from John Neff – a partner of Akre Capital Management. It’s a fund founded by Chuck Akre, an American investor and businessman. Since its inception in 2009, the fund’s annualized returns are at 17.92% compared to 15.35% for the S&P 500 index.
These are some of my takeaways from the article:
- In the past market drawdowns, if investors had done nothing except for investing in great businesses, they would still do fine or even better.
- “It is not the adverse macro events that derail compounding, it is investors’ reactions to them.”
- Most investors try to do something when they are faced with uncertainty – selling before the next recession, buying just before the next bull market, and/or dumping stocks during a downturn. It’s mentally difficult to do nothing because it demands “irrational” behaviour. It’s almost like asking you not to do anything when you’re bleeding. But it is exactly these actions that self-sabotage because it could possibly create more losses instead of making more profits.
- John Neff shared two companies (CarMax and KRR) which had improved their fundamentals. Yet both companies are down -30% year-to-date.
- At the end of the day, the value of a company is determined by its earning power, not any form of macro event that is temporary.
If we let macro stuff get into our heads, we may lose the essence of being an investor, which is to be served by the stock market and not be instructed by it.
Besides, while waiting for the bottom, there could be companies that are growing their profits very quickly. The stock prices of these companies could potentially go up when the S&P 500 is bottoming instead.
Right now, it’s not popular to tell readers to focus on companies, do their valuations work, and dollar cost average with a sufficient margin of safety. There will be other investors who will disagree with me. That’s the beauty of investing to me. It’s always a tug-of-war on who has a better reading and approach towards maximising returns.
At the same time, I’m not here to win any sprints. I’m here to participate in a marathon of compounding.
I still read macroeconomics every other day but if you ask me, I see a lot more value to spend my time identifying and understanding good businesses.
This is why I’ve been buying stocks using the game plan that I shared here.
As part of my game plan, I use a simple 3-step framework to identify strong companies with rock-solid balance sheets and clear competitive advantages. If you’re keen to find out how this framework has helped me to build a recession-resilient portfolio, I’ll be holding a free 2-hour foundation class to share this time-proven strategy. Slots are limited – click here to register for the sharing now!
What are other top investors doing?
Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” In the same light, fund managers who are buying stocks expect their purchases to make them money over time.
Apart from my own personal transactions, let’s take a look at what other investors have been doing.
Warren Buffett
Known as one of the most successful investors in the world. Currently the Chairman and CEO of Berkshire Hathaway.
According to Fortune, “the key change during the quarter was that Berkshire’s mountain of cash shrank to $106 billion from $147 billion at the beginning of the year as it invested $51 billion in equities. Buffett also spent $3.2 billion repurchasing Berkshire stock.”
Buffett bought stocks mostly in oil and gas companies. It might be a hedge against inflation. He also added exposure in Apple, HP, and Citigroup.
Bryan Lawrence
Founder of Oakcliff Capital, an investment partnership which invests in publicly-traded securities.
Dennis Hong
Founder and CEO of ShawSpring Partners, a Boston-based investment firm.
Pat Dorsey
Founder of Dorsey Asset Management, an Illinois-based hedge fund manager.
Personal takeaways
These successful fund managers made these purchases in the first quarter despite the huge economic uncertainty they are facing.
Given how beaten down the stock market is, this could perhaps signal something. While there are possible downsides, the upside is greater than the downside.
As always, stay safe and happy investing.