A little trade war angst has spiced things up a bit in the markets lately. So…I bought some stuff. Also, Barron’s had a negative Berkshire article suggesting some dramatic changes for Buffett, complete with recommendations about how to deal with his “cash problem.”
I bought some stuff today. I also felt like I should post something since I kind of got a crapload of views, for some reason.
I bought some non-U.S. index ETFs with a tilt to value and developed markets. I talked about the reasons for my preference for ex-U.S. before:Best Foreign Value Factor ETFs, Resource Roundup: Research Affiliates Asset Allocation Tool, Foreign Value Factor ETFs Update, Resource Roundup: More CAPE.
There was also another good restatement of the status of things and discussion of how one can intelligently respond to the relative valuation gaps and opportunities currently on offer in capital markets by Verdad Capital. I got it via their weekly research email which you can sign up for here. The idea is basically, base rates say probability favors higher future returns for cheaper securities, which are located in certain sectors of the U.S. market and in pretty much every market outside the U.S.
The reason for buying today, was simply adding on price weakness due to trade war fears. I could see trade conflicts slowing global growth but in the long term….meh. If they did work to redound to the benefit of the world’s (by far) largest market for goods and services they would probably just end up promoting more growth in other economies and raising all boats or at least all the business boats. Maybe social safety net and or defense spending would have to be adjusted outside the U.S., but I don’t think that’s really knowable. In sum, I was looking to ad some more cheap (especially in dollar terms) non-U.S. stocks so I did so on some weakness.
As a retail investor, I generally use funds for foreign investments. I bought a little VXUS and SPDW for broad index exposures. I bought SPDW because it was in an TD Ameritrade account is one of their no transaction fee ETFs. It also has only a .04 BPS expense ratio!
VXUS is a Vanguard ETF, which I chose over an equivalent product from BlackRock because Vanguard returns 100% of securities lending to the fund, the fund holds almost twice as many stocks as the BlackRock product, and this is in a taxable account. I don’t trust BlackRock as much as vanguard to keep the costs low when I’m stuck because I’m sitting on 10 years worth of capital gains or something (See, for example, creating IEFA with a competitive ER versus lowering the ratio on EFA…stuff like that).
IVAL is the non-U.S. version of quantitive value by Alpha Architect. Here’s the book wherein they detail the strategy. It is basically 40 stocks based on EV/EBIT, with quality screens applied to the cheap stocks as a second step (the EV/EBIT is the big muscle movement). The quality screens are based on various academic studies versus the simple ROIC quality prong of the Magic Formula, for example. Here’s the book that details the strategy:
A couple of additional things to note about IVAL: 1) It excludes financials, so that is a large portion of the equity in many of these non-us markets, especially the value stocks; 2) the expense ratio is .79% and the turnover is probably going to be high. This costs are, therefore, a little high for most ETFs. For an active foreign fund, however, it is relatively cheap. It currently holds a lot of Japanese stocks but these are screened for good operating metrics (resulting in high ROAs and ROEs…especially for Japan).
I also used FNDF to tilt to value and developed. It is a Schwab fund based on a RAFI index that I have discussed before here: Best Foreign Value Factor ETFs. It’s largely weighted basically by shareholder yield. I like the methodology and the very low expenses. The turnover should be really low so hidden costs like market impact and trading should be minimized. In addition, the expense ratio is only .25%.
Barron’s “Coaching Up” Berkshire
So Barron’s had an article this weekend, basically suggesting a bunch of stuff that Buffett should do to prepare Berkshire for the eventual post-Buffett transition. First, I’m pretty sure they wrote something nearly identical (with different successors) maybe 20 years ago. Second, there is some really rigorous and impressive current and future P/E ratio analysis in the piece. So, basically the article is kind of click-baity and pretty much not worth taking the time to read.
It is interesting, however, that these sorts of articles always come around after periods of underperformance. After all, no one is asking Buffett to share the stage when he’s fresh off a five year trouncing of the indices. So in that respect it has some value to me as a potential signal of the mood. Sort of like a less embarrassing “Death of Equities” piece. BRK is trading ~1.35x book, so it seems pretty cheap. Really cheap compared to most everything else. I had a buy order in today, closer to 1.3x, but it didn’t catch a fill.
For a little opportunity cost/heat check, RPV and SPVU offer a basket of the cheapest S&P 500 stocks with an aggregate P/B ratios of ~1.4 and ~1.6. I am trying to do a little research on maybe how Buffett views his opportunity set.
I think Berkshire Energy might be somewhat informative and want to look into it a little more. The capital BRK can deploy in power (and pipelines) also makes me the think about the opportunity set (which I discussed before: Is Berkshire too Big to Succeed?). It seems BRK is really not limited by the total US or even world market public securities market caps. They can now “find intelligent things to do” in new capital investments in power generation, distribution, transportation (pipes). They can do things in public and private equity investments and they can also deploy capital into the insurance market (likely only in a big way after a decimation of the capital flooding into “insurance linked securities). I am basically willing to bet they can compound @ 12-15% with their float/leverage for a long while yet. Meanwhile the downside seems very limited compared to most options in this market.
I am not long BRK currently, but it seems like a pretty attractive option on additional weakness. We may owe Barron’s a debt for their willingness to lecture the GOAT about what to do with his cash problem.