The Digest #10

Published on February 26, 2020

In Today’s Issue:

  • Berkshire Hathaway Annual Report Roundup
  • Louis Rukeyser on Market Crashes
  • Dollar Cost Averaging vs. Lump Sum Investing
  • The Benefits of Walking

To read last week’s newsletter covering Berkshire Hathaway, Charlie Munger’s Daily Journal annual meeting, Blue Chip Stamps, and Stretch IRA changes, please click here.

Berkshire Hathaway Annual Report Roundup

Berkshire Hathaway reported 2019 results on Saturday, February 22. A special issue of Rational Reflections was sent out to subscribers on Saturday with some initial thoughts on the annual report as well as Warren Buffett’s letter to shareholders. Here are several links to additional resources that might be useful for those interested in learning more about Berkshire:

  • Buffett Loosens the Purse Strings for Repurchases (Rational Walk). This article, published on Monday, goes into more detail regarding Berkshire’s repurchase history from 2011 to 2019. A comprehensive summary of all repurchase activity is provided along with indicators of valuation for each repurchase. It appears that Berkshire shares currently trade well within a range where Warren Buffett has been willing to buy back shares in the past. Since the article was posted on Monday morning, Berkshire shares have traded down even more as the overall market has declined due to coronavirus concerns. Buffett is clearly interested in repurchases at the right price.
  • Buffett’s Berkshire Stock Underperforms (WSJ). The WSJ’s coverage of the annual report focuses on the fact that Berkshire’s stock price only advanced 11% in 2019 vs. 31.5% for the S&P 500. The Journal’s Berkshire coverage has improved in recent years and it seems like reporters have a better understanding of the company, but the nature of financial news is short-term and that’s the primary focus in this article.
  • Becky Quick Interviews Warren Buffett (CNBC). For the 13th consecutive year, Warren Buffett agreed to be interviewed by Becky Quick for three hours on CNBC. Buffett appeared healthy and in good spirits during the interview which started at 5 am central time and he commented on a variety of topics, many not directly related to Berkshire. It’s surprising that Buffett agrees to a three hour format with so many commercial interruptions. Becky Quick understands Berkshire and asks good questions.
  • Common Stocks as Long Term Investments (Google Books). In his discussion of retained earnings, Buffett mentions Common Stocks as Long Term Investments by Edgar Lawrence Smith, a book published in 1924. I have not read this book but look forward to doing so in the near future. The link above is on Google Books but the book is also available on
  • Ask Yourself: In What Year Would You Have Hopped Off the Warren Buffett Compounding Train? (Focused Compounding). Geoff Gannon proposes an interesting thought experiment: If you had purchased Berkshire Hathaway stock in 1965, at what point would you have sold your shares? Would you have been shaken out of the stock in 1973-74 which were big down years? Or taken profits in the big up years? It’s an interesting topic to consider. Few investors would have stayed in for the entire time, and once you sell you might never get back in. 
  • Motley Fool Berkshire Message Board (Motley Fool). Message boards are notorious wastes of time in most cases, but the Berkshire message board on the Motley Fool website has provided some useful content for many years. The best poster is mungofitch and it’s rarely a waste of time to read his thoughts on Berkshire. One way to read this board is to see which posts have the most recommendations and check those out.

Louis Rukeyser on Market Crashes

The S&P 500 fell 3.4% on Monday and another 3% on Tuesday which was attributed by market observers to increasing fears of a Coronavirus pandemic. The virus, now renamed as COVID-19, has spread to more countries in recent days. Coupled with fears of major supply chain disruptions due to severe impacts on China’s economy, traders sold stocks. 

Of course, this is nothing like a real market crash. On October 19, 1987, the Dow Jones Industrial Average dropped 508 points, or 22.6%, in an event known as Black Monday. With benefit of hindsight, we know that the 1987 crash did not lead to another Great Depression, as many at the time were predicting. But this was anything but clear at the end of that tumultuous week.

In a memorable episode of Wall Street Week, Louis Rukeyser provided his perspective on how to think about market declines, starting with “It’s just your money, not your life.” Wall Street Week was a Friday night ritual for decades and I still recall watching this episode as a perplexed high school student.

Dollar Cost Averaging vs. Lump Sum Investing

The question of whether to invest a significant lump sum in stocks immediately or over a period of time is a problem that most people rarely encounter. Unless you receive a windfall at one time from an inheritance, selling a business, or winning the lottery, it’s likely that you have essentially dollar cost averaged into the market over time. The benefits of doing so in an automated manner can be significant. From a psychological perspective, knowing that you will be a regular buyer of stocks for years or decades to come can make it easier to deal with market declines.

But the question of investing a large windfall is still relevant. If you suddenly find yourself with $100,000, are you better off investing it all at once or over a few years? 

Nick Maggiulli has published a number of articles on this topic in recent months and put together “The Definitive Guide” to dollar cost averaging vs. lump sum investing this week. His message is clear: “When deciding between investing all your money now (lump sum) or over time (dollar cost averaging), it is almost always better to invest it now, even on a risk-adjusted basis.”

But imagine that you invested $100,000 in the S&P 500 last Friday only to see the index drop 3.4% on Monday and another 3% on Tuesday. We know that such short term movements are best ignored but we wouldn’t be human if we didn’t kick ourselves after such bad luck. For this reason, many people will still opt to dollar cost average into the market regardless of what the data might suggest is optimal. Ultimately, it is a personal decision but one that should be made with full understanding of the data.

The Benefits of Walking

Everyone knows that physical activity is a good thing from a health perspective, but I have long believed that the follow-on effects from walking or running improve productivity as well. Most of the articles I have written over the years have been developed not in front of a computer but while running.

Ryan Holiday advocates daily walks in a new article and notes a number of historical figures who made a point to get out into the real world on a regular basis. The idea has a lot of merit and you might be surprised by how many ideas you get while pounding the pavement (or trail). 

Upper Basin, Kings Canyon National Park

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Copyright and Disclosures

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC. 

The Digest #10