Buffett and Munger – A Partnership for the Ages
On May 4 Berkshire Hathaway, the conglomerate run by Warren Buffett, held its annual meeting. This was the first meeting where Buffett was not accompanied by his long- time partner, Charlie Munger, who passed away in November just five weeks shy of his 100th birthday. We wrote about Buffett after he turned 93 last August, describing the enormous wealth he created for himself and his shareholders over the last nearly 60 years since he acquired Berkshire Hathaway in 1965.
Both Buffett and Munger are known for their many pearls of wisdom, and much of Munger’s philosophy and insights are captured in a collection of his talks titled Poor Charlie’s Almanack.1 Charlie emphasizes the importance of life-long learning. As he put it, “the acquisition of wisdom is a moral duty.” Munger believes Berkshire’s success over the decades is because Warren Buffett is, “a continuous learning machine” who spends half his waking time reading and “then a big chunk of the rest of his time…talking one-on-one, either on the telephone or personally, with highly gifted people whom he trusts and who trust him.”
Through their management of Berkshire Hathaway, Buffett and Munger had both the investment acumen and the intense work ethic to succeed where so few investors have –earning market-beating returns over a very long periods of time. Buffett has long advocated, however, that most of the rest of us, who likely cannot match his ability and dedication, should not try to replicate picking individual stocks like he does but rather invest in an S&P 500 index fund which is low-cost, tax-efficient and has beaten the return of 88% of all stock funds that invest in large domestic equities over the last 15 years. As Buffett said in 2017: “Consistently buy an S&P 500 low-cost index fund. Keep buying it through thick and thin, and especially through thin.”
The Team Hewins Approach
Is that it? Just put all your allocation to the stock market into an S&P 500 index fund? While we agree with Mr. Buffett’s advice, especially when it comes to allocating to large domestic equities (where we do allocate 80% of our large domestic stock allocation to an index or its equivalent), there is much more to global stock markets than just the S&P 500.
The S&P 500 makes up about 80% of the US stock market valuation, and the US makes up roughly 60% of the global stock market. Therefore, if investors solely allocate to the S&P 500 rather than the rest of US stocks and the rest of the world, they are neglecting 52% of the total global stock market.2 That’s a lot of diversification and potential returns to ignore.
Speaking of returns, over long periods of time smaller companies have outperformed larger companies by an average of 1.9% a year since 1928.3 Meanwhile, the S&P 500 is heavily weighted towards technology-related growth companies, with the top 10 names representing a full third of the index.4 But, also, since 1928 less expensive value companies have outperformed growth companies by 3% per year.5 Plus, there is plenty of relative value today in international markets with the All-Country World ex-US Index trading at just 13X forward earnings vs the S&P 500 at 20X forward earnings.6
Source: FactSet as of 05/10/2024.
With all due to respect to Mr. Buffett, the case for a more expansive equity program than just investing in the S&P 500 is strong. At Team Hewins, our equity program is built to be fully diversified across all segments of the global stock market and also to better capture the premiums from small cap and value stocks and valuation discrepancies around the world by modestly titling our exposures towards these areas of the equity market.
Update on Market Drivers
After peaking in late March, markets had a tough April with the S&P 500 dropping over 4% as various inflation reports indicated that the decline in inflation had ended.7 This, in turn, would mean that the Federal Reserve would have to delay widely expected interest rate cuts. In this month of May, however, the inflation news has improved some, and the Federal Reserve has indicated that their plans to do some cutting by year end remains more or less on track.
The S&P 500 is now just 1% below its late March peak with key inflation reports coming this week.8 If the inflation news continues to be satisfactory and upward pressure on bond yields can keep easing, then equities can potentially continue advancing. Of course, other factors like geopolitical events, the election, or earnings disappointments could be more determinant of where markets may go in the second half of the year. We’ll see soon enough.
Buffett and Team Hewins – A Common Approach
Berkshire Hathaway currently has close to $200 billion in cash. With Charlie Munger no longer at his side, Buffett now works with a team of next generation managers led by Greg Abel who are today’s ‘learning machines’ devouring business filings, looking for the next set of companies to acquire or passively invest in.
The Berkshire philosophy and the Team Hewins philosophy have more in common than not – a commitment to a disciplined, well-reasoned approach that emphasizes straight forward, simple, and cost-effective portfolio construction that, as Buffett demands, we stick with “through thick and thin, and especially through thin.”
Patience and perseverance will bring ultimate success.
Happy investing!
1. Munger, Charles T. Poor Charlie’s Almanack: The Essential Wit and Wisdom of Charles T. Munger. Fourth, vol. Pages 270-271, Stripe Press, 2023.
2. Shalett, Lisa. “The Case for International Stocks | Morgan Stanley.” Morgan Stanley, 28 Feb 2024, https://www.morganstanley.com/ideas/international-stocks-opportunities-2024.
3. Source: Dimensional Fund Advisors, “Performance of the Equity Premiums” Slide 4 titled “Dimensions of Expected Returns”, Data as of 12/31/2023.
4. JPMorgan Guide to the Markets, Slide 10, “Weight of the top 10 stocks in the S&P 500”, Data as of May 13 2024.
5. Source: Dimensional Fund Advisors, “Performance of the Equity Premiums” Slide 4 titled “Dimensions of Expected Returns”, Data as of 12/31/2023.
6. Shalett, Lisa. “The Case for International Stocks | Morgan Stanley.” Morgan Stanley, 28 Feb 2024, https://www.morganstanley.com/ideas/international-stocks-opportunities-2024.
7. Sean Longoria, Umer Khan, “S&P 500 Falls 4.2% in April as market momentum loses steam”, S&P Global, 1 May 2024, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-500-falls-4-2-in-april-as-market-momentum-loses-steam-81466397#:~:text=The%20S%26P%20500%20dropped%204.2,pullback%20after%20months%20of%20gains.
8. Santoli, Michael. “S&P 500 rebounds to less than 1% from a record after orderly three-week pullback”, CNBC, 11 May 2024, https://www.cnbc.com/2024/05/11/sp-500-rebounds-to-less-than-1percent-from-a-record-after-orderly-three-week-pullback.html.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Certain information contained herein constitutes forward-looking statements. Team Hewins does not guarantee the achievement of long-term goals in the portfolio review process. Past performance is no guarantee of future results, and a diversified portfolio does not guarantee a positive outcome. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future.