The Value of Confidence

In the short run, the stock market is a voting machine. But in the long run, it is a weighing machine. -Benjamin Graham
 
Never bet against America -Warren Buffett

Two good quotes from two of the most famous value investors, and ones we’ve referenced many times in our letters and meetings. That first quote by the father of value investing just means that in the short term the stock markets, and the individual companies that make up those markets, are valued hastily by people influenced by their emotions, the media, and their peers. However, over time, as more logical and common sensical evaluation methods are put to work, the true value of those companies and markets are more accurately represented.

The second quote, by the Prophet of Omaha, is well known and used these days. Betting on America has been the correct bet for close to 250 years. I’m sure at times we have all had misgivings about the ways things have been handled in our country. I am not trying to placate anyone, but want to say that it is more important now than ever that we the people recapture and fortify our power. We are the country, not the officials we elect. If we are as divided and unhappy as we find ourselves today, it is up to us to fix things. And that is what betting on America for the next 250 years means… betting on the American people and the values which have led us to the global leadership we still hold today. It does not mean betting on the hope that our current leaders and institutions will save us.
 
I know we are all worried about the dramatic changes being implemented by the Trump administration. Large changes are being enacted abruptly and quickly, and the uncertainty of where they will lead creates fear that is amplified by the news and by those with the largest voices and personal agendas. But more pointedly, this uncertainty has been affecting our investments, and our confidence in our investments. When the stock and bond markets move as drastically as they have these past few weeks, it tests our confidence in our savings and our confidence in our ability to live our lives the way we have hoped for into the future.
 
I cannot fix the uncertainty that stems from the changes we are experiencing. Although the 90-day pause on tariffs was met with a large positive reaction from the markets, all it did was ultimately extend the unknown for another quarter. More than anything, what businesses want to know are firm figures that they can plan with. Known costs are better than unknown costs, possible costs, or estimated costs. If there was certainty, leaders could adapt plans and vision.
Managerial accountants could adjust product lines, disband and create new ones, or even commit to building new plants. Business and the pursuit of profit could move forward. But those things are not possible until businesses have real figures to work with.
 
That is what the volatility in the market is stemming from. But as I’ve said before, and will say again, the fear driven behavior of selling is almost always done in an extreme proportion to the reality of the problem. Tariffs are bad for business, trade, and the economy. How bad, though, can only be answered with more certainty and time. We cannot confidently predict that whatever level of tariffs are enacted will lead to excess inflation, a dramatic drop into recession, depression, or stagflation, the decline of the U.S. dollar, a default by the U.S. government, a loss of the U.S. dollar as the world’s reserve currency, or an end to globalization. Most of those fears are overblown, but that is the level of fear we currently see reflected in the uncertainty of the stock markets.
 
What will happen? I think if we simply limit our predictions to changes in behavior, we will get a more realistic idea of what’s to come. If certain things suddenly become more expensive, purchasing behavior will change. If you are a business, you will look for other sources of similar products not subject to the increases, substitute what can be substituted, or discontinue lines of business that will no longer be profitable. If you are a consumer, you do exactly the same thing. You find cheaper alternatives, make replacements, or discontinue use/purchase of items you find too expensive.
 
This will be a bad enough scenario for some businesses that they close, which will present amazing opportunities for other businesses to grow. We, the consumers, will deal with it. We’ll mourn the things we were forced to give up, while finding joy in new things we were forced to try. Then, as a result of this blending of adaptive behavior we will get a new inflation report, and a new GDP report. The trade balance reports with other nations will change. Employment and employment opportunities will fluctuate. The Federal Reserve will adjust interest rates. But life as usual will go on, and the adjustments will likely not be as bad or as severe as we fear.
 
Again, I cannot tell the future, and I am not basing this on pages and pages of predictive spreadsheets with vast quantities of data I’ve scrounged from across the internet. But I do try to read broad levels of opinions, and lend credence to sources I believe are truer to their art than the biases of politics or self-interest. The numbers that I have been reading from those sources are projections of flat to slightly negative GDP for 2025 (small recession) leading into slow growth in 2026; a total tariff rate of 10-20%, which could be highly altered by the final China tariff figure; an increase in U.S. revenue (or tax…which is what tariffs are) of 0.85% of GDP (representing the biggest peace time tax hike since 1982); inflation nearing 4.0% by the end of 2025, then beginning a decline again in 2026; and a year-end target for the S&P 500 of 5,200. These are all estimates of course, and the final figures will most certainly be different. However, if they are anywhere near close to what we get they are nowhere near world ending results.
 
We are all worried about the change, the rate of change, and the future. It is what we as people do. But I do believe things will not be as bad as we fear. Over time confidence will return, and then, once again, we will venture into overconfidence. These cycles will repeat. In the meantime, we are looking for cast off gems being thrown out as trash.
 
As usual, I want you all to know your questions, calls, and visits (scheduled or impromptu) are never unwarranted by you, or unwanted by us. I look forward to connecting with you in the future.
 
Our best wishes,
 
Justin Anderson