Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Markets

1929 Crash On The Horizon?

In recent months, we have heard more and more talk about the infamous stock market crash of 1929.

A lot of this talk has been driven by the new book written by CNBC’s Aaron Ross Sorkin 1929.

It has received excellent reviews, and we are going to be reading it in the next few weeks. We will be sure to share our thoughts…

It seems to have peaked interest in this famed event, though, and now the “mainstream media” is chiming in with their thoughts.

Here is a recent opinion piece from the NY Times shared by (the always awesome) Ben Carlson of A Wealth of Common Sense…

Of course, they managed to politicize it by bringing in Donald Trump but – aside from that – do they have a point?

First, let’s remind everyone what exactly happened in 1929 and the ensuing decade long stock market sell-off around the Great Depression.

Here is a chart showing the price of the major stock index of the time – the Dow Jones Industrial Average – from 1920 to 1950…

On the chart you can see that the Dow Jones rallied from less than $100 to almost $400 per share over course of the 1920s.

After selling off almost 13% on the “Black Monday” of October 28,1929 the Dow continued to fall before bottoming in September of 1932.

Over a period of three years, it sold off an incredible -89% from its September 1929 peak!

To put is in perspective, the sell offs around the Internet Bubble and the Global Financial Crisis were roughly -50% for the Dow Jones. We saw a similar sell off in the mid-1970s, but every other sell off over the 75 years has been closer to -30% on average.

So, we want that to sink in…

…” Blue Chip” stocks were down almost -90% in JUST three years. Amazing!

One fear we often hear from investors is that the next “crash” is right around the corner.

For our purposes, we define a “crash” as a double digit move in the major stock market indices in a just a few days or even one day.

The reality is that “crashes” (like1929) and extended market sell offs are not correlated SINCE 1929.

We have seen several crashes – including the largest one every in 1987 – but none of the major BEAR markets were set off by one of these crashes.

In fact, the major BEAR markets of the last century have begun with more of a “whimper” than a “bang.”

As a result, we are not as worried about a rapid one-day decline or at least one setting off a huge BEAR market.

In his note, Ben brings up some very valid points on “why” this won’t happen again.

It is not him arguing “this time is different” but rather pointing out the improvements we have made to our financial system.

This is no different than the fact that our cities don’t burn down every 20 years because they are no longer all built out of wood and we have fire hydrants!

Here are some of the structures that are in place NOW, that were not then…

• The Securities and Exchange Commission (SEC)

• The Federal Deposit Insurance Corporation (FDIC)

• Unemployment Insurance

• Social Security

• The Supplemental Nutrition Assistance Program (SNAP) or as they are known – “food stamps.”

This is without even considering other changes in market structure like circuit breakers, margin requirements, trading rules, etc.

There was also extremely slow dissemination of information and rampant insider trading. Not only was there no internet, but there wasn’t even television!

The other huge factor is that our policy makers HAVE learned from previous mistakes.

Are they making new ones? Probably…

…but when it comes to stock market crashes and extended BEAR markets, they have developed a host of weapons to combat them.

Maybe it all ends EXTREMELY badly, but that is going to take a very long time.

The reality is that the financial markets – and the world as a whole – is a much better and safer place than it was a century ago.

It might not feel like it at the moment, but it is a fact.

We think this is relevant because it is easy to be preoccupied with a low-probability, binary negative event.

Remember that our bodies are biologically programmed to respond much more strongly to negative outcomes. The ratio of stimulus is eight-to-one.

This made sense for ancient man as the threat of being eaten by a sabretooth ended your genetic line and, therefore, was overweighted by our nervous system versus a good meal.

For investors today, we think this is an important recognition.

Don’t let the headlines and a very small probability (or none whatsoever) of a very negative outcome shake you out of your long-term goals.

HX Daily Redux

Warren Buffett’s Farewell

Warren Buffett published his farewell letter to shareholders this week. In honor of Buffett, we will share our (reasonably unique) perspective on Buffett.

This first note will make a point that many of my regular readers have heard me make in the past…Buffett has made his money as a GROWTH investor rather than a VALUE investor.

What does this mean?

Look up the definition of "value investor," and you get the following…

“Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The overreaction offers an opportunity to profit by purchasing stocks at discounted prices.”

-https://www.investopedia.com/terms/v/valueinvesting.asp

That next sentence in that article says…

“Warren Buffet is probably the best-known value investor today…”

What does it mean to be a value investor?

Read the writings of Benjamin Graham and many of the "founding fathers" of value investing, and you will read about them buying companies at less than "book value, " which is the accounting value of their assets.

There will also be many examples of buying a company below the replacement value of its assets or liquidation value.

These “buy $1 of assets for $0.50” opportunities used to exist in the stock market fifty years ago. That was before these strategies became more well known, the explosion in the asset management business and – most importantly – the Internet.

Outside the complex distressed security market, there are very few of these opportunities in the stock market anymore—certainly not large ones.

Buffett began his professional investing career in the 1950s and 1960s when these opportunities still existed.

Looking at how he ACTUALLY made his money, though, you see that it was NOT on these types of opportunities.

Instead, it was buying large companies that would GROW their earnings tremendously.

Let’s look at his most famous investment – The Coca-Cola Company (NYSE: KO).

He initiated this position in 1988, and his $1.3 billion investment has turned into a $24.5 billion stake or a profit of $23 billion.

Here is a Financial Analysis table of the key financial metrics for KO since 1988 and through the end of 2023…

Let’s discuss both tables.

We don’t have precise data, but Buffett began buying KO in 1988. For the purposes of our analysis, we ran our numbers as if he had taken four years to enter the position.

Across those four years, the stock's media price-to-earnings (P/E) ratio was 15.8x. Over the next three decades, the median P/E ratio was slightly less than 27x.

This means that the appreciation from a multiple perspective was +70%.

Also note that at 16x forward EPS back in 1988, KO was a +10% premium to the multiple of the S&P 500. Even the next year (1989) was only a -15% discount, and 1990 was a premium again.

Now, let's look at earnings per share (EPS) over the period. It has grown +2370% from $0.18 per share to almost $2.50 per share in 2023.

Looking at the almost +2200% increase in the stock price across this thirty-five-year period, the expansion in earnings multiple (+70%) certainly helped, but the REAL driver was earnings growth.

This was also a stock that was NOT trading at a discount to asset value or the overall stock market at the time.

The VALUATION of KO stock did not drive the appreciation in Buffett's stake; rather, it was the GROWTH in earnings that did.

Now, let's go back to the definition of "Value Investing" at the top. It does take into account this situation.

It says value investors seek "…stocks that they think the stock market is underestimating."

This captures what happened with KO stock.

It wasn’t that it was trading at a discount to the asset value at the time or the stock market, but it certainly was excellent value given the future growth that would happen. In THAT sense, it certainly was a good "value" purchase.

This means the critical stock analysis was NOT about understanding the VALUE but rather about handicapping the GROWTH.

It is interesting to note that the return we quoted above was the return of his stock holdings, not his total returns.

If we consider the dividends that were paid, that is another +952% return. This brings his return to over +3000% on his KO holding.

The annual dividend has grown from $0.08 per share to $1.84 per share or +2200%. That number is almost the same as the earnings growth.

Again, the key to this investment is the GROWTH of the company.

While Buffett is lauded as the most extraordinary living (or ever) VALUE investor of all time, we think the KEY to his success has been identifying GROWTH.

This brings us to our favorite Buffett quote…

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This is something that every young investor should take to heart…

Market Wizard’s Wisdom

7 Final Lessons From Buffett’s Farewell

Here is an article shared last night in Enrique’s free daily email at Paradigm Press called Truth & Trends. You can read the original article here.

Warren Buffett published his farewell letter to shareholders this week, ending one of the most remarkable runs in corporate history.

His leadership and reputation have been a key to Berkshire Hathaway’s success.

Shares of Berkshire were at an all-time high in May just before Buffett made his announcement.

Three months later, the stock was down 15% while the broad market soared. Keep in mind this before he even stepped down.

Buffett’s wisdom clearly matters, as it always has.

So today, I want to dig into his farewell letter for some final lessons from one of finance’s biggest success stories.

Buffett is known more for investing. But this piece of advice is especially powerful for traders, especially in today’s market.

It’s important to understand that failure and losses are part of the process. The best processes accept this fact and move on quickly.

Sure, you should take a moment of reflection to see if there are any lessons to be learned. But focus on the next opportunity.

This is also great advice for life.

Mentors, or “heroes,” are an important part of investing.

Each of us can learn from our own experience. But it’s important to also leverage the knowledge of others’ vast experience as well.

This is the most powerful method of improving in the markets.

It’s also the reason I write to you here to share my experience so you can improve your financial future.

Remember that we can always improve. This was also referenced in the previous quote.

Your skills as a trader and investor are a process, not an endpoint. That’s especially true since the markets constantly evolve.

Every day, think about how you could be better and how to make it happen.

These two quotes both refer to the concept of how we treat other people and how it reflects on us.

What does this have to do with trading and investing? A lot, in my opinion.

A positive and optimistic mindset is a key to success in the markets.

Treating others with respect helps establish that mindset and will make you a better investor.

I think about this one every day.

In terms of affording people opportunities to change their future, the United States is the greatest country in human history.

There are plenty of areas where our country can do better, but it is by far the best.

Growing up poor and the child of an immigrant, this concept is particularly powerful to me.

Be grateful and think about how you can help others in their journey.

This one is obviously on Buffett’s mind as a 95-year-old. He will have hundreds, maybe thousands, of obituaries written about him. Most of us will not.

My take on this is to think about the people around you and how you have impacted their lives.

Would their “personal obituary” of you reflect well on you? Were you a positive force in their lives? Did you help them with their journey?

This is one of my goals as a financial writer — to bring my experience and insight to help you.

As always, it is an honor and a privilege to be able to do this job. So thank you.

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].