John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it.
Markets have a psychological effect on spending habits, even for billionaires, it seems. When markets are up, confidence rises and people are apt to spend a little more. They feel they can splurge on that trip or go out to an expensive restaurant. Conversely, when markets are down, confidence wanes and people tend to rein in spending.
In a new documentary from HBO titled Becoming Warren Buffett, we get insights into the many habits and traits of potentially the greatest long-term investor of all time.
Every day the Oracle of Omaha heads off to work in his car with a set amount of money to buy his breakfast. He decides how much to take based on how the market is doing that day, but it is either $2.61, $2.95 or $3.17.
Between his home and his office, he stops at a McDonald's drive-through and places his order based on that day's ration. The most expensive breakfast – when he's feeling his most prosperous – would be a bacon, egg and cheese biscuit, paired with a Coke he opens when he gets to his office. The least extravagant would be two sausage patties eaten together on an English muffin. In the middle is a sausage McMuffin with egg and cheese.
Mr. Buffett might be doing something quite similar as he continuously scours for bargains that fit his investing criteria. And in many ways, it is the same thinking behind the strategy a retiree would use to withdraw savings for living expenses.
The general rule for retirees is a 4-per-cent annual withdrawal rate, but in periods during which the markets are flying, there is a little wiggle room to go over that and not risk outliving your savings. During periods in which the market is in decline, however, 4 per cent might be too much, especially if it means selling stocks at a discount or a loss. Having a disciplined, and somewhat flexible, spending strategy is one insight investors can glean from Mr. Buffett's daily breakfast routine, particularly during corrections and bear markets.
His choice of breakfast is his daily barometer of the stock market. Periods of confidence alternate with periods of restraint. It's important not to go overboard, however. When markets are down, there's an opportunity to buy undervalued stocks, and when markets are soaring, there's a danger of overpaying.
Mr. Buffett is against trying to time the market, emphasizing that people should pick stocks of good companies and be willing to hold them over a long period – years not quarters or months. And he is a proponent of getting into a stock in regular increments over time, in a way that would force investment in good markets and in bad. The idea is to buy more shares when prices are low and fewer when they are high but to always be investing.
Some of Mr. Buffett's recent action and inaction helps paint the picture about how he views long-term investing. As of the end of September, 2016, Berkshire Hathaway Inc. had nearly $85-billion (U.S.) in cash on hand – the largest amount ever for Berkshire. Mr. Buffett views cash as the ultimate call option, where he can buy any assets at any time.
But Mr. Buffett also knows that cash is a non-producing asset. Last month, in an interview with Charlie Rose, he revealed that Berkshire bought somewhere in the range of $12-billion of stock over the past few months. While we won't know what he bought until at least Feb. 14, which is the deadline for his quarterly regulatory filing for the last three months of the past year, we do know that Mr. Buffett has been expanding his investment opportunity set with stakes in airlines, a business model he has been critical of in the past, and even stakes in technology names such as Apple and IBM, which is now Berkshire's fourth-largest holding.
We know he's a long-term fan of bank stocks such as Wells Fargo and U.S. Bancorp and food and beverage brands such as Kraft Heinz, Coca-Cola and Restaurant Brands International, the holding company for Burger King and Tim Hortons. This month's disclosure by Berkshire of its holdings could see some additions in those sectors, or it might say confidential treatment has been requested so he doesn't have to play his hand quite yet.
While most of the media will key in on what Berkshire is buying once the names are released, there is a larger lesson here for investors. Control your discretionary spending when stocks are down and use the opportunities the market gives you over time to buy quality stocks. Investors need to focus on investing in the long run, not short-term swings. As Mr. Buffett once said "Someone's sitting in the shade today because someone planted a tree a long time ago."