Motley Fool Hidden Gems Investing - Au revoir, Warren….

Starting point is 00:00:00 Buffett quiet exits so we're going to be the band that plays him off this is Motley Fool Money welcome to Motley Fool Money I'm Tyler Crowe and today I'm joined by longtime fool contributors John Quast and Matt Frankel today we're gonna talk about Warren Buffett's farewell letter, I guess, for a lack of a better term. And as usual, it's the Thursday show, so we're going to do stocks on our radar. But first, we'd be remiss if we didn't acknowledge that this is officially the end of this current government shutdown. Yesterday, today, we kind of debated which one it was, but we'll just say it's today anyways. Before we really kind of get into a discussion, I actually want to ask both of you guys a quick

Starting point is 00:00:55 question. What was the return of the S&P 500 during the shutdown? Just give me a number. I would guess up less than 1%. Yeah, since John kind of took my answer, I'll say up 3%. Well, let's split it right down the middle, because it was 2.08%. Maybe one of you would consider the win with the Dow Jones was actually up 3.91% over the 42-day span. Now, I bring this up. I don't want to sound tone deaf to everyone that had to go through some rough times over the past five weeks, but the market didn't really seem to care that much. 2% is technically, if we look at long-term historical averages, that's technically better than the historical average. Am I wrong

Starting point is 00:01:42 that the market just didn't seem to care? Yeah, Tyler, you bring up a great point. There were essential workers that had to continue to go into work, and they did so without a paycheck. They do get back pay, but they still had bills in the meantime. So it did cause hardship for people, and we don't want to make light of that. But to your point about the market being up in spite of the headlines, you know what? I'm glad it worked out that way, because you would have thought from all of the talk and all the chatter leading up to the shutdown, during the shutdown, you would have thought that it would have made a big difference in the stock market. But looking at the results, it frankly didn't. Great investor Peter Lynch tells investors not

Starting point is 00:02:18 to look at the macro, but rather to focus on the individual businesses. And I think that we're seeing, once again, that there's a whole lot of noise out there, but very few of the headlines are actually of true significance for long-term investors. So, it's refreshing that something as big and as scary, supposedly, as the longest government shutdown in history actually had really little impact on the stock market. Yeah. I mean, it did have some impact, to be fair, when they announced that there was a deal in sight over the weekend. We definitely saw the market rally a little bit. That's what happened on Monday and Tuesday of this week. The Dow set a new record. And that was really on the backs of the announcement. But for me,

Starting point is 00:02:55 the most important thing isn't what the shutdown means to investors, what a five-week or six-week or whatever it was. It's what we are avoiding by the shutdown not lasting even longer. So, just to name a couple examples, real estate investment trusts that own government-leased properties have been collecting rent because the October and November payments were generally authorized already. If it had kept dragging on, there would have been some disruption there. Airlines are another one. There have been some flight cancellations. They never even really ramped up to that true 10% that they were talking about before the shutdown ended. It was really only a week or so that we saw flight cancellations. Another thing that the government reopening does

Starting point is 00:03:36 is it allows agencies to start releasing economic data again at the normal cadence for jobs, inflation, et cetera, which has mostly either been paused or delayed. That's why the social security cost of living adjustment was delayed. This is essential for allowing things like the Fed to act with the latest available information in mind for investors like us to make informed decisions about the economic factors that affect our companies and things like that. Again, getting back to it, this was kind of a five-week dead zone, I guess, if you will, for a lot of economic data and things like that, largely to make decisions and for us to have things to talk about. This is what someone who discusses investing topics with

Starting point is 00:04:18 you guys and with the world struggles with. The Motley Fool, among many other great investors over time, have always espoused buying and holding stocks for several years and letting the business's growth and value creation do the heavy lifting. In this type of investing, a 42-day period of government shutdown doesn't really change things, as glib as I make this whole event sound. And yet, it's something that most investors want to discuss. I mean, it was the head of the Wall Street Journal. It was the head of Bloomberg. Every new financial media outlet that I checked this morning, this was the headline. And it's what people want to read and want to talk about. How will it impact businesses like travel and leisure? Could government

Starting point is 00:05:07 contracts be at risk, et cetera, et cetera? In the world of investings, these are such minor bumps in a long and windy road. I want to pose this question to you guys. Because this is very much one of the signal versus noise problems that we as investors have to grapple with every day, how have you oriented your investing, we'll call it the signal detector, to filter out what in the moment seems like a pretty big deal. News versus noise is always a big struggle for investors. I don't always get it right. No investor does. Think of the pandemic era and how many things that seemed like they were here to stay now seem like ancient history, things like putting on masks and social distancing. A lot of people thought that was just the new normal that

Starting point is 00:05:52 was going to last forever. I tend to try to compartmentalize things into temporary and permanent headwinds for my investing decisions, or potentially permanent. There's really no world where the government shutdown would have drug on forever, for example. It was clearly a temporary headwind. As you mentioned, the market really dismissed it as such. More generally in my investing, I love investing based on temporary headwinds when they affect stocks. If a company is beaten down because of current weakness in the real estate market, or because of tariff uncertainties having a temporary impact on the business. That's some of my favorite times to invest. But permanent headwinds, say like regulatory changes, for example, can be a thesis changer.

Starting point is 00:06:35 Yeah, I didn't realize how similar my answer was to Matt's until right now. But when you're looking to filter out the noise, yeah, time is such an important filter to put in place. And so when you look at the shutdown, for example, we knew going in that in a worst-case scenario, it would be short-lived. It was the longest one in history, and it still lasted less than two months. When we're talking about investing over five years, two months is just the blink of an eye. That time filter shows us that the shutdown was a little bit more noise than news. You look at other things, for example. We can look at things on the other side of the equation. I think of something like the aging workforce. Baby boomers are hitting retirement age,

Starting point is 00:07:20 this huge generation. That's a trend that can play out for significant time. And so I think that does have more ramifications for investors. Or how about housing, for example? There's an undersupply of homes, and we've talked about it on this podcast. That can't be rectified very quickly, even if we tried, even if we built a lot of homes today. So that's another time filter that puts that more into the news or the signal category than the noise. Speaking of people hitting retirement age, we're going to talk about Warren Buffett's most recent letter coming up next. One of the lingering questions many Berkshire Hathaway investors have had since Warren Buffett announced he was stepping away from the CEO role was,

Starting point is 00:08:04 how will he be involved? Will this still be like brokering deals as executive chairman? Will he still be doing those marathon Q&A sessions at the annual meeting? I think there was a lot of wish-casting around Berkshire's future. Oh, he'll swoop in when he needs to, to get those big deals or something like that. But we got a little bit more sense of finality this week of Warren Buffett's tenure when he penned a Thanksgiving letter that more or less said he's laid out his future role. And in short, Greg Abel's going to handle all of it. now the one thing that buffett did commit to was an annual thanksgiving letter the one that he just

Starting point is 00:08:42 penned and for as long as he can do it i certainly have thoughts on how this clarifies the role buffett will play in the future but i would like to get your thoughts on it as well like was what warren buffett announced where it's basically he's saying i'm gonna handle basically walk away from more or less all the things you've known that me doing was kind of what you expected yeah i mean I thought he was going to walk away. He's 95. His involvement behind the scenes, I'm guessing, has been declining for some time. He can't do the marathon 12-hour days of being in meetings and things like that anymore. He doesn't do interviews as much as he used to, and there's a reason for that. I'm not shocked to see him turn everything over to Greg. I wouldn't be surprised

Starting point is 00:09:25 to see something else from Buffett toward the end of the year. I don't think this is a total farewell, maybe just a short CNBC interview or something to that effect. I wouldn't go so far as to say this letter is what I would have expected, but it's not a surprise for Buffett to help ease the leadership transition in the minds of investors, because he's been doing that for years. I'll certainly be reading these Thanksgiving letters as long as Buffett's around, but I don't expect them to be too heavy on investing thoughts or commentary or anything like that. This one really wasn't. That's where I'm at with it. Yeah, when it comes to the leadership transition between Warren Buffett to Greg Abel, Warren Buffett, everything I know about him, he does not strike me as a backseat driver. He's the kind of guy who's going to throw you the keys to the car and say, I prepared you for this moment and go drive down the road. And it seems like that's what he's doing with Greg Abel. So it's not that surprising to me.

Starting point is 00:10:16 I will say that what was surprising was that his Thanksgiving letter, if this is his final curtain call, if this is his farewell, it really felt anticlimactic. It was a great letter. I enjoyed reading it. But this is the greatest investor of all time, in my opinion. And I would have loved to see something just way more ceremonious and just way more celebratory for such a great career, a big to-do. He needs a parade somewhere. It felt anticlimactic to me. It was a great letter.

Starting point is 00:10:52 But then again, you know what? Buffett, he's a simple guy. He's a modest guy. It did feel like how he wants to go out. I think at this point, anybody who has spent more than, I don't know, 12 hours working in the financial investing media world that the three of us find ourselves in, And we've had at least one tidbit of Buffett advice that's really stuck with us. And I'll give mine, and I want you guys to give yours, and any parting thoughts on Thanksgiving letter. But mine was basically, it was at the 1999 annual meeting, where basically somebody asked, if you were to start over today, what would you do?

Starting point is 00:11:31 And it sounds a little glib, but he just basically said, start with the A's. It was this idea of sticking with the tradition that he has been as a worker, turning over as many stones as possible, really trying to find what he's called the great business at a good price sort of thing. And to do that takes a monumental amount of work. And it reverberated with me the most because I think the follow Buffett mantra has become just buy the things that he buys versus using the principles that he has espoused upon us about investing and using the tools rather than just being copycats. My favorite line from Warren Buffett came from his 1992 letter to shareholders where he wrote, we think the very term value investing is redundant. And in that section of the letter,

Starting point is 00:12:28 Buffett was talking about these mental categories that investors tend to have between growth stocks and value stocks, as if they're two completely opposing ideas. And for Buffett, he was explaining that, yeah, what a company is going to be worth in five years, the value of the company, it has a lot to do with the growth it's going to experience over the next five years. And so, you can't calculate future value without estimating its future growth. And for this reason, all investing for Warren Buffett is value investing, trying to pay an appropriate price based on what the business is going to be worth over your holding period, whether that's five years, 10 years, whatever that is. And so, yeah, I really love that quote. It's a great thing to think

Starting point is 00:13:13 about. He thinks the term value investing is redundant. For me, there's too many Buffett quotes that I love to discuss them all here. I literally wrote an article once that compiled 100 different Buffett quotes that I loved. But if there's one that really changed my investing mindset more than others, it's the quote that it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. In other words, cheap garbage is still garbage. In my early days of investing, if you can even call it investing, I made a mistake that a lot of young investors make. I would generally look for companies that were just down by 70%, 80%, 90%, and buy them in the mindset that they were going to come back.

Starting point is 00:13:52 But after actually learning about investing, I knew they were that way for a reason. Think things like mortgage companies in the years leading up to the financial crisis, when things started to collapse. Now, I focus on great businesses first, then consider valuation. And it has served me well for more than 15 years of what I would call serious investing. I feel the parallels of music taste and Warren Buffett quotes really tracks here because we have three middle-aged men discussing their favorite things and they all happen to have in the nineties. Just a parting thought on investor quotes here. After the break, we're going to do stocks on a radar. You know, guys, hopefully one day we too will be able to have

Starting point is 00:14:30 enough money like Michael Burry that we can just kind of dissolve our capital management program and just go to a family office like he is. But until that day, we're still going to be picking stocks and hopefully bringing people along the ride with us. So, we're going to do stocks on our radar. And I'm going to go first this week. And the company on my radar is Canadian Solar, ticker CSIQ. I mentioned First Solar a couple weeks ago, I think, at this point. And a lot of the things that I talked about with First Solar, I think, apply to Canadian Solar as well. The idea where this AI infrastructure build-out and the power demands that we are going to have to see for AI build-out is not going to wait for nuclear to arrive. It's going to go now.

Starting point is 00:15:15 We're seeing it happen now with natural gas being deployed, with solar being deployed, because these are the fastest-to-deploy electrons we can put into a system. I think for solar, it's going to be a major beneficiary of it. i think canadian solar is going to be a beneficiary because it's one of the very few companies out there in the utility scale space that is going to have the scale to actually build up and sell into this sort of network uh the reason i'm highlighting canadian solar this month rather uh or this time rather than uh with first solar is i think it's a little bit more beaten down going back to matt's thing of like buying stuff that's way down and hopefully coming back maybe I'm going wrong on that regard. But I see a business that is going to catch a long-term

Starting point is 00:16:00 trend with AI infrastructure build-out in solar. I don't think a lot of people are thinking that way, and that's why I've been looking into this one a lot more. All right. Well, one on my watch list, speaking of stocks that had been beaten down, is a company called Appian, ticker symbol APPN. They provide an automation platform for enterprise clients. The stock was essentially left for dead by Wall Street a few years ago, after years of sluggish growth, being late to the AI party. They never really had a fantastic growth rate, even back in the 2021 era when they should have. But its recent results really show major signs of life. The company had one of its best days ever after its third

Starting point is 00:16:35 quarter earnings, showed cloud subscription revenue up 21%. Strong operating income, they're net profitable, they lost money a year ago. Strong guidance. I've owned this one for a while, and it was painful for a little while. But the business really appears to have reached an inflection point, finally. I'll close this out with Decker's Brands, ticker symbol D-E-C-K. I'm sticking with the theme of stocks that are beaten down because this one's down more than 60% from its all-time high. I'm a simple guy, so I like simple businesses that I can understand. This is a shoe company, jogging shoes and boots. I can get my mind around that. Typically speaking, shoe stocks have cheap valuations. Decker's recently had a somewhat

Starting point is 00:17:17 premium valuation. I think it's finally dropped down to a valuation that's more becoming of a shoe business. That said, Deckers is a quality shoe business. Both sales for its Hoka brand and its UGG brand are still growing. Profits are growing faster than sales. It has good profit margins for a shoe business. Also, it has a pristine balance sheet with $1.4 billion in cash and no debt. That's a good thing. If we do have struggles in the economy, it's well set up. There are expansion opportunities with this business. It's growing in international markets, even though growth could be somewhat modest, but there is growth. I think the valuation is attractive at 12 times its earnings. I think that for investors who buy today, they can enjoy some

Starting point is 00:18:01 long-term upside from this starting point. If you're going to own a shoe stock, you want to own a quality one, and I think Decker's is that. All right. We have Decker's, Appian, and Canadian Solar to wrap out this week. As always, people on the program may have interests in the stock they talk about, and The Motley Fool may have formal recommendations for our guests, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to producer Dan Boyd and the rest of The Motley

Starting point is 00:18:36 Fool team. For Matt, John, and myself, thanks for listening, and we'll chat again soon. Thank you.

Motley Fool Hidden Gems Investing - Au revoir, Warren….

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