It’s easier to be a pessimist today than it is to be an optimist.
The negative headlines are unrelenting. Here is a sample of the US stock market …
Dow sinks 900 points, as S&P 500, NASDAQ post worst month since March 2020
Tech rout drags NASDAQ to worst month since 2008
Stocks in a tailspin, dollar soars as hard landing fears grow
The S&P is having its worst start to a year since 1939
… to everywhere else.
China CPI exceeds forecasts as COVID lockdowns roil supplies
From soaring food prices to social unrest, the fallout from the Russia-Ukraine war could be immense
Stock market ‘carnage’ will continue as the Fed hikes while China slows — and there’s nowhere to hide
Asia stocks hit 2-year low on rate hike, inflation and economy worries
There is no shortage of worries ranging from inflation, China’s COVID-19 lockdowns, the ongoing Russia-Ukraine war, and interest rate hikes — a list that is growing longer by the day.
Yet, amid these calamities, a certain Warren Buffett has been buying stocks.
Calling the bottom?
To be sure, Buffett is not calling the bottom here.
The Oracle of Omaha is not an economist — he is an investor.
History has shown that Buffett doesn’t even try to time his entry into stock market — a point he made clear in an October 2008 op-ed:
“Let me be clear on one point: I can’t predict the short-term movements of the stock market.
I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now.”
At the time, the world was undergoing one of the worst financial crises ever.
Like any investor worth their salt, Buffett started buying stocks in October 2008.
Yet, as one of the best investors of our generation, he missed the bottom by a mile.
From the day he penned the op-ed, the NASDAQ went on to plunge by another 26% before bottoming out more than four months later.
Not that it mattered.
Between October 2008 and today, the NASDAQ has risen by over 560%, a satisfying return despite missing the bottom.
Buffett’s secret to understanding market downturns
While Buffett doesn’t time the market, he did understand a simple fact, which is explained in his op-ed:
“What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.
So, if you wait for the robins, spring will be over.”
Indeed, the stock market bottomed long before the good news appeared.
The US economy officially exited the recession in September 2009, but the stock market had already bottomed six months before and was on its way up.
All of the above brings us back to TODAY.
As the Oracle of Omaha has done countless times before, he is not waiting around for the good news to turn up.
These are not empty words — it’s backed by action.
In 2022’s first quarter, Buffett has poured US$51 billion, or over a third of his cash position, into stocks.
Again, history has informed us that this is not a call for the market’s bottom.
Indeed, the stock market continued to fall in April and May, to date.
But knowing what you know today, do you think Buffett is worried?
We highly doubt so.
The Audacity of Optimism
When the news is uniformly bad, the good news rarely sees the light of day.
That’s why we are obsessed with digging into businesses to find the positive news buried amid negative headlines.
Growth rates may have come down from the pandemic-highs, but there is little to be unhappy about with the trends that we are seeing.
Take cloud computing …
Amazon’s (NASDAQ: AMZN) AWS revenue rose by over 36% year on year in its first quarter.
Not to be undone, Alphabet (NASDAQ: GOOGL) saw its Google Cloud revenue soar by almost 44% year on year.
To top it off, Microsoft’s (NASDAQ: MSFT) Azure delivered a 46% year on year increase in revenue.
Mind you, these are not small, insignificant businesses.
Amazon’s AWS has an annualised revenue of almost US$74 billion while Microsoft’s entire cloud business (including Azure) is worth north of US$93 billion annualised.
Try finding another business at that scale with these growth rates — you’ll be hard pressed to find any.
Then, there’s payments and the broader fintech space …
Take, fintech firm Block (NYSE: SQ) saw gross profit rising 34% year on year as more customers flocked to its cash app and buy now, pay later services.
Or Mercado Libre’s (NASDAQ: MELI) fintech services which experienced a 72% year on year increase in total payment volume.
We have much more to share.
Don’t miss our FREE webinar on 17 May 2022, where I will be joined by two of my favourite investors, Chong Ser Jing and Eugene Ng.
Get Smart: Head up, one step at the time
To close, I would like share one of my favourite paragraphs from Peter Lynch’s “Beating the Street” published in 1992.
“You can be the world’s greatest expert on balance sheets or P/E ratios, but without faith, you’ll tend to believe the negative headlines.
What sort of faith am I talking about?
Faith that America will survive, that people will continue to get up in the morning and put their pants on one leg at a time and that the corporations that make the pants will turn a profit for the shareholders.”
When good news is in short supply, we have to make an effort to look for it.
From our experience, when everyone is focused on the downside, the potential upside is often forgotten and buried.
At The Smart All Stars Portfolio, we have been focused on finding growth, as we always have.
Stocks are down but our faith remains strong as we believe that the stock market will eventually turn.
When it does, to use another Lynch quote, we want caught with our pants up — being invested in the stock market.
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Disclosure: Chin Hui Leong owns shares in Amazon, Microsoft, Mercado Libre, and Alphabet.