Buffett Is Right: It's a 'Long-Term Investors Only' Market

A few months ago, Wendy's ran out of hamburgers...

The world is running out of small gold coins and bars...

And iconic investor Warren Buffett has sold billions of dollars of airline stocks.

Today, the economy is getting back on track. But there's plenty of uncertainty ahead. And Buffett's story is the perfect example of the toll it could take on your investments.

COVID-19 is perhaps the most economically devastating event since World War II. Lives will be lost. Individuals will face tremendous financial hardships. Businesses will fold. Industries will crumble. And retail and other commercial real estate will fall in value.

Yet stocks are up more than 50% from their March lows. And as I'll explain, caution does not necessarily mean that you have to stay out of the markets today...

Although the federal government named U.S. meat-processing facilities "essential businesses" during the COVID-19 pandemic, many chose to close up shop or reduce operations to protect their employees. Only recently have they begun to reopen.

Workers at these factories labor in tight quarters, making social distancing impossible. At least 16,000 industry workers had contracted COVID-19 by the end of May. The resulting supply shortage caused big problems for restaurants and consumers who rely on fresh meats, including fast-food places like Wendy's.

It's the same story with metals refiners. Many metal refineries have shut down or halted production of small coins and bars because making those products requires many workers in a relatively confined space.

The meat-processing and metals-refining industries will get back on track quickly once the COVID-19 pandemic response ends. But as for the airline industry, Buffett suspects it may take two or three years before people feel safe traveling on flying petri dishes as much as they used to.

Buffett spoke at the annual Berkshire Hathaway shareholder meeting in Omaha, Nebraska in May. Starting in 2016, he paid $7 billion to $8 billion to buy roughly 10% of four airline companies (United, American, Delta, and Southwest). Berkshire's share of their earnings was roughly $1 billion, which he thought was likely to rise over the long term.

But he said, "That was my mistake," showing a slide that implied most of the $6.5 billion of equities Berkshire sold in April were airline stocks.

The business is notoriously difficult, which Buffett acknowledged in May. But it makes you wonder...

If Wendy's can run out of beef... if coin dealers can run out of gold and silver coins... if air travel can change in such a major way for at least a couple more years... Is any business safe from the pandemic response?

The only credible answer is: "Probably, but I don't know." Buffett must have said "I don't know" a few dozen times at the May shareholder meeting. Of the U.S. economy, he said...

We do not know exactly what happens when you voluntarily shut down a substantial portion of your society. In 2008 and 2009, our economic train went off the tracks...  This time, we just pulled the train off and put it on a [railroad] siding.

Buffett expects owning great businesses to work out in the long term, but he's not buying here. Berkshire invested just $426 million in equities in April – a tiny amount of money for the company.

He's right to be cautious. We could see another 20% or 30% drop in the market before this is all over. But his caution is no reason for long-term investors like us to avoid owning the right stocks today.

He noted many times at the meeting that equities are still great long-term investments. That's exactly what I told my Extreme Value readers in April when I encouraged long-term investors to buy great businesses...

Whether the markets make sustained lower lows or sustained higher highs from here doesn't matter to me. We're bound to see some continued volatility... sharp drops, steep rallies... and an eventual bottom...

All I care about is that after years of sky-high valuations, the market has finally presented us with several bargains.

I'm happy to take advantage of those bargains now because the decision to invest in a stock is more than just following price charts and worrying about near-term economic developments. When you buy a stock, you own part of a real business with real assets, liabilities, customers, employees, and management teams.

If you do your due diligence and still believe this pandemic won't matter to a company over the long run, then now is a good time to buy.

Good investing,

Dan Ferris

Editor's note: While Dan once had just $268 to his name, he now enjoys mansion living, first-class vacations, and more... thanks to one investing secret. And right now, it's pointing to a company that the COVID-19 crisis can't stop. He believes this single stock could ultimately return up to 16.5 times your money. To learn more, check out his brand-new presentation here.

Further Reading

"You've probably noticed that investors are talking more about the stock market this year," Steve writes. With the recent recovery in stocks, lots of people are buying in. You might feel like you've missed out. But the truth is very different... Get the full story here: Stocks Have More Upside Than You Can Imagine.

"Investing is a simple game," Porter Stansberry says. "The goal is to get the most in return for having given the least in exchange." By understanding these three key elements of great businesses, anybody can become a world-class investor... Read more here: How to Buy the Most Capital-Efficient Stocks, Safely.

Market Notes
SELLING 'BASIC' CARE PRODUCTS IS A RECIPE FOR A NEW ALL-TIME HIGH

Today’s chart looks at a giant that’s “selling the basics”…

Regular readers know that while it’s not exciting or sexy, selling basic products that people need on a day-to-day basis is a winning strategy. Customers always need items like shampoo and laundry detergent – they use them up, then immediately buy more. And today’s company is a leader in this sector…

Procter & Gamble (PG) is a $340 billion consumer-goods giant. It sells its products to 5 billion customers in 180 countries around the world. You probably have its brands in your home right now… like Pampers diapers, Tide detergent, or Bounty paper towels. And its net sales grew 4% in the most recent quarter, due to higher demand for household cleaning supplies and personal health items during the COVID-19 crisis.

PG shares are up roughly 110% including dividends over the past five years. They recently hit a new all-time high. And as folks focus on home and personal care in the midst of the pandemic, that trend should continue…