Warren Buffett on the power of ‘buy and hold’

Welcome to your March monthly market outlook from atomos 

American billionaire Warren Buffett is 93 years old and still chair of his company, Berkshire Hathaway. The businessman and philanthropist is one of the world’s most famous investors, known for ‘buy and hold’ long-term value investing. He once quipped that “our favourite holding period is forever.” In his latest annual letter, published on 24 February, he reminded his shareholders of the importance of patience when it comes to successful investing.

“I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that I have not had a majority of my net worth in equities, U.S.-based equities,” he wrote. “And so far, so good. The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I “pulled the trigger.” I was down about $5 by the time school was out. Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”

‘Sitting quietly’ can be hard to do in the face of falling markets, but in fact market corrections (defined as more than a 10% fall from a previous high) come around more often than investors believe.   

Temporary declines vs permanent returns

We know that stock markets provide positive returns about three in every four years. These periodic share price falls are the price of admission for profiting from the collective ingenuity of the hundreds of companies working for you while you sleep.

We also know that the stock market does not move in a straight line, but rather fluctuates around a generally upward trend. We call this ‘volatility’. Unfortunately, we cannot consistently predict when these fluctuations will occur or when they will reverse. But, if you’re in it for the long run, the odds are stacked in your favour.

Why a UK recession doesn’t have to spell disaster for your portfolio

It’s official – the UK slipped into recession at the end of last year as the cost of living crisis put the brakes on household spending.

Recession is defined as two consecutive quarters of negative economic growth. It’s a worry because it often leads to higher unemployment and financial stress for households, and can cause turbulence in stock markets.

It can also lead to lower inflation and cuts to interest rates. However, inflation remains fairly high in the UK. When high inflation meets slowing economic growth, the result can be ‘stagflation’, which is a tricky problem to solve. 

Although overall economic activity and spending has been weak in the UK since 2022, there are bright spots. For instance, the unemployment rate recently fell to 3.8%, showing the continued resilience of the UK jobs market.

The stock market and the economy are not the same thing, although they can affect each other. While words like ‘recession’ grab the headlines, macroeconomic factors are only part of investors’ analysis. They also think carefully about corporate fundamentals, which includes things like profitability, revenue, assets, liabilities and growth potential. As Buffett suggests, when a company has solid fundamentals, you can afford to invest with conviction. A rough ride for share prices during a recession should not unduly concern a long-term investor.  

Spring Budget around the corner

The Chancellor Jeremy Hunt will deliver his Spring Budget on 6 March and speculation is growing about what he may announce. The key question is how much wiggle room the Chancellor really has in this Budget for giveaways ahead of the next general election.

The UK posted the largest budget surplus on record in January of £16.7 billion. While the surplus wasn’t a surprise – tax receipts are higher in January due to tax self-assessments – the number was roughly double that of a year ago. Combined with lower-than-expected interest rates, this has increased the ‘fiscal headroom’ the Chancellor has available to bring in vote-winning tax cuts.

On 6 March, Hunt may announce cuts to income tax, National Insurance or inheritance tax. A 1p cut in the basic income tax rate would cost around £6bn and a 1% cut in the main rate of corporate tax would cost £3.5bn, based on government estimates, so this seems affordable. However, National Insurance contributions were reduced in the Autumn Statement, so this is perhaps less likely. A reduction in the marginal property stamp duty rate is plausible. Another possibility could be lowering or removing the 0.5% stamp duty rate on UK equities. The existence of this tax is an outlier by international standards and might be one reason why UK equities trade at a discount.  
 

Sector in focus: Global alternative energy

Last year we saw declines in stocks from renewable energy companies, electric vehicle charging stations, energy storage and heat pump manufacturers. The MSCI Global Alternative Energy Index, a stock index made up of companies from both developed and emerging markets which derive at least half of their revenues from alternative energy products and services, fell more than 30%. This was driven primarily by a decline in stock valuations (a method to work out the true value of a stock, for instance by looking at the share price compared to the company’s earnings per share).

Some of the factors contributing to these share price falls include rapidly rising interest rates, cost inflation, reduced government incentives, and regulatory changes. Looking forward, we expect the extent of government initiatives over a long time horizon to be a key driver for global alternative energy. In the short term, declining interest rates and easing inflation may boost the sub-sector following a challenging 2023.