We hear numerous market strategists talk about stocks which are going up because “there is no alternative” to owning them. In the Wall Street vernacular, this goes by the phrase TINA.

Since the inflation cocktail is closely related to value stock outperformance, we are very excited about our future value investing possibilities.

In the time since COVID-19 hit the economy and stock market, there has been three phases. First, the question was ‘when’ will the economy return to pre-COVID normal? Next came ‘sooner or later’? Recently, we have moved to ‘will the economy ever come back’? For long-duration investors like us, what are the investment implications in where we are now in a U.S. stock market with many securities priced for ‘never’?

When you are in a financial euphoria episode, like the one we are in currently, it is hard to visualize the impact it has when it breaks. Historically, it is the leading cause of stock market failure. We thought it would be helpful to discuss the secondary impact of the euphoria on common stocks.

The nice thing about being the boy who cried wolf is that you look stupid before you are proven correct and you look smart when you are right, but nobody believes you until it is too late.

With markets extremely difficult and volatile as we work through COVID-19, we thought it would be good to review important parts of our investment discipline. One way to do that is to consider stocks we found via our eight criteria for stock selection and did not keep long enough to get to their ultimate rewards.

On June 4, 2020, eBay (EBAY) released a business update to make investors aware that the quarantine circumstances have caused their business to perform “significantly better than expectations,” compared to their earnings report on April 29, 2020.

A series of charts and historical evidence exists in late May of 2020 which shows that the S&P 500 Index and the vast majority of institutional investors of all shapes and forms have concentrated their investments in the most popular stocks in the stock market.

Great investment opportunities are lonely. History shows us the crowd behaviors to avoid and the investment market circumstances to capitalize on. We believe we are at one of the great junctures, where the crowd thinks they unequivocally know the future.

Warren Buffett has been arguably the best asset allocator and value stock picker of the last 60 years. We are normally thrilled to sit in his classroom. Quite frankly, we were baffled by the Berkshire Hathaway Annual Meeting held on Saturday in Omaha.

You have to love The Wall Street Journal writer, Jason Zweig. His extremely inciteful “Intelligent Investor” column could be called “Jason’s Wet Blanket,” because he seems to throw a wet blanket on most investment disciplines in U.S. stocks. This week’s wet blanket is designed to create even more desperation for value investors via his interview with Charlie Munger.

This smashing of economic hopes, right before one of our brightest demographic phases, could be a bonanza which only those of us who are willing to look foolish can acquire.

The year after I graduated from college, the movie Animal House debuted in 1981. With everything falling apart for the Delta fraternity, including grades and double-triple probation, all looked lost. At the point when others would give up, senior fraternity member, John Blutarsky, gave a spirited call to arms by reminding everyone that the U.S. didn’t give up when our Naval operations at Pearl Harbor were bombed on December 7, 1941.

This year feels so much like late in 1981, late in 1999 and late in 2008 to us. The first reaction by investors was to flush whatever they had left in economically sensitive stocks. Then, as if there hadn’t been enough torture for value investors today, Saudi Arabia decided to chop the knees out from under the oil industry in the U.S.

Those of you who have been with us recently know that we are calling the recent decline in value stocks a capitulation in a value investing depression. The coronavirus has sucked all the economic optimism out of a market which has hugged tightly to large growth companies providing reliable sales or earnings momentum.

To us, Warren Buffett is the greatest value investor of our time. He wrote the annual letter to his Berkshire Hathaway (BRK.B) shareholders on February 22, 2020. This letter happens to coincide with some of his worst relative performance in the last year to five years.

A truly interesting contradiction is developing in stock markets around the world. A number of major corporate executives are calling for businesses to be judged by something other than the net present value of their future earnings or other conventional business/investment metrics.

In the annual letter to Berkshire Hathaway shareholders in early 2000, Warren Buffett attempted to remind everyone why value investing works, despite the financial euphoria all around him at that time. We will revisit this valuable lesson and draw implications for reviving enthusiasm for value investing at a point eerily similar to early 2000.

Our definition of value is to buy meritorious companies at a significant discount to intrinsic value with a high margin of safety. Since doing this is more art than science, the margin of safety is important.

In a recent appearance on CNBC, we were asked about what we do with stocks we own which have run-up recently. They asked us how we plan to handle Disney (DIS), JPMorgan (JPM) and Target (TGT) after those stocks enjoyed strong price increases this year.

One way of thinking about the share price of a common stock is the price range as a teeter-totter. When the psychology of investors is very negative, enthusiasm for the company hits the ground. On the other end, when everyone is in love with a company’s shares, their end of the board can’t seem to get any higher. Where is the board end hitting the ground currently and who is stuck up in the air on a psychological high?

As Carl Icahn bailed out on Occidental Petroleum (OXY) common shares recently, selling spread as traders and algorithms begged on more selling.

In the revenue growth world of the last five years, this make-believe company would be a huge success story. They would tout a 100% growth in sales the second year and ask investors to ignore the doubling of the loss from $100,000 to $200,000 for the sake of growth.

In financial euphoria episodes, investors become immune to the risks of capital destruction by blacking out to their normal risk aversion. Usually these episodes come from extrapolating the recent past out many years into the future. What can we learn from other disciplines about blacking out? How did this happen with investors in the past and where are risks in the U.S. stock market blacked out today?

When baby-boomer adults were in their twenties, we sang along with Mark Knopfler and Dire Straits. Their song, “Money for Nothing” defined the era of music videos. We got cable in 1981 and will admit that we were glued to the TV watching music videos of the bands and performers we loved.

Over the last ten years we’ve seen the rise of the Battle Royal markets and the shift away from one-on-one investing. There are all sorts of different battle royal’s, but the ones I watched as a kid were the biggest events in pro wrestling...

It is human to want to win and we are pre-programmed as children to get what we want quickly. Then we become adults in need of good investment returns and we are forced to operate in longer time frames of five to ten years. Only mavericks want to do what is needed.

We believe money always goes where it gets treated the best. A recent article detailing the most attractive places in the U.S. for millennials to buy a house included the following cities, and that has implications for investing, not just nesting.

One of the all-time classic ballad songs is Nat King Cole’s “Unforgettable.” The song gives us a great picture of what has been going on in the common stock market with meritorious companies which have been thrown in the bargain bin.

If you examine the portfolio of the Daily Journal, run by Berkshire Hathaway (BRKB) Vice Chairman Charlie Munger, you will see three main stocks. In 2009, near the market bottom, Munger purchased shares of Wells Fargo (WFC), Bank of America (BAC) and U.S. Bancorp (USB).

The stock market has a history of torturing highly-valued knowledge. About every seven years a consensus forms around the fastest growing sector of the stock market, or the fastest growing country, or the fastest growing industry.

In today’s missive, we would like to discuss the tribulation arising out of political scrutiny and the sectors or companies suffering at the hands of political football.

Why is free cash flow so important in common stock selection? First, you must think like the owner of an entire business. As a sole owner, the cash flow leftover after all obligations are paid is all yours. The more of it you get, the richer you are!

A series of important factors in the U.S. stock market are in play which beg the question, “Are we at the beginning of a risk cycle or at an ending?” The answers will have a bearing on what to own and where to be positioned going forward. These thoughts won’t be exhaustive, but we hope to get you thinking on a few important subjects.

Many are wondering why the market for Initial Public Offerings (IPOs) has performed so poorly, even though the flood of hot new ones came to market recently. It took three years to choke demand for money-losing dot-com IPO companies back in 1997, even though Federal Reserve Chairman Alan Greenspan called the mania for tech stocks in late 1996 an “irrational exuberance.” What has killed the goose which traditionally laid the golden eggs on Wall Street?

Charlie Munger set the tone for the 2019 Berkshire Hathaway Annual Meeting. He said that people involved in creating cryptocurrencies, “honored the life and work of Judas Iscariot.” On many major subjects, questions were fired at Warren Buffett and Charlie Munger related to short comings which self-proclaimed expert observers see at Berkshire

We believe the U.S. stock market will come down to a clash between one very positive forward-looking set of facts and a very negative set over the next ten years.

The history of the stock market lays some reliable markers for long duration investors when it comes to these morals. First, in the long run, a basket of the cheapest of the stocks in the S&P 500 Index has outperformed the expensive ones by 3.6% per year...

We believe there is a severe lack of liquidity in the stock market and it shows itself both directions. Good news is overly capitalized to the upside and bad news is more heavily punished than in prior eras.

The singer, Prince, wrote about “partying like it’s 1999.” We can tell you that 1999 was no party unless you owned the most popular tech stocks and the hottest initial public offerings of the latest dot-com company.

We consider ourselves excellent spectators of competition and look forward to March Madness this month. We are reminded that these very competitive games can’t take place unless there are rules and referees to officiate. Our long-time readers are aware that we have warned of the danger surrounding the aggregation of power by the monopolistic tech behemoths.

We remember looking at demographic charts back in the 1990s which compared the population of the peak borrowing age group (28-40) with the peak savings age group (49-62). At that time, 10-year Treasury bonds were still yielding 7.5-8% and investors wondered where interest rates were going.

There is an old expression, “You can’t see the forest for the trees.” After reading through Warren Buffett’s 2018 Annual Letter to Berkshire Hathaway shareholders twice, we fielded questions from the media folks who reviewed the annual letter by focusing on very small trees mentioned by Buffett.

The most popular missives we write are associated with Warren Buffett’s annual letter to shareholders and the annual shareholder meeting in Omaha. This year we thought it would be fun to channel Mr. Buffett and attempt to write his letter for him.

A popular song and a recent article in The Wall Street Journal reminded us of Edmund Burke’s quote and how important history is to the long-term success of common stock ownership.

Financial euphoria episodes are a common occurrence in investment markets and the U.S. stock market. When a new one comes along, market participants accelerate their enthusiasm toward the end, which makes the shares of companies involved dead to us.

In the famous book, Strange Case of Dr. Jekyll and Mr. Hyde, Dr. Jekyll and Mr. Hyde were one human being with a split personality. Dr. Jekyll healed people and Mr. Hyde murdered them. This economic environment and the U.S. stock market have the same kind of split personality.

Amazon recently announced that they are combing through the list of things they warehouse and sell to determine which items “can’t realize a profit” (C.R.a.P.).1 We found it very interesting how they are determining which items to pare from their website list.

Jessie Livermore was one of the greatest investors of all time. In the book, Reminiscences of a Stock Operator, Livermore explained that the single activity that made him the most money was, “sitting on my hands.”

Our long-time readers are aware that we analyze the U.S. stock market through the prism of what we call “well-known facts.” A well-known fact is a body of economic information which is pretty much known to all market participants and has been acted on by almost everyone with available capital.