Recession on Rails: Falling Carloads and Container Shipments Is Sign of Tough Times Ahead

http://trn.trains.com/news/news-wire/2016/01/19-carloads

Is It Time To Sell Out Like Buffett In 1969?

In 1969, Warren Buffett called it quits on the market. He spent most of the year liquidating his portfolio. Buffett's decision to quit the Buffett Partnerships and liquidate assets was VERY shrewd at the time. After multiple years of big gains in the Dow Jones Industrial Average, 1969 was a terrible year for the Dow. The Dow had been around 1,000 in May 1969, it dipped below 900 in June. The Dow ended the year at 800. Buffett somehow made a 6.8% gain in 1969, while the Dow fell -11.6%. The Dow would fall substantially for the next four years. But before he quit, Buffett was doing remarkable returns -- a compound annual rate of return of 30% from 1957 to 1969 compared with the Dow's performance of 8.6%.

Buffett's investors asked him where they should put their money. He recommended Bill Ruane of the Sequoia Fund. His partnership liquidated all but two of its investments, Berkshire Hathaway and Diversified Retailing. Each partner could take his proportional interests in Berkshire and Diversified or opt to take cash out. Buffett took stock and urged his partners to think of Berkshire as a business, rather than just a "stock," according to "Buffett: The Making of an American Capitalist" by Roger Lowenstein.

In early 1969, Richard Nixon succeeded Lyndon Johnson as president of the United States. Woodstock was in August. The first man stepped on the Moon. The Beatles released Abby Road. David Bowie released his second album. President Nixon tried to gather support for the Vietnam War and the U.S. began a lottery for the draft.

Is 2016 a similar story? The S&P 500 registered a -0.72% decline in 2015 and was down -8% in the first two weeks of trading this year. It appears the bull market that started in 2009 is over. President Barack Obama is in the last year of his second term in office. We will have a new president elected in November.

Buffett was 39 years old in 1969. Today he is 85. Buffett doesn't appear to be selling out now. Indeed, he has spent the last 45 years building up Berkshire Hathaway, so the company would be around another 100 years. But let's examine a few lessons from Buffett's seminal move in 1969.

Buffett took advantage of the Go-Go years by going deep on certain stocks, sometimes representing one-third of the portfolio. One of the gems he owned back then was a company called Sanborn Map Co., its once-lucrative map business was declining but the company had an investment portfolio worth $65 per share but the stock, reflecting the poor operating business, was trading at $45 per share. With high concentration of this stock in the portfolio, Buffett made a killing on this deal, showing that even one good deal per year can be immensely rewarding. These jewels are hard to find. Buffett's track record is not as good today as it was in the 1950s and '60s. Berkshire recently bought more shares of Phillips 66 (PSX) which is trading at a 9.25 P/E and 1.73 times book value. PSX's operating margins are modest at 4.8% but it's enough to make money.

Another lesson from 1969, Buffett said he would put much of his own money in municipal bonds, but said he was not buying issues from large cities because he didn't know how to analyze a New York City or a Chicago.

One of my best investment decisions was in February 2013, when I purchased bonds issued by Union Pacific (UNP) and BNSF Railway (BRK.B) (BRK.A) when the 10-year Treasury rate was 2.70%. The 10-year Treasury fell to 2.02%. Now bonds are more expensive. I want yield and preservation of capital, bonds represent 20% of my portfolio in my brokerage account. It should be closer to 50%. Bonds certainly carry risk too, but if I hold my bonds to term, I can't lose my principal.

I believe we are headed for a recession. The railroads' declining volumes have been telling us the industrial sector has been in a recession since spring 2015. Industrial production declined another 0.4 percent in December 2016, primarily as a result of cutbacks for utilities and mining. The decrease for total industrial production in November was larger than previously reported, but upward revisions to earlier months left the level of the index in November only slightly below its initial estimate. For the fourth quarter as a whole, industrial production fell at an annual rate of -3.4%.

Final thoughts

Buffett did not get out of the market completely in 1969. But he did make a seminal decision to focus on running Berkshire Hathaway. I have been through two major stock market crashes over my 22 years of investing. The first was 2000-01. The second was 2008-09. I was excited about the 2008-09, because I was very well prepared for it. I made a lot of money buying Union Pacific at a split-adjusted $22 per share and selling most of my shares at $106 and $103. I made a lot of money off Church & Dwight (CHD). I've taken some profits in CHD but would like to buy some back. Berkshire Hathaway is still a good bet. The stock is trading near 1.2 times book value, a price at which Buffett might consider buying back some shares. Bottom line, I'm not getting out of the market, but I am holding 10% of cash in my main brokerage account. I think the stock market has further to fall. I will be waiting and watching and looking for deals. But honestly, I really don't want to go through another bear market. What if the market continues to decline over the next four years? In that case moving all assets to cash would be a better bet.