September Newsletter 2024
September 3, 2024
“We Only Swing at the Pitches We Like”
With the long days of summer beginning to wane, I am looking forward to an exciting and very interesting finale to the 2024 MLB season. By now, you must know that I am an avid baseball fan who watches as many major league games as possible (some at the stadium, but most on TV) with an emphasis on the National League Western Division. The race to the playoffs is very tight, with the Los Angeles Dodgers leading the way with the Arizona Diamondbacks and San Diego Padres not far behind. At this writing, the Dodgers have a five-game lead over the Friars and the Snakes, with San Diego leading Arizona by just one game in the Wild Card standings. It is setting up to be a nail-biter to the end of the season with the Diamondbacks hosting the Padres in Phoenix for the final series before the playoffs.
Just as exciting is the amazing show that Shohei Ohtani is putting on for the Dodgers. On August 23, Ohtani became the fastest player to join the elite group of 40-40 players with 40 homeruns and 40 stolen bases in a single season. He did it with a walk off grand slam and several swiped bags. With a full month of baseball to play, Ohtani is marching toward a 50-50 single season record as he now has hit the 44-46 mark, with 24 games remaining in the regular season. History will soon be made! In his last seven games, “Showtime” is batting .300 (a real feat in itself in the current era of flame-throwing pitchers with low earned run averages), with an OBP (on base percentage) of .353 and a SLG (slugging percentage) of .623. He definitely is a wizard with a bat in his hands as he only swings at the pitches he likes.
Not unlike who Ohtani is to baseball, Warren Buffett can claim the same success from his stock picking prowess as he was recently quoted as saying at the annual shareholder meeting of Berkshire Hathaway, “We only swing at the pitches we like.” The response was to a question about the large cash reserves at Berkshire (currently standing at roughly $200B). That is Billion with a B! Buffett’s success rate is legendary, as evidenced by his long-term S&P 500 beating returns.
Our broadly diversified portfolio has included Buffett’s results for many years now. We proudly own Berkshire through the closed end investment company SRH Total Return Fund (STEW) which holds both Berkshire as well as many of the individual companies in the Berkshire portfolio. Using my and Jeannie’s retirement portfolio as a proxy, STEW returned 242 percent (before management fees) for the eight-year period ended August 31, 2024; including a year-to-date return of almost eight percent. Nearly all managed client portfolios include a meaningful allocation of STEW. Laura has included the STEW eight-year blue line graph for reference.
Of the five Large-Cap equity funds in the total managed portfolio, STEW stands out above the other four (all of which are “winners” in their own right). Buffett avoids the “high-flyers” which often turn out to be a flash in the pan and sticks with Large-Cap US companies that have earned high ratings for their fundamentals and superior management. He is also known for “buying low” at great discounts to inherent value and watching his picks mature over time. When he adds a company in total to his herd, he is known for holding the company “forever” (or at least it seems that way). Over the last eight-year period, STEW’s total return (growth and dividends) has been a 75 percent/25 percent split. He banks the dividends and other cash flows within his war chest while he waits and watches for the next big opportunity to present itself. With $200B just waiting to be deployed, he is patiently waiting for the “over-bought” equities market to “correct” before he jumps in with both feet. And when he does, it will surely be because he is ready to “swing at a pitch he likes.”
Looking at the eight-year graph for the Wheeldon entire Domestic portfolio, the total return (before management fees) approaches 156 percent as depicted in the green line graphic below. 
As noted above, the equity markets have grown to unimaginable heights in recent months as investors are betting on Jay Powell to lower interest rates in the near term to save us from the mistakes of the past. Also, technology company investors have become giddy over the whole AI phenom; more than likely getting out over their skis. In fact, the Magnificent Seven tech stocks have been trounced in recent days as more investors come to their senses and deal with news of a slowing economy. Looking back a month or so when we reduced our exposure to Large Cap holdings, heavily weighted to technology companies, we are now pleased with our tactical decisions; often resulting in adding to either the CD/Bond Ladder or Alternative Income positions. Adding to the frenzy, both geo-political and at home political saber-rattling will surely provide for more market volatility as the economy and the markets search for an equilibrium. Keeping with our long-term strategies of “buying low” and advising retirement account clients to once again consider Roth Conversions to further add to their long-term account growth (many times totally tax-free), the whole staff is working very hard to keep up with the process.
The Roth Conversion opportunity has also risen to a new level based on the tax changes (both known and expected) coming in 2025 when current tax provisions expire, if not extended. In a nutshell, income tax rates are projected to be higher on all types of income, including investment returns in the form of interest, dividends and capital gains. The current tax rates, coupled with the opportunity to convert at lower values, makes talking to your tax professional a “must do”. We are currently working with many clients and their tax advisors to facilitate the process. Please do not wait until the last minute to examine your own tax situation.
The Roth Conversion opportunity is even more important when considering the future RMD (Required Mandatory Distribution) impacts from higher tax rates on large RMDs down the road. We just helped a client and her CPA with the analysis where the current value of the IRA is $1M; with ten years to grow before RMDs kick in. With an annual growth rate of ten percent (clearly achievable when considering that Roth accounts own mostly high growth potential equities) or all STEW at much higher growth rates; future tax rates if not converted shoot up the steps of our tax tables, consuming much of the ten-year growth. Not a pretty picture!
Lastly, and not to be at all political, the upcoming election cycle is setting up to be a fight over basic economic principles which will certainly result in fiscal and monetary policies that will impact all taxpayers and their investments. With the Covid-driven inflation policies causing prices to be driven up for everything by two-fold (or more), it has become a challenge to navigate the shark filled investment waters to once again meet client goals for retirement and life down the road. Portfolio growth in recent months has certainly helped but may not continue (as noted above). We have been able to increase monthly distributions when requested, although large emergencies could create a disaster. For example, the keepers of all things statistical, recently announced that a couple, both at age 65, will need $315,000 to cover unreimbursed health care costs over their retirement. And health care costs have been the largest contributor to the inflation monster. And, of course, 75 is now the new 65 with many of my generation putting off their retirement days on the stream or golf course to help build up their own personal inflation war chests. For our part, we have raised the risk profiles of most clients to their pre-Covid risk profiles and even increased the risk component further for many clients due to need.
As I often tell Jeannie, “We do live in interesting times!”
As summer ends, try taking in a ball game and rooting for your favorite team. And no matter which team I root for, I am anxiously rooting for Ohtani to set new records with his bat and speedy legs! I believe his 2024 records will stand for generations to come. Babe Ruth, get out of the way!
Sincerely,
Intelligent Investment Management, LLP
