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In late February, geopolitical tensions were at the boiling point as Russian President Vladimir Putin dispatched his army to the Ukrainian border for “military exercises” and put his fighter jets along Russia’s western borders on high alert.
After publicly denying plans to invade Ukraine, Putin ordered the invasion days later, characterizing it as a short-term, peacekeeping mission “until the political-social situation in the country is normalized.” He also vociferously denied any desire or plan to return to “Mother Russia” any territory lost in the 1991 breakup of the Soviet Union.
This sounds eerily familiar to what happened a few short weeks ago, but describes the first Russian invasion of Ukraine, which coincidentally occurred almost exactly eight years ago. The 2014 invasion resulted in Russia’s “annexing” Crimea, seizing it by force from Ukraine. Western leaders protested loudly, but Putin largely “got away with it,” which might be why we’re facing a similar crisis today (and why the world’s response is significantly stronger this time).
Then, as now, investor fears ran rampant, and markets were roiled. Berkshire Hathaway CEO Warren Buffett told CNBC in 2014 that Russia’s invasion of Ukraine not only wouldn’t cause him to sell stocks, but “if stocks are cheaper, I’ll be more likely to be buying them,” even if the conflict escalated into a new Cold War or World War III.
Stocks represent business ownership sliced into small pieces. The owner of the business is entitled to the future cash flows generated by the business. The intrinsic value of the business is simply the cumulative amount of those future cash flows, discounted back to today (i.e., the “present value” of the future cash flows).
It’s important to note that, while stock prices can be extraordinarily volatile (like recently), the intrinsic values of the underlying businesses are much less so.
“If you’re buying a business, and that’s what stocks are … you’re gonna own it for 10 or 20 years,“ Buffett said in an interview on MSNBC following the release of his annual letter to Berkshire Hathaway shareholders in late February 2020 (just as the pandemic was causing the economy to shut down). “The real question is: ‘Has the 10-year or 20-year outlook for American business changed in the last 24 hours or 48 hours?’”
Nobody knows how long and far Russia’s invasion of Ukraine will go or how it will end. Just like the pandemic, the uncertainty is scary. In a global economy, near-term cash flows will be hurt, but cash flows going out 10 or 20 years are unlikely to be so. In other words, we’re confident this will prove to be a temporary and not permanent impairment of intrinsic value and a better buying opportunity.
The best way to combat fear is with facts and truth. That can help you have a greater perspective on things and encourage wise decisions. Here are a few facts:
◗ The market will remain volatile and might go down more.
◗ Energy prices will likely soar even further on supply constraints.
◗ As a result, inflation might get worse before it gets better.
◗ War is ugly, and this might last longer than we are expecting/hoping.
Now that you have the facts, do you really need to tune into the news to tell you this stuff over and over? This is a good time to practice “strategic ignorance.” Not all information is beneficial.
Perhaps the greatest question you can ask yourself right now is: Will this matter in five years?
In five years (and probably sooner), this crisis will have passed. Do you want to look back and see yourself selling great companies at low prices just because of the uncertainty and fear today? Or do we want to learn from the 2008/2009 financial crisis and 2020 COVID crash and seek opportunity to profit from others’ panic? Russia’s invasion of Ukraine might not matter to your portfolio in five years, but the decisions you make this year will absolutely matter.
Mark Twain said, “History doesn’t repeat itself, but it rhymes.” From the first Russian invasion of Ukraine to the second (the eight years from Feb. 28, 2014, to Feb. 28, 2022), the S&P 500 had a total return of 174.2% (13.4% average annual return).
Buffett reiterated his faith in America’s long-term prospects during Berkshire’s 2020 meeting. “I was convinced of this in World War II. I was convinced of it during the Cuban Missile Crisis, 9/11, the financial crisis—that nothing can basically stop America,” he said, adding, “We faced tougher problems, and the American miracle, the American magic, has always prevailed, and it will do so again. Never bet against America.”•
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Kim is Kirr Marbach & Co.’s chief operating officer and chief compliance officer. He can be reached at 812-376-9444 or mickey@kirrmar.com.
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Run away from this opinion – it smells like Klaus Schwab’s [expletive deleted]
Anyone who wants to tell you about “intrinsic value” measured in dollars means everything is worth 0