PRIMECAP versus Buffett Hello, this is Jeff DeMaso with the FFSA Vanguard Hotline for Thursday, April 29th. There are no changes recommended for any of our Model Portfolios. The U.S. economy is in recovery mode. The government's first estimate indicates the economy grew at a 6.4% annualized pace in the first quarter. The personal consumption component of GDP, the biggest part of the economy, grew at a 10.7% annualized rate. And remember that this activity was during the early stages of the vaccine rollout. I'm expecting that there is a lot of pent-up consumer demand being released right now as more and more people are vaccinated, which means we should see even greater GDP growth in the current quarter and the months to come. We won't just be "recovering" for much longer—soon the U.S. economy will be back in expansion mode. After last night's address to Congress, President Biden's far-reaching plans are making headlines, but keep in mind that what the president wants and what he gets are often two very different things. This is just the first gambit in the negotiation. I expect there will be a lot of politicking around the bills, and the end result is uncertain. The same goes for how we'll pay for all the proposed spending. Yes, it seems likely that higher tax rates are coming for the highest earners, but we don't know exactly what the new policy will be. So, by all means, start thinking about how you might need to tweak your financial plan, but don't take any concrete action in response to proposed tax changes. It's better to wait to see how this all plays out. On another note, here's a lesson in investing. A year ago, the first weekend in May 2020, Warren Buffett made headlines by announcing he had sold his $4 billion stake in airline stocks—namely Southwest, United, Delta and American. Buffett, a typically patient investor, who's claimed that his favorite holding period is "forever," said that the "world [had] changed for the airlines." Buffett wasn't the only investor in the airlines when COVID-19 turned the world upside-down and brought travel to a screeching halt in March and April last year. The far more media-shy PRIMECAP Management team also owned the airlines—they owned the same four as Buffett plus a few others. The question is, how did these two investors respond once the shock hit and airline stocks augered in. As I told you, Buffett sold. The PRIMECAP team did the opposite; they held on. With the benefit of hindsight, PRIMECAP's decision to stick with the airlines looks pretty smart. The four big airline stocks returned between 92% and 113% since Buffett told the world he had sold. Capital Opportunity (VHCOX) returned 65% over that period, meaning that the airlines were a positive contributor to returns for the PRIMECAP-run fund. And, by comparison, Berkshire Hathaway's stock only increased 50% over the same period. Score one for the PRIMECAP team! Had Buffett shown a little more patience—like the PRIMECAP folks—and just held on for one year before selling, his exit price would've been vastly improved. It is easy to sit here and cast judgement on Buffett, which isn't my intention. Instead, this serves as a reminder that selling in the midst of a panic often feels good in the moment but can come to be revealed as a big mistake with time—and it's a mistake even the best investors can (and will) make. But let's also appreciate the discipline, skill and patience of the PRIMECAP Management team. 
Okay, that's a lesson in patience and timing, but maybe the greater lesson in patience is with those who keep asking why we own international stocks. With Total Stock Market Index (VTSAX) outpacing Total International Stock Index (VTIAX) 12.3% to 8.3% this year and having outpaced it by 8.5% per annum over the last 10 years, plus the fact that the U.S. has nearly turned a corner on COVID-19 while most of the world is still (tragically) a step behind, it's a question I'm getting more and more these days. While it's a reasonable question, keep in mind that we are not buying stock markets, we are buying individual companies via an active manager. So, in our mind, it is less of a foreign versus domestic allocation question, and more about partnering with managers hunting in waters around the globe. In our Growth Model Portfolio, we have an 18% position in International Growth (VWIGX). That may sound like a lot, but it's about half of Vanguard's standard advice to have 40% of your stocks overseas. It's also about half of the global market measured by Total World Stock Index (VTWAX). Consider that in the 10 years ending in March, Total Stock Market Index returned 13.7% per year. International Growth returned 11.8% a year over the last decade—so, not too far behind, and that's despite swimming against the current! Total International Stock Index compounded at just 5.2% a year. So, though International Growth may be classified as a foreign stock fund, we're happy to have it as part of our Model Portfolios, which, by the way, are showing decent returns for the year through Wednesday. The Growth Model is up 9.8%, the Growth Index Model is up 9.0%, the Conservative Growth Model is up 7.6% and finally the Income Model is up 6.2%. This compares to a 12.3% gain for Total Stock Market Index, an 8.3% return for Total International Stock Index and a 2.8% decline for Total Bond Market Index (VBTLX). Vanguard's most aggressive multi-index fund, Target Retirement 2065 (VLXVX), is up 9.3% for the year, and its most conservative, Target Retirement Income (VTINX), is up 2.0% for the year. Until next week, this is Jeff DeMaso wishing you a safe, sound and prosperous investment future.  Like Dan and Jeff on Facebook
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