As we enter the New Year, I think this is a good time to take stock of the year that was, and try to get a sense of how the up-coming year might be different, and the same. This is a process I try to undertake at the start of each year, and hopefully I am able to learn a thing or two from the past so I can apply the lessons learned in the coming year. I will admit some years I seem to be better at the learning part than others. But I believe the process is just as important as the result. And 2024 being an election year in an age of chaos, every lesson we can master will prove invaluable to our success as investors.
Let’s start out by taking a look at what we lost in 2023. We did lose some very good people in the past year. Looking first at the investment world, we lost Charlie Munger. He passed away at the age of 99 and for 45 years was Warren Buffett’s longtime right-hand man at Berkshire Hathaway. During their time at the helm, the price of a single Class A share of Berkshire stock went from $285 to $560,500 as of the date of this writing (January 10th). Yep, that’s not a typo folks! And in those 45 years, the stock price only had seven years in which it was lower at the end of the year than where it started. Quite a feat indeed. There’s a lot I can learn from this example of investing and business management success.
In the world of financial academia we lost Harry Markowitz, who passed at the age of 95. He was the author of the 1952 paper titled “Portfolio Selection”, which earned him the Nobel prize in Economics. This essay laid the groundwork for the practice of portfolio selection known as Modern Portfolio Theory, which is employed by many individual and institutional investors. Again, lots to learn here about managing risk over time in the investment portfolio.
Outside the financial world we saw many well known personalities leave this world in 2023: Matthew Perry from Friends, Tom Smothers (one half of the Smothers Brothers comedy act), Ryan O’Neal (maybe best known for his roles in Love Story and Paper Moon), Norman Lear (producer of All in the Family, The Jeffersons, One Day at a Time and more), Richard Roundtree (Shaft), Suzanne Somers (Three’s Company), Dick Butkus (Chicago Bears linebacker), Jimmy Buffett (singer and businessman), and many others too numerous to name. I’m sure there is much good to learn from many of these personalities, but also many lessons about what pitfalls to avoid as success magnifies.
Among those names I feel the need to take a moment to comment more fully on the success of Jimmy Buffett. Buffett achieved international fame and left a lasting legacy in 1977 with his breakthrough hit, "Margaritaville," which will be proudly played in bars and homes around the world for all time. Of just as much significance to me as an investor and businessman is that he managed to turn what could have been a “one hit wonder” career into a business behemoth. He went on to launch several retail stores, a collection of hotels, the Cheeseburger in Paradise restaurant chain, and T-shirt and footwear lines. There’s even retirement communities with his name on them now.
Pretty amazing considering the song about wasting away on a beach, originally inspired by a trip to Key West, FL with a friend in 1971, launched a billion-dollar empire. It’s a testament to how making the most of an even unlikely opportunity can realize great results with hard work and business acumen.
The losses in 2023 weren’t limited just to people. Several well-known companies gave up the ghost this past year. Home retailer Bed, Bath & Beyond filed for bankruptcy protection in 2023 closing all of its remaining stores. But, in a lesson of possibilities, its assets were bought by online retailer Overstock and the company dumped its old name, revamped its website and re-launched under BedBathandBeyond.com. Its advertising promises the same great bed, bath and kitchen products found in the retail stores, but adding “a much better beyond” as well. It’s a bold move of retail restructuring and I guess we’ll learn in 2024 whether consumers are buying the new pitch.
In a story that has yet to find a successful ending, Rite-Aid, one of the largest pharmacy chains in America also filed for Chapter 11 bankruptcy protection. According to the filing, heavy debt, declining sales, and more than 1,000 Federal, State and local lawsuits claiming it filled thousands of illegal prescriptions for painkillers were the drivers of its demise. They recently received approval by the court to sell their pharmacy benefits manager firm (Elixir) for $575 million, which will provide some funds for the coffers toward their overwhelming obligations. Lots of lessons to be learned from this decline, almost too many to list here.
However, one of the factors that undoubtedly have allowed companies like Bed, Bath and Beyond and Rite-Aid to last (probably) much longer than they otherwise would have, was the Federal Reserve’s policy on interest rates. Following the Great Financial Crisis (GFC) and then the Covid pandemic, the Federal Reserve kept their target interest rate near zero for an extended period of time. That allowed companies with weak business models to cling to life by accessing low interest loans. However, when rates increased, and the business models hadn’t been improved, they faced the inability to service the massive debt loads on the balance sheet.
While the Fed’s actions distorted the cost of capital, encouraged bad decision-making, and essentially rewarded failure for several years, Bed, Bath & Beyond and Rite Aid failed because they weren’t able to compete with more innovative rivals like Amazon, which had been encroaching on their turf for years. In a free-market economy, business failures are part of the creative destruction that pushes us forward. Weaker competitors die off, allowing stronger ones to gain market share. That’s how it’s supposed to work, and we all benefit as a result of lower prices and better service. That’s capitalism. It’s not always pretty, but it works.
Maybe that’s the overall lesson from 2023. There will always be winners and losers. There will always be some level of uncertainty and chaos. With 2024 being an election year, and one that looks to possibly have more chaos than usual, as investors we need to have our A Game. Let’s begin 2024 ready and welcoming that challenge.