E53: First Quarter 2025 Client Letter – Warren Buffett Edition

This podcast is brought to you by Ginsler Wealth. The information discussed today is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Gensler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation, and past performance does not guarantee future returns. All the pain felt by investors these past few weeks is mostly due to one man, unfortunately forewarning. I will invoke his name five times in this podcast. Today, on the unlimited podcast I read my first quarter 2025 letter to clients, which is coming after one of the worst weeks for investors in history. I review Warren Buffett's latest letter to his shareholders to shed some light on on what we should do now. Let's go. Welcome everybody. This is what I do four times a year. Read my quarterly letter so folks don't have to read it if they don't want to and rather listen to my voice. So this is our 2025 first quarter client update. I call it the Warren Buffett Edition and you will see why shortly. So here we go to Gensler Wells clients. While I'm still not sure how I got into Harvard Business school back in 2001, once on campus, I was constantly amazed by the caliber of speakers the school could attract. But at hbs, no visiting speaker generated more excitement than the greatest investor in the world. Capitalized letters, that is. And that's Warren Buffett. HBS's auditorium. Bird in the hall would be packed to the rafters to hear Buffett sing. Age advice. I had the great fortune of hearing and seeing Buffett twice during my two years at hbs, and Warren was even nice enough to take a picture with me. And in the letter you'll see that picture of me and Buffett circa 2002. I note that almost 25 years later, Buffett looks about the same. While I certainly don't have the same head of hair I did back then, I've been following Buffett's musings since leaving hbs. Each year Buffett pens his annual letter to Berkshire Hathaway shareholders, and for the past many years I've written a standalone Gensler wealth commentary on each of Warren's letters. And in this letter you will have links to all those letters. If you go read this or see this on our website kinslerwealth.com and there's a lot of links actually in these letters or in this letter I should say, so you might want to go check it out online. Buffett's latest letter, also hyperlinked by the way, was released on February 22amid one of the most volatile and uncertain calendar quarters perhaps in history. And I'm writing this letter, and I'm actually now reading this letter after the first week of April, with Trump's tariffs roiling global markets as usual, Buffett's letter contains some very important themes and lessons. As such, I thought I'd connect the Oracle of Omaha's latest insights to today's investing environment and how we're applying them in managing your portfolios at Gensler wealth, and I will identify Buffett's quotes for those listening here in the letter. They are in bold italics for context, which I suspect you are all aware of. Trump's actions primarily drove the US stock market to a negative 4.6% return through to the end of March 31, 2025, and dramatically lower than that in the first week of April. World equity markets generally have all turned negative for the year to date as well. I'll pause for a second and just say, as usual, there are endnotes and footnotes and all a whole bunch of other notes that you really want to read, along with what the core text of the letter is to just get the context and the disclaimers. And that's the last time I'll mention that remain invested and don't time the markets. The most common question I've been asked in recent months is how to navigate the uncertainty surrounding Trump's tariffs and other unpredictable developments. This is often followed by the acknowledgment that no one can reliably forecast what's coming next, particularly since it's unclear whether even Trump knows what he'll declare from one day to the next. Here are two quotes from Buffett's letter Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won't change. Berkshire will never prefer ownership of cash equivalent assets over the ownership of good businesses. And the second quote, Businesses, as well as individuals with desired talents, will usually find a way to cope with instability. Buffett reminds us that staying invested will, in hindsight, likely be seen as the wisest course of action. We have written often about doing nothing and doing something, including combining the two ideas in my February 2nd note to clients re the Trump tariffs. As my former boss Gerald Sheff, co founder of preeminent wealth management firm Gleskin Sheff and Associates Inc. Reminded our listeners on the latest episode of the Unlimited podcast, here's A quote from Jerry Doing nothing is often the best thing to do, because if you do something, you have to do it right twice. And there's links out to Jerry's podcast episode as well, by the way, which you can find on our website. And in line with Buffett's comments, our general approach to investing does not involve, quote, going to cash, end quote, when uncertainty or volatility rises. Instead, we aim to construct portfolios that are built to better withstand market swings than traditional equity and bond portfolios. And there'll be more on this below. Here's another quote from Buffett Greg and I have no view on future foreign exchange rates. For those who don't know, Greg is the CEO in waiting to take over from Warren Buffett, so he's starting to talk about Greg a lot more in his letters just to make people aware that he's coming. It is also important to remind you that Buffett consistently emphasizes that he and his team have little ability to predict what will happen in the economy and markets. Instead, they focus on making sound decisions without relying on a crystal ball. We do the same at Gensler wealth the Importance of Diversification and Building the All Weather Portfolio Here's a quote From Buffett in 2024, Berkshire did better than I expected, though 53% of our 189 operating businesses reported a decline in earnings. We have described our portfolio construction approach many times and in my 2022 year end letter I called this portfolio the All Weather Portfolio, a portfolio that can provide a reasonable level of downside protection, some income along the way, and the opportunity for growth and gains. A typical in quotes diversified investment portfolio outside Ginser wealth is sometimes called the 6040 portfolio. In other words 60% stocks and 40% bonds. As you know, at Genzer wealth we have augmented that so called diversified portfolio to include other asset classes, alternatives and real estate most commonly, and include a variety of sub strategies within each asset class. In the letter you'll see two pie charts that break down what the 6040 portfolio looks like and what an illustrative Gensler Wealth All Weather Portfolio looks like. As Buffett explains in his quote above, even with more than half of Berkshire's businesses experiencing a decline in earnings, Berkshire's diversified portfolio of businesses did well overall. Breaking down the Gensler wealth pie chart above, the high level results of the strategies in each asset class over the first quarter of 2025 were as follows. There's a chart in the letter which but basically it goes in this manner. Asset Class on the equity side, 11 core strategies were used. Five of the US ones were negative overall, although the dividend focused US equity strategy was positive. Four Canada focused strategies were flat to up 7% with dividend strategies again generating the best returns and two international focused strategies, both positive with our emerging market strategy up almost 9%. On the fixed income side, six core strategies used including corporate bonds, alternative credit, venture debt, private debt and structured notes, all positive in the quarter. On the alternative side, five core strategies are used. The music royalty strategy continued its uninterrupted positive performance, the other strategies were more mixed and on the real estate side, three core strategies, all positive with almost no negative months in the multi year history of these holdings. So if you look at the table at the bottom overall the ending summary is Most portfolios avoided the downward momentum in Q1 and specifically 72% of the strategies we held were positive in the quarter notwithstanding negative markets. Given the unique circumstances, goals and objectives of each client family, it's challenging to provide a personalized performance summary in a general letter like this. However, one key takeaway applies broadly. The importance of diversification only grows as market volatility and uncertainty increase. Here's a quote from Buffett A small but important exception to our US based focus is our growing investment in Japan. Buffett details in his recent letter about Berkshire's investments outside the US in my last quarterly letter, I described one of our key moves going into 2025, which was decreasing U.S. equity exposure and increasing international and emerging markets exposure as per the table above or what I've just described above. That has been a good decision and we believe maintaining this international exposure enhances the overall diversification of portfolios. The cost of diversification is worth it. Here's a quote from Buffett. Berkshire Hathaway paid far more in corporate income tax than the US Government had ever received from any company, even the American tech titans that commanded market values in the trillions. That's an end quote there. A theme of Buffett's last few letters has been the amount of taxes Berkshire proudly pays each year. Why? Because paying taxes means they're making a lot of money. At Ginser wealth, part of our role is to help you minimize taxes through thoughtful financial and tax planning, as well as by designing tax efficient portfolios. And I discussed this in my 2024 Q1 letter, the free Money Edition. But that doesn't mean avoiding taxes at all costs. At a high level, equities tend to be among the most tax efficient investments because you typically only pay taxes when, or I guess if you sell them at a gain, often many years down the road, and only half of that gain is taxable. But unfortunately, this tax advantage doesn't come cheap. The cost is market uncertainty, volatility, sharp swings, sleepless nights, and maybe even a touch of nausea, which I suspect many investors felt last week as one tries to reduce those unpleasant side effects by holding more stable and consistent investments, some of which I highlighted earlier in the letter. The trade off is often reduced tax efficiency, meaning you may pay a higher tax rate per unit of return. However, like Buffett, we believe this cost in the form of taxes is well worth it over the long run, especially during periods of market distress like we're experiencing today. Reminder Investing Requires a Long Time Horizon Here's a couple quotes from Buffett Our measure of operating earnings excludes capital gains or losses on the stocks and bonds we own, whether realized or unrealized. Over time, we think it highly likely that gains will prevail, though the year by year numbers will swing wildly and unpredictably. Our horizon for such commitments is almost always far longer than a single year. In many our thinking involves decades. Everyone knows that investing requires a long time horizon, but in our experience, many investors have a long time horizon until they get spooked. And there is always something to worry about. As Buffett says, year by year swings will be wild and unpredictable. But the chart below, or the chart that's in the letter that you can't see, which I call Climbing the Wall of Worry, shows a reasonably predictable long term pattern. And what that chart shows is essentially investing in larger stocks in the US from 1824 all the way through to 2020. That's as far as that chart goes, and it shows some of the key major financial and other catastrophes that happen along the way. The panic of 1837, Black Friday in 1869, World War I in 1914, World War II in 1939, just after the Great Depression a decade earlier, JFK's assassination, the crash of 1987. Anyways, Covid, of course you get the picture. But what you see with all these calamities and financial disasters is US equities just keep climbing up and to the right. When you zoom out, it's a pretty clear pattern. Opportunity knocks again. Question mark. Here's a quote from Buffett. Really outstanding businesses are very seldom offered in their entirety, but small fractions of these gems can be purchased Monday through Friday on Wall street, and very occasionally they sell at bargain prices. A few years ago, in the third quarter of 2022, after a brutal nine month stretch, the US equity market was down 25% for the year and the Canadian market was down 13. Fixed income markets. The bonds in the traditional 6040 portfolio mentioned earlier were also down significantly. At that point, the 6040 portfolio didn't feel all that diversified. I released my Opportunity Knox themed quarterly letter on October 9, 2022. I encourage you to revisit it for a look at past market declines and the strong recoveries that often followed. And then there's a chart here, so it says. As the chart below shows, just three days later, the US equity market bottomed out and went on to gain 78% to its recent high in mid February, almost 63% through the end of March and still 47% as of April 4, 2025, even after recent steep declines. And so hopefully that's described the chart for you. You can see it online. In other words, periods of significant market declines have historically been some of the best and most opportunistic times to invest. But please don't assume the market will bottom three days from now. Remember, I don't have a crystal ball, Warren Buffett, Kohl's Notes or TLDR for the young folks. Number one Stay invested. Don't try to time the markets or predict the future. Do nothing. Sometimes. Two Diversification works. True diversification proves its value when you need it Most, like now. 3. Paying taxes is okay. It means you're making money. Don't let tax concerns override sound investment decisions. Number four Think long term. Successful investing requires patience. Markets tend to climb the wall of worry. And number five, find opportunity in fear, as Buffett famously said. Maybe the most famous Buffett quote Be fearful when others are greedy, and greedy when others are fearful. Me and Buffett are alike. Here's a quote from Buffett during the 2019-23 period, I've used the words mistake or error 16 times in my letters to you. Many other huge companies have never used either word. Probably the only thing Warren Buffett and I have in common, aside from our love of Coca Cola and McDonald's, is that we both make mistakes. In fact, I'm probably better than Buffett at making mistakes. Here's another quote from Buffett Greg Our directors and I all have a very large investment in Berkshire in relation to any compensation we receive. If you lose money, so do we. This approach encourages caution but does not ensure foresight. So also like Buffett, me and my family are invested in the same holdings and strategies we recommend for our clients. So when it comes to managing your portfolios, both I and the Ginza wealth team think and act with great care. Yes, we will make mistakes from time to time, but we do well when you do well, and vice versa. You can trust that we are fully focused on navigating today's uncertainty, guided in part by the timeless wisdom of the Oracle of Omaha. Thank you for your continued trust, support and confidence. We are available 247 should you need us. Sincerely, me, Brian Gensler, President and CEO so there's the first quarter letter after a very bumpy and uncertain period that no doubt is going to continue for, well, I guess three years and nine months more, give or take. Hopefully not longer. I don't know that Trump will get that rule changed, but you never know. So. So thanks for listening, more episodes to come and for our clients in particular. We are here when you need us. Reach out and we'll talk to you soon. Bye bye.

The Unlimited podcast is hosted and produced by Brian Ginsler and is edited and mixed by myself, David McMillan. This podcast is not to be taken as investment advice. If you like what you heard, don't forget to rate the podcast and follow us on social media. Inslerwealth thanks for listening and see you next time.

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