In this segment of the MarketFoolery podcast, host Mac Greer, Jason Moser of Million Dollar Portfolio, and David Kretzmann of Hidden Gems Canada weigh in on the conflict that President Trump is ratcheting up with China.
Beijing's response -- a threat to impose countertariffs on a range of U.S. exports, including soybeans, China's largest single U.S. import. Stocks plunged briefly on the news, then the market basically decided to ignore it. Now, part of that is likely because none of the tariffs on either side have actually gone into effect yet -- and on the U.S. side, imposing them could take a while. The Fools look at these threatened maneuvers as negotiating tactics. But for their listeners, one question looms large: Should we adjust our investing strategy to account for this new variety of macroeconomic menace?
A full transcript follows the video.
This video was recorded on April 4, 2018.
Mac Greer: Guys, let's begin with a potential trade war. In response to proposed tariffs by the Trump Administration on software patents and other technology, China has proposed new tariffs on U.S. products including cars, whiskey and soybeans, which is the biggest U.S. export to China. Guys, this morning, I was really fired up about this story. In the pre-market, it was looking ugly. The market opened sharply down. But now, the market has turned that frown upside down.
David Kretzmann: That didn't take long.
Greer: It didn't take long, and that may be related to a statement made by the president's economic advisor, Larry Kudlow, right before our taping today. Kudlow told reporters that the market shouldn't overreact to trade measures, saying the market correction is mild and overdue. Kudlow went on to say that the president is a free trader at heart. So, what does it all mean for investors?
Kretzmann: Well, there's a lot of back-and-forth going on between the U.S. and China. I think it's important to take a step back and recognize that these tariffs aren't going into effect right away. I think the best way to look at it at this point is, these are really negotiating tactics from the Trump Administration and, on the other side of the table, China. In the case of the U.S. proposed tariffs, companies have until May 22nd to review and probably object to the tariffs being put in place. From there, the U.S. government would have 180 extra days to review whether or not they want to put those tariffs in place and to what extent they would put them in place. So really, the worst-case scenario here is, the tariffs would probably go into place in a couple of months or even later this year if they even go into place at all. But, at this point, I look at it as negotiating tactics. I don't think the U.S. or China really wants these tariffs to be put in place. I don't think either country really benefits.
Greer: Jason, it sounds like a better term might be a proposed trade war.
Jason Moser: Yeah. That's it, right? Nobody really wants a trade war. I think David's right, I think it's really more or less a couple of strong-willed individuals just trying to lob up some strong negotiating tactics and get the conversation started, at least.
I think, the question we get when we see headlines like these is, "How should I change my investing strategy? What should I do as an investor? How should I change or adjust?" And honestly, the best part about our investing style -- which is, as we always talk about, investing in businesses, focusing on longer periods of time, taking things with a grain of salt and focusing on the bigger picture -- the best part about our investing style is, when you run into these kinds of stretches, there's volatility, the markets are down, and you think, "Woah!" But then, go take a look at your portfolio, particularly look at the holdings that you've had in there for a long time. And by "a long time" I mean three, four, five years, even longer. The nice part about our style of investing is, there's a good chance, if you're investing in good businesses and you've held them for three, four, five years, even longer, even in times like these, those positions are still doing really well. They're still typically going to be rewarding your portfolio.
So, I think it's always nice to take a step back, take a look at your portfolio, look at those companies you've been holding on to for a long time and ask yourself, do I really need to change what I'm doing? Because in the long run, it seems to be working, these short-term sorts of moves notwithstanding. And perhaps it's an opportunity to add a little bit to those positions that are doing so well.
Greer: David, pushing back on Jason's point a little bit --
Moser: Don't push back on me.
Greer: OK, Jason, I'm going to push back on your point directly. If I'm a shareholder in a company like Boeing (NYSE:BA) -- Boeing last year agreed to sell 300 planes to China. That's around $37 billion worth of planes. Boeing estimates that China could buy more than a trillion dollars of aircraft over the next 20 years. That's not nothing.
Moser: I'm going to pull my Tim Cook card, I would never be an investor in Boeing in the first place, Mac. How about that?
Greer: Oh, what a dodge!
Kretzmann: He doesn't accept the premise of your question, Mac.
Moser: That's right.
Greer: You reject the premise. But, if you're a Boeing shareholder, do you look at this story, and do you look in a potential trade war, and say, "You know what? Maybe I should get out."
Kretzmann: I think it's premature to do that. Obviously, Boeing has a diversified business, it isn't just selling to the U.S. or to China. And hopefully you're not investing so much into Boeing that you're losing sleep at night over this proposed trade war. With our style of investing, as JaMo was outlining there, if you have a diversified portfolio of quality businesses, they're not going to be all companies largely dependent on China for the bulk of their revenue, I think you can afford, in this case, to continue holding Boeing or a company like that, that's a little bit more dependent on China for the long-term. Like I mentioned earlier, I just don't see these tariffs being put into place, at least to the extent that I think both countries are jockeying for at this point.
Moser: Yeah. And to your point, I think that's a good one.
Greer: Thank you. I appreciate that.
Moser: All companies are not created equally; all markets and industries are not created equal. There are certain companies or industries that are going to be a bit more exposed to this than others. And I think one we've seen a lot discussed here recently is appliances and electronics, a lot of that stuff that's imported over here, chances are we have a house full of them. And on the one hand, in theory the price of things like home appliances and electronics could go up.
I also was thinking about this from the other side of that, though. It doesn't necessarily mean that a retailer has to pass on those costs, especially if that retailer is run by someone who takes a longer outlook and is focused more on being the Earth's most customer-centric company, for example, [coughs] Jeff Bezos and Amazon. But, I mean, there are examples of retailers out there that will forgo that short-term profitability in order to build up that loyal customer base, and they would view things like this as a bit more temporary in nature. So, that's another way to look at it.
Kretzmann: I would say, at the end of the day, I would be nervous about letting macro events drive your investing decisions one way or another. Our former Fool colleague Morgan Housel, he had an article looking back at previous Administrations. The Bush Jr. Administration was supposed to be good for airlines and energy. Those industries turned out to perform terribly under his tenure as president. Obama was supposed to be great for clean energy, and that industry by and large really performed poorly, from an investing perspective.
For me, it comes down to, don't let those macro decisions drive your investing decisions. At The Fool, we tend to be bottom-up investors. Focus on finding great, quality businesses that you think have good odds to perform well over the next five years or beyond, regardless of which administration or political party has power at that given time.
Greer: And it sounds like you're both saying, this could end up being more of a trade kerfuffle, right? Not a trade war.
Kretzmann: I would lean more toward that.
Kretzmann: Kerfuffle, I like it.
Greer: Can we all say that together, kerfuffle?