My new interview with Julia La Roche; Costco: One of the worst whiffs in my investing career – and lessons from it; The latest inflation report; Good news on the TikTok front

1) My old friend Julia La Roche just interviewed me for her Julia La Roche Show...

You can listen to our 53-minute conversation on Apple Podcasts here or watch it on YouTube here:

Here's a summary of the topics we discussed, with timestamps:

• Introduction (0:00)

• Big-picture view of the economy and markets (0:55)

• Caution against letting politics influence investment decisions (2:43)

• The mistake of predicting gloom and doom (3:38)

• Betting against America doesn't make sense (5:24)

• There are warning flags, but stocks aren't in bubble territory (6:59)

• Bitcoin smells frothy, but "I would never short it" (8:10)

• Berkshire Hathaway (BRK-B), Meta Platforms (META), and other opportunities (9:22)

• Bitcoin is an instrument of pure speculation (10:02)

• Berkshire, Meta, etc. (15:56)

• Introduction to Warren Buffett and value investing (21:26)

• Stock exchanges as interesting investment opportunities (26:48)

• Lessons from missed opportunities (29:08)

• The importance of letting winners run (36:07)

• Reflecting on closing the hedge fund, mental mistakes investors make (38:50)

• Running a hedge fund with patience and discipline (43:48)

• Charlie Munger's legacy (46:13)
• The Art of Playing Defense (50:06)

2) My comments in the interview about missed opportunities, letting your winners run, and Munger all combined to make me think about one of the biggest whiffs in my investing career...

To this day, I have never owned big-box retailer Costco Wholesale (COST).

(Munger loved Costco with a passion – see this Business Insider article: Charlie Munger was obsessed with Costco. Here's why the billionaire called himself a 'total addict' – and served on Costco's board from 1997 until the day he died last November.)

I also love Costco with a passion and am a total addict.

It's my favorite place to shop, bar none. I love both the "treasure hunt" aspect of shopping there as well as the feeling of knowing I'll never see anything I buy there at a lower price anywhere else.

In light of my love affair with Costco, how on earth did I miss the stock all these years? I've wondered this myself...

The answer to my total idiocy can be found in an article I published on June 1, 2000 when I was writing for TheStreet.com, entitled "Cheap at Half the Price?" (nearly 24 years later, it's no longer online, so here's a link to the PDF I saved).

At the time, Costco was facing some headwinds that had caused it to miss earnings estimates. That led its stock to plunge by nearly 50% from more than $60 per share two months earlier to $32.38 per share on the day I published my article.

In my article, I (correctly) heaped praise on the company and carefully considered whether to buy its stock:

It's an exceptionally well-managed company, boasts strong growth potential and, despite having razor-thin net margins, generates a decent 16% return on equity. The secret is phenomenal asset turns – Costco turns over its entire inventory a remarkable once a month. Costco's performance has not gone unnoticed by Warren Buffett and Charlie Munger, who rave about the company (Munger also sits on Costco's board).

I've always wanted to own the stock, but – until last week anyway – it's never been anywhere close to cheap enough for me. Now, with the stock down nearly 50% in the past month, I decided to take a closer look.

Ultimately, however, I (stupidly) decided not to buy the stock, concluding:

It's still quite a ways from a buy, for three primary reasons. First, last quarter's cash flow statement was somewhat worrisome. Second, I think Costco's slowdown is due in part to the weakness in technology stocks – a factor I don't expect to change anytime soon. Finally, Costco's stock is still not cheap enough, as I don't think it's likely to yield a 15% compounded annual return over the next five years or so, which is my minimum hurdle.

What a terrible decision that was!

Here's what Costco has done since then – rising more than 2,200%, far outpacing the return of the S&P 500 Index over the same time frame:

There are some important lessons here:

• Focus on identifying high-quality companies with better business models than the competition, that deliver outstanding value to customers, and have excellent management and strong corporate cultures.

• When you find such a business and the stock gets whacked by headwinds that are clearly short-term in nature, don't get cute trying to bottom-tick it – just buy it!

• Once you own such a stock, again, don't get cute: Just hang on and let it run.

I know this all might sound obvious...

But trust me, fewer than 1% of investors do this.

If you have the smarts and patience to be in this select company, you have a great chance of beating the market over time.

In fact, I'll go so far as to say this is likely the only approach that gives you a good chance of beating the market over time...

3) Yesterday's inflation report had no surprises for me.

Consumer prices were up 3.2% last month from a year earlier – up a hair from expectations of 3.1%.

It's the second straight month of higher-than-expected inflation, but investors still expect the Federal Reserve to start cutting rates later this year (with the first cut expected in June).

Here's the Wall Street Journal with more: Inflation Picks Up to 3.2%, Slightly Hotter Than Expected. Excerpt:

[Officials] are focused on when to cut rates – rather than whether to raise them again. Inflation has declined notably from 40-year highs following the most rapid rate increases in four decades.

Tuesday's report "basically tells the story that there's a gradual improvement" in core inflation, [Eric] Rosengren said in an interview. "As long as wages and salaries continue to drift down, I don't see this report really altering the overall view of probably a June reduction."

As I've been writing for the better part of a year, I continue to believe that inflation is a nonissue and will remain in the 3% to 4% range.

While this is higher than the Fed's official target of 2%, I think, unofficially, the Fed (and investors) will have no problem with this modest level of inflation.

4) Longtime readers know I've been pounding the table for well over a year that giving a Chinese company a direct line, for hours a day, into the minds of tens of millions of our young people is truly crazy.

So I was delighted to see that the House Committee on Energy and Commerce last week voted 50-0 to advance a bill that would give TikTok's owner, China's ByteDance, six months to divest TikTok or the app would be banned in the U.S.

I hope it passes the House and Senate and then President Joe Biden signs it into law – it can't happen soon enough.

Here are two articles with further background:

• Why TikTok Needs to be Sold or Banned Before the 2024 Election (Time)

• Why the political clock is ticking for TikTok (Silver Bulletin, which is by statistician and FiveThirtyEight founder Nate Silver)

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.