Thoughts on the Terrorist Attacks
tilsonfunds.com
September 13, 2001
Dear readers and friends,
I'm sure you share my feelings of deep sorrow and anger about this week's terrorist attacks.
First and foremost, I wanted to let you know that my friends, family and I are fine. I very much hope the same is true for you.
While it may seem crass to talk about investing at this time, the stock markets may open tomorrow (though I suspect it will be Monday). Many of us have a significant portion of our life's savings in the market, so it's important to think about the implications in this area of this week's awful events.
I cannot predict what investors will do when the markets reopen. Stocks fell sharply in Europe on Tuesday, but rebounded slightly on Wednesday, while they fell sharply both days in Asia. I suspect that U.S. markets will fall significantly, in part due to the real costs of the terrorist acts, though I think this would be irrational. U.S. GDP last year was nearly $10 trillion, so the economic costs of the tragedy are minor in the grand scheme of things. They might not even exceed those of Hurricane Andrew, which caused losses of $18-20 billion in 1992.
The psychological impact of the tragedy on consumers and investors, however, could trigger a market decline. American consumer spending has been propping up the U.S. -- and, to some extent, the world -- economy. Should this change, it could lead to a recession. As for investors, given their herd-like behavior, selling could beget more selling, especially since valuations remain high in general and because investors were already nervous and looking for reasons to sell.
In short, the current situation reminds me of what Franklin D. Roosevelt said in his first inaugural address on March 4, 1933: "The only thing we have to fear is fear itself." I'm optimistic that the American people will prove to be resilient, as they have so many times in the past.
As for particular stocks I own, I can think of only four that might be affected by this tragedy in any specific way: insurers Berkshire Hathaway, Wesco Financial (80.1% owned by Berkshire Hathaway) and White Mountains, and one airline, Mesaba Holdings.
Berkshire Hathaway issued the following statement yesterday: "It will be many years before even a rough range can be established for the losses that the insurance industry will sustain from the terrorist events of yesterday. In addition to the normal problems involved in estimating catastrophe losses from natural events, in this case there will be additional complicated issues in respect to coverage and liability that will take years to fully resolve.
"Therefore, Berkshire Hathaway cannot now make an intelligent estimate of industry-wide losses. Historically, Berkshire's share of catastrophe payments (pro-forma for General Re in the years prior to acquisition) has been in the range of 2-3% of the industry's total losses. Berkshire's present guess is that it will incur 3-5% of the industry's loss in this catastrophe due to a different mix of policy coverages than that which prevails in natural catastrophes."
While Berkshire is unwilling to estimate total potential losses, credit ratings agency Moody's Investors Services said insurers could pay out $10 billion to $15 billion. Even if we doubled this and took the high end (5%) of Berkshire Hathaway's estimate of its liability, this would translate into a loss of $1.5 billion -- a small amount relative to Berkshire Hathaway's book value of $55 billion and $30 billion of cash and bonds. So Berkshire will be fine and possibly could write very profitable insurance in the aftermath of this event. I expect that Wesco losses will be similarly small relative to net worth. Finally, Berkshire and Wesco both have many other businesses whose value is unaffected by this disaster.
White Mountains, which is primarily a property & casualty insurer and reinsurer, has not issued any information about its potential losses, but the company has a strong balance sheet and I would guess that its exposure will be modest.
Finally, the stock of Mesaba (which operates as Northwest Airlink, the regional feeder airline for Northwest Airlines) will likely get whacked when the markets reopen, along with all other airlines (these stocks were down 15% or so on the European exchanges), due to the legitimate concerns that fewer passengers will be flying because of the added fear and hassle, and that costs will go up due to extra security measures. Fortunately, Mesaba has always been profitable and has the strongest balance sheet in the industry, with $96 million of cash (vs. a market cap of $183 million) and no debt.
As always, I try to form no opinions on essentially unpredictably macroeconomic factors such as economic growth, interest rates, short-term stock market movements and so forth. Instead, I will continue to focus on buying at very low prices the stocks of a handful of solid companies. If other investors panic and are willing to sell to me at even lower prices, so much the better.
Sincerely yours,
Whitney Tilson |
