With bonds and stocks declining at same time.
More credible people BELKIN/George NOBLE making analogies to 1987
Why is this line of thinking wrong?
Impo: It’s wrong because the thinking is all based on Feds is going to continue to increase interest rate to stop unstoppable inflation.
I think inflation is already slowing and Feds is able to increase interest rate quickly thanks to the current strong economy. People who are complaining are mainly PE folks, their business model are being killed. There are two kinds of inflation — one kind is that input costs rising too fast. Second kind is everyone has more money. We are more like the 2nd kind, which is not entirely bad things.
Europe and Asia are more worrisome. They are more exposed to energy prices but their economy is not strong enough to increase interest rate. Yet, higher US rate will make their currency cheaper and add to their inflation problem. They deserved this. European were too soft to Russia in the past and China let Xi, who’s Putin best buddy, came to power.
Why is this line of thinking wrong?
It’s not that it’s necessarily wrong.
It’s just unpredictable.
Almost always there are things to be rationally fearful about in the macro/geopolitical/financial outlook.
And most of the time the market ignores them.
Picking the few exceptions is a mug’s game, beyond sticking with generalities.
The most useful and reliable generality:
If you buy at a time of cyclically high valuations and sell at a time of typical valuations you’ll definitely get a lower than typical rate of return.
Valuations on most things are definitely high on most metrics, so that observation probably applies to a whole lot of investment choices right now.
That doesn’t mean the price of any of them is about to fall any time soon.
Jim
(43% cash)
9 Likes
Fear now is 3/2020 or 2009 like
Increasing calls for crash by people with incredible records: Michael Belkin/George Noble
Mr 43% cash>>>what is buyable now?
43% cash. Wow.
If I may ask, what’s your “normal” level of cash?
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However, the current P/E of S&P 500 is around 23, nasdaq around 29, not extrema high. Forward estimates are even lower.
The E is wrong
It depends on if there will be a recession and how deep it will be. Not a sure thing.
43% cash. Wow.
If I may ask, what’s your “normal” level of cash?
A hard question to answer. My personal finances are complicated.
But, a fair bit lower than 43%.
I’m not fearful of falling prices. I’m hopeful of falling prices.
The reasons for the increased cash allocation are:
- Mainly: I’m hopeful of a two foot hurdle in a reasonable time frame, so I can pounce.
- I had a lot of Berkshire at the start of the year, and the valuation multiples got high enough
that probable one year returns were looking negative, so it looked like cash would be a better bet for the moment. - There is a faint possibility I might buy a cottage this year, giving another reason to hold a larger-than-usual amount of cash.
Mr 43% cash>>>what is buyable now?
Hard to say, as always. It depends mainly on whom you ask.
FWIW, I bought GOOGL in the last 2-3 weeks. Not a trivial amount. I’ve said nice things about the prospects I see for a good return from Carmax.
But (see above) I have a non-justified hunch there will be some good opportunities somewhere within a year or so.
I would love to reload hugely on Berkshire at (say) 1.25 times book, for example.
That would require a ~10% drop soon, or a slightly bigger drop a little later. Not impossible.
As it sits, I don’t really expect to make any money from the markets in the next year.
To have that expectation I’d need to be holding a big position in something I see as undervalued enough to be due a meaningful price bump soonish.
That isn’t my first thought when I look at the list.
Jim
5 Likes
I think it is too early to say “earnings” are high or going to go down. Some industries, those which benefitted from “stay home” is going have earnings impact, however, many other industries are having very strong demand. Retail for example, is not having any sales, no mark downs. They are suffering from supply chain, not sufficient inventory. The consumer demand is robust, at least so far. It could change.
But so far the earnings estimates have not come down, consumer demand is still high, there is ton of cash sitting in consumer balance sheet, consumer credit, credit card delinquencies are all very low. Still banks are releasing reserves, not adding them.
No one knows what future holds, but we don’t have any evidence so far. Of course, you can make your investment decisions based on where you think economy is going.
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However, the current P/E of S&P 500 is around 23, nasdaq around 29, not extrema high. Forward estimates are even lower.
FWIW, I’ve estimated that QQQE (the Nasdaq 100 Equal Weight) would be trading at maybe $59-64 today if it were at average valuations since 2005 or so, using smoothed real earnings.
The current price is $67.18, which is a fair price within rounding error.
This is an attractive security to watch because the value growth has been so large, and not just in a few companies.
Recall that no firm is more than 1% of the group.
Earnings have risen inflation+8.2%/year on trend since 2005, and not much slower than that considering 1997 to date.
That is an amazing figure. Even if it slows, it would be head and shoulders above the S&P 500.
Given the historically typical rate of earnings growth, I might expect a four year return in the vicinity of inflation + 5%/year.
About 0.5%/year in dividends, the other 4.5% in price increase.
That doesn’t sound like much, but it’s WAY better than what the same reasoning would suggest for the S&P 500.
Jim
24 Likes
Unlike Jim I never get out of Mr. Market. Primarily that’s because during my working time I ploughed money into the business I was part owner of (majority owner) and only contributed $30,000 in total to my IRA.
So today I’m all taxable accounts, either inherited money or my merged stuff with AJ Gallagher. So what do I do in the blasting upwards periods? Well I do something mental, and I do it with a passion.
I simply convince myself to be completely prepared for a 50% drop. Yep, I go there mentally and I stay right there in spirit. When it comes? Well, I’m completely prepared and honestly I’m not affected at all.
Generally in the past when Mr. Market plummetted I also had a mandate not to buy anything major, to just hold off paying double (yea, if you sell assets in the downturn you literally can pay double for your purchases). Today I have enough divy income not to be concerned…
…I hope!
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Maybe it is because, like Chompin, we also live in Central NC, own a business and have the majority of our portfolio in taxable accounts that we also ride the ups and downs without selling. Like Chompin, my bride and I are perpetually prepared for a 50% portfolio valuation decline. In 2008 -2009 we saw it drop 60%, more than the overall market. By 2012 those same holdings were ahead of the overall market. Ca la vie (It is the life)
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To add to Uwharrie’s post I think it is a good idea to comment, discuss, rant, maybe even make a fool of yourself sometimes conversationally as to investments and business cycles. As that’s in process my suggestion too is to act on your thoughts and emotions far less and certainly in less extreme fashion.
In doing the above you’ve basically mirrowed Mr. Market with your comments and emotions, then you’ve miorrored your businesses (stock holdings) with your actions. Business is never as good nor as bad as Mr. Market and stock prices suggest; both are extremists; both cycle; but one generally cycles exponentially in comparison to the other.
The reason I have ranted (remember ranting is nothing but emotions and thought) so much about the Saul’s thing is because investors there tend to forget that in the times their stock prices went parabolic they weren’t being valued, those stock prices were being chased and it was exciting. Investors in those sectors were trying to use logic to justify illogical actions, the absolute dead opposite of what I tried to describe in the first two paragraphs above.
But train yourself in the upside not to get much excited, just watch and be entertained. Things cycle; things change; obsessions move on to something else in large group format. I often write things that honestly I look back on as downright embarrassing. In person you’d find me far more stable. But the first thing, that is writing my thoughts and feelings, well it assists in the 2nd thing- that is- staying stable.
Yea, rant and do nothing sometimes. But don’t try to logic the illogical. Saul has done that and countless followers will lose a great deal of their savings because of that.
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Sorry to get way off topic here, but the talk of a crash which concerns me most is real estate. We are seriously struggling with what to do with our main house in trendy Bend Oregon. We lead the country in boom-bust range in the last meltdown, and while the current situation is totally different, as mentioned above the current state is difficult to explain with logic.
A young tech entrepreneur just plopped down 6-7 A shares for our neighbors house, a nice little place on a 50 foot riverfront lot. Sight unseen, sold in three days. I saw a famous football player listed a mega mansion in a less trendy spot for less.
We only live in our little tulip bulb part time and selling would indeed open a number of possibilities. We can’t figure out if we need to jump on the opportunity, or even if we just missed it. The chatter is all over the spectrum. From “interest rates will cause a crash” to “techies are paying cash to diversify out of stocks into real estate” to “remote work paradigm shift changed values forever”.
There is a lot of talk, not many good answers, though the best analysis I have seen may be an article on Musk’s twitter takeover. It speculated that after Tesla suffers its reentry, tech companies shake out, crypto deflates and real estate becomes affordable we will look at this period and wonder what people were smoking.
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Here’s the article I cited above. It speculates the Musk Twitter deal may be looked back upon as the start of the market crash:
https://www.washingtonpost.com/business/2022/05/02/elon-musk…
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the talk of a crash which concerns me most is real estate
dwerme,
According to this “The Economist” article and it’s statistics America won’t be at the epicenter of a real estate crash, contrary to some European countries and NZ/Aussi:
https://www.economist.com/finance-and-economics/which-housin…
Especially this: In America mortgage rates tend to be fixed for two or three decades should result in prices while not rising any more also not crashing (as it seems likely for the countries on the top of that list).
P.S.: Doesn’t look like we can get a house in Entrevaux for half price, buddy.
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Said—-I’m in the south of France, a few km from Entrevaux this month. Part of the real estate mystery to me is how the prices have remained flat here since 2008. I don’t think we’ll find any discounts but it might be time to rotate out if the USA and into Jim’s neighborhood. I wonder what sort of a “cottage” you are looking at Mungo?
I wonder what sort of a “cottage” you are looking at Mungo?
Not sayin’ : )
Specifics are undecided.
Won’t be nearby.
Jim
2 Likes
Entrevaux … it might be time to rotate out if the USA and into Jim’s neighborhood
I am still thinking about that. Would be funny if we’d become neighbors.
I wonder what sort of a “cottage” you are looking at Mungo?
Me too, having his “Killaleigh Castle” bargain in mind.