OT: how did the market behave in 2000 and 2008

How did the market behave in 2000s…although the NASDAQ increased today, at one stage, it was down…and so were the DOW JONES, S&P 500 and even 10 year treasury yield, and bond yields…

And then the market now started rallying a bit??

Is there any message that is being conveyed by these actions?

In particular, is the declining bond yields a proxy for improvement in market sentiment? Or is this how bear traps look like?

Thanks a lot,
Charlie

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How did the market behave in 2000s…although the NASDAQ increased today, at one stage, it was down…and so were the DOW JONES, S&P 500 and even 10 year treasury yield, and bond yields…

And then the market now started rallying a bit??

Is there any message that is being conveyed by these actions?

Charlie, I suggest not trying to read much (or anything, really) into daily fluctuations in the market. CNBC and financial publications always try to come up with some reason the market did what it did on any particular day, and it’s usually a bunch of nonsense. Check out the cartoon in this recent memo by Howard Marks: https://www.oaktreecapital.com/insights/memo/bull-market-rhy…. In another of his memos, Marks said: “I’m always amused when the pundits say, ‘stocks went up today because several companies beat analysts’ earnings forecasts’ or ‘the market dropped because of increased uncertainty regarding the price of oil.’ How do they know? Where do buyers or sellers register their motivations, such that the media can discern them so definitively? There’s only one indisputable explanation for why the market went up on a given day: there were more buyers than sellers. . . .” https://www.oaktreecapital.com/docs/default-source/memos/201…

If you’re not familiar with Howard Marks, he’s a well-regarded investor (primarily in fixed income or bonds) who has been writing memos on investing and the markets for decades. Warren Buffett was quoted in connection with one of Marks’s books as saying: “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.” https://www.masteringthemarketcycle.com/book/

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Is there any message that is being conveyed by these actions?

Sure…prices fluctuate!

Pick something that is pretty darned sure to have earnings 5-10 years from now that are reasonably priced relative to the price today.
Then go sit on the beach.

If you really care about the direction of the broad market in the shorter term, most of my omens seem bad.
My simple Nasdaq indicator has been bearish continuously since November 22 last year and the average Nasdaq 100 firm is down 27% since then.

But one of the fun side effects seems to be a wider dispersion in valuation levels lately.
Some things still seem weirdly expensive, other things seem weirdly cheap.
Put it this way: NIO plus RIVN are priced at almost exactly 1/10th the whole of Berkshire.
I know which one I would pick if I had $61bn to spare:
My runes suggest Berkshire is priced at a level historically consistent with over 20% upside in the next year.
Timing is uncertain. Maybe up by 1/3 in two years instead.
It might go down by half first, of course. Prices can do anything for a while.

Jim

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Thanks RAS337 and Jim. I am really trying hard to not do anything stupid but it is obviously tough to hang in there…so, trying my best to at least try and read a bit on the buffet annual letters. In between, I am trying to see what the market is doing and why…but I am none the wiser!

However, I managed to take out some money out of my stocks, and buy BRK today. So, that is at least a start!!

It is obvious long term wealth comes with proper planning and lots of patience…Ironically, I had abundance of patience for decades before shooting myself in the foot last year.

Completely agree that patience and pragmatism are highly important for financial well being…both creating wealth, and more importantly for not destroying wealth.

Thanks again.

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Thanks RAS337 for the links. I enjoyed reading the memo. Indeed Mr. Marks is a brilliant writer…And one line bought a wry smile on my face (whilst thinking about buying BRK B today):

“What the wise man does in the beginning, the fool does in the end.”

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although the NASDAQ increased today, at one stage, it was down…and so were the DOW JONES, S&P 500 and even 10 year treasury yield, and bond yields…

And then the market now started rallying a bit??

Ignore the daily movements in stock prices. As they say, Mr. Market is a manic depressive, sometimes in the same day. It’s easy to get swept up in the emotion of the markets, but all that matters is watching for opportunities to buy good companies at bargain prices when Mr. Market is suffering a depressive episode.

It is easy to be gripped by the feeling that the train has left the station when a fallen angel like DDOG is up 7% in a day. I’d say two things about that. What is the intrinsic value of DDOG? I have no idea, so why should I care if Mr. Market is excited again? If I miss that train, there will be another. Second, these large swings in the price of story stocks have been happening regularly. The trend, however, remains downward. I would guess that DDOG hasn’t found it’s bottom yet, even if Mr. Market thinks otherwise today.

Rather than gamble on stocks I don’t know how to value, or whose valuation incorporates such a wide range of outcomes as to be simple guesswork, I just stick to the knowable. I have a few companies I’ve been looking at and started positions recently, like Berkshire and Google. I know that Google will be making money for many years to come. It’s margins are golden, plus it’s selling at the low end of its price range over the last 10-15 years. I expect Google will conservatively return 10-15% a year over the next decade. It rarely trades below a PE of 20 or a PS of 5. It’s below both currently. Mungo has covered the attractiveness of BRKB at current prices, so no need to rehash that one.

Rather than looking at the market you should be watching companies you like and that you’d like to own. When their prices get to a point where you can reasonably expect to earn 10-15% per year, buy them. Maybe your target is 15-20% per year. These are harder to find, but they happen. Microsoft was available a dozen years ago at $25. You had to be patient buying and holding that one, but despite the criticism, it always made boatloads of money even as Mr. Market declared it dead.

Forget the market. Find what you want to own, watch for an opportunity to buy on the cheap and act when the opportunity presents itself.

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It is easy to be gripped by the feeling that the train has left the station when a fallen angel like DDOG is up 7% in a day. I’d say two things about that. What is the intrinsic value of DDOG?

Here is a simple analysis of Data Dog. I encourage any investor to change some of the assumptions and post a compelling reason why it makes sense at today’s levels.

TTM Revenue : $1,192B

Assume 30% growth for the next 5 years

5 Year Revenue Target : $3,500B
Assume Target Operating Margin of 20%
5 Year Profit Target : $680M

Target Profit Multiple : 30x
Target Market Cap : $20B - $25B

Its trading at $35B valuation today :open_mouth: - Yikes. Maybe we will be in strong bull market and they will trade at 50x, that still only gets you to $34B. Maybe they will have another few years of 75% growth before tapering out, that might get you to $50B - who knows. Lots of maybes here.

tecmo

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Its trading at $35B valuation today :open_mouth: - Yikes. Maybe we will be in strong bull market and they will trade at 50x, that still only gets you to $34B. Maybe they will have another few years of 75% growth before tapering out, that might get you to $50B - who knows. Lots of maybes here.

Let’s compare DDOG and GOOGL. Anyone investing in DDOG is making an assumption that earnings will grow at 50% or more for at least another five years and that net margins will settle in around 20%. If it hits this marks, we’re looking at a $90 billion market cap in five years, returning just over 21% annually from today’s prices. A lot of optimistic ifs in this scenario.

Now GOOGL is currently a $1.5 trillion company with $270 bil in annual revenues. It’s been growing revenues at 13.5% over the past five years. If we project that growth rate forward for another five years we’re looking at almost $510 billion in revenues. Slap the current 27.5% net margins on those revs and you get $140 bil in earnings. A PE of 35 is ambitious but not impossible, do the five year target is $4.9 trillion for an expected annual return of 21%.

Same expected result from both investments. What’s the difference? One company is gushing cash and its forward expectations are simply a projection of what it is currently doing. The other has yet to earn a penny and its forward expectations are wildly optimistic and its future earnings power is based on a WAG about future net margins.

If googl disappoints and only grows at 10% over the next five years, reverts to net margins of 22%, and gets a historically low multiple of 20x eps we’re still looking at an annual return of 6%. What can you say about DDOG should it disappoint?

This expected low range result for Google is what value investors call a margin of safety. Google is very unlikely to lose you money going forward, and quite likely to offer an attractive return. DDOG is very unlikely to offer that 20%+ return and has a non-zero chance of losing you a ton of money.

When looking at these two investment opportunities, entirely abstracted from the daily gyrations of Mr. Market, the choice is a no brained if these are your only two choices.

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Here is a simple analysis of Data Dog. I encourage any investor to change some of the assumptions and post a compelling reason why it makes sense at today’s levels.

TTM Revenue : $1,192B

Assume 30% growth for the next 5 years

5 Year Revenue Target : $3,500B
Assume Target Operating Margin of 20%
5 Year Profit Target : $680M

Target Profit Multiple : 30x
Target Market Cap : $20B - $25B

Its trading at $35B valuation today :open_mouth: - Yikes.

It seems too pessimistic to start off with 30% revenue growth assumptions, after the company has seen revenues of $101m, $198m, $363m, $604m, and $1029m from 2017 to 2021, so up 70% last year. Last Q was $363m, compared to $198m in Q1 2021 which is up 83%. TTM $1193.3 compared to TTM of $670.8 a year prior, so that’s up 78%.

Maybe that won’t hold up for 5 years, granted, but if you’re saying it will be only 30%, you need to justify why growth will suddenly fall off a cliff.

Say you give them 60%, 50%, 40%, 35% and 30% in the next 5 years, you get $7,037m in 5 years, instead of $3500m. (or instead of $4431m, which is $1193.3*1.3^5; I’m not sure where you got $1192, or where you got $3500…)

If you give them a 20% margin as you suggest (sounds reasonable, although it could be higher), that would be $1407m, meaning that at their current market cap of $31.8b (not $35b!), they are trading at 23 times their earnings in 5 years.

In other words, even if current growth only slows down slowly, a final P/E of 23 is consistent with 0 returns in the meantime. Positive share price returns require more optimistic assumptions. It’s not for me, but it’s not crazy if you have reasons to believe that margins might be higher than 20% or growth might be a bit better.

dtb

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I encourage any investor to change some of the assumptions and post a compelling reason why it makes sense at today’s levels.

You have access to M* research? They use traditional DCF and fairly plausible input assumptions to rate DDOG at 4*. Operating margins are expected to expand (in the near term) rather than contract as the flywheel gets going. Is M* right? Who knows? But it’s not as if there is no plausible case to be made. CFRA rates DDOG 5*. These are fairly disinterested analyses.

I don’t own DDOG, but it’s on my list at a price of $90 as I await the summer clearance sale. GOOG is my largest holding (after cash and short-term equivalents), with BRK/B #2.

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Now GOOGL is currently a $1.5 trillion company with $270 bil in annual revenues. It’s been growing revenues at 13.5% over the past five years. If we project that growth rate forward for another five years we’re looking at almost $510 billion in revenues. Slap the current 27.5% net margins on those revs and you get $140 bil in earnings. A PE of 35 is ambitious but not impossible, do the five year target is $4.9 trillion for an expected annual return of 21%.

You need to account for return of capital to shareholders (ie: buybacks) which will be significant over the next 5 years. This makes GOOG even more compelling (and why I envision a return to a 7x multiple of sales).

tecmo

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Here is another favorite, Cloudflare (NET)

Assumptions

  • Could get to $2B in revenues in 5 years
  • Could get to 20% operating margin.
  • Could trade at 10x revenues, which would be $20B in market value.

However current market value is $16B, and there will certainly be some dilution in the future - so maybe best case is a flat share price for 5 years? Stock is down 75% from its highs, I wonder what the assumptions were when it was trading at $200? $10B in revenue?

tecmo

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…but all that matters is watching for opportunities to buy good companies at bargain prices when Mr. Market is suffering a depressive episode.

Or simply put a limit order in at a price you are willing to pay and then go play!

IP

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You need to account for return of capital to shareholders (ie: buybacks) which will be significant over the next 5 years.
This makes GOOG even more compelling (and why I envision a return to a 7x multiple of sales).

True, but you can’t count the same benefit twice.
That capital is being deployed into a company trading at ~6 times sales and a high multiple of current earning power.
So if the future is very bright that’s a good use of capital making the future even brighter.
But if the future is a bit dimmer, then it’s poor capital allocation, making the future dimmer still.

I’m long the stock, just pointing out that buybacks are weirdly circular.
If a firm does buybacks at times that the stock isn’t clearly cheap,
they shouldn’t do the buybacks at that level or maybe even a bit cheaper, because it’s a firm that isn’t that great at capital allocation…
But if a firm is really fussy about when they do buybacks, they should do even more of them,
because it’s a firm that is really good at capital allocation…
Buybacks are sort of like increasing a firm’s “value beta”.

Jim

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True, but you can’t count the same benefit twice.
That capital is being deployed into a company trading at ~6 times sales and a high multiple of current earning power.
So if the future is very bright that’s a good use of capital making the future even brighter.
But if the future is a bit dimmer, then it’s poor capital allocation, making the future dimmer still.

True, I guess what I was trying to say is that Google has been able to turn the profit dial up and down in the past creating fluxations in EPS. If they start doing massive buy backs that will add another variable to the equation.

My speculation is that EPS is going to look very attractive going forward and will act as a tailwind for the stock.

tecmo

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My speculation is that EPS is going to look very attractive going forward and will act as a tailwind for the stock.

Seems like a good guess to me.
I’m allocating my cash to their stock right now, so I can’t exactly suggest that it’s a dumb idea for them to be doing the same.

The question is what they’ll do with their buyback program next time they’re trading at (say) over 8 times sales.
Or over 15 times likely 7-year-forward earnings.

Jim

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