Right or wrong, I have to agree with he and Munger on this topic:
Grantham:"Cryptocurrencies leave me increasingly feeling like the boy watching the naked emperor passing in procession. So many significant people and institutions are admiring his incredible coat, which is so technically complicated and superior that normal people simply can’t comprehend it and must take it on trust. I would not. In such situations I have learned to prefer avoidance to trust."
Dont you think it seems more likely this time than it did the last time? And isnt this time more like the time before the last time?
Is he fibbing, or is this time the real thing?
Oh, it’s certainly the real thing this time…in certain corners of the markets.
Insanity doesn’t have to hit everybody in the village for the village to be deemed a crazy place.
Normally most securities in the market trade within the broad range of normality, with occasional pockets of insanity for the flavour of the day.
These days it sometimes seems more like the reverse.
Jim
Normally most securities in the market trade within the broad range of normality, with occasional pockets of insanity for the flavour of the day.
These days it sometimes seems more like the reverse.
A random peek into that:
Value Line covers 1700 stocks every week, and has done so for decades.
Since 1997, on a typical day, an average of 50 of those are trading at more than 10 times last-four-quarters sales, under 3% of them.
As of January 3 the figure was 176 stocks, over 3 standard deviations above the average proportion.
Heck, 47 of them are trading at over 20 times sales.
It seems that an unusually large number of stocks is being seen with boundless optimism.
Berkshire is trading at about 1.91 times recent sales, in case anybody is wondering.
It’s not a meaningful metric for any one firm, but it’s a token attempt to stay on topic.
Jim
Just wondered if theres any data of how ADRs perform in bear markets vs domestic listed firms. Eg if BABA has an 8 to 1 ratio and the HK listing is holding up nicely does it bolster the US share price?
Cathie Wood gave the single worst intvw I’ve ever heard on Invest Like the Best a few years back. She refused to name one investing mistake or error she had ever made. Her analysis was so facile it was laughable.
I shorted ARKK last March and have been enjoying it ever since.
“Oh, it’s certainly the real thing this time…in certain corners of the markets.”
I agree. Take the NASDAQ, for example. It’s down 12.5% from its November high, and still trading at 37x earnings. How low do you think it will go before it recovers to its November high? 15% below the November high? 50% below the high. I’d guess closer to 50% than 15%. We’ll see.
Grantham tends to be basically “right” but without too much effort or accuracy related to time. Therefore the market goes far further in whatever direction and the valuations get more extreme all while he is chanting (whatever he’s chanting).
As of today, the U.S. has seen three great asset bubbles in 25 years, far more than normal. I believe this is far from being a run of bad luck, rather this is a direct outcome of the post-Volcker regime of dovish Fed bosses. It is a good time to ask why on Earth the Fed would not only have allowed these events but should have actually encouraged and facilitated them.
If I had copied and pasted every part of this article I wanted to I would have needed to post the whole thing. But, the above is the $64,000 question. For you youngsters here, you may need to look up this reference.
It appears that there was insufficient damage done by the previous housing and stock bubbles. What did we miss? the Fed asked. “Bonds,” they shouted through their hallowed halls. Bonds! Add those this time!
I have been warning of this disorder for years; so long that I am tired of hearing myself say it. But, just because someone is wrong in the present moment – though there is evidence that even now that may not be true – it doesn’t mean that the thesis itself is not accurate. It involves timing, and timing is a bitch.
If I wanted to put on my conspiracy hat, I could say that the Fed and its masters in the political class have been kicking the can down the road. “Peace and prosperity in our time,” they chant. “I will have made mine and be out of office, political or enterprise, before it all falls apart.” Is this why?
Or, I could say it is all of the elites. Those with power, privilege and prestige have many more opportunities than the bottom 99% to profit from this insanity. They encouraged a Fed policy that would allow them to use their wide range schemes for the creating and protecting of wealth; unconcerned about the eventual damage that will be done to the much less fortunate. Is that what is happening? I think so.
Whatever the case, how could you put an innocuous explanation to the intentional manipulation of asset prices over the last 20 or so years? How does Mr. and Mrs. John Doe protect themselves? Their mortgages will be underwater and their saved wealth in stocks and bonds will be decimated. Do the people who created this mayhem for their own personal gain care about them? Apparently not.
When this all ends, as it will, we will have accomplished a hugh transfer of wealth from the small and medium to the rich and powerful. If the value of the stock in your company’s IPO falls from $2 billion to $500 million, you are still more than OK. If your already barely sufficient retirement savings fall in half or more, you are not OK.
Future history will not be kind to the architects of this looming catastrophe.
Another data point: Looking at the market in tech jobs, salaries have easily increased 100-300% from five years ago. It’s really bananas out there. Big tech and well funded startups are throwing tons of cash/equity at tech folks because there is so much demand for them. Feels exuberant to me.
A few other signs that worry me:
No idea what’s going to happen but things are so crazy now, there is no way it’s going to last forever. I’m sitting on a decent amount of cash and am employed at a steady company who should not be too affected by a downturn in some of the above trends. Mostly just twiddling my thumbs and nibbling at things that look cheap.
[1] https://www.nytimes.com/2022/01/19/technology/tech-startup-f…
There are more than 900 tech startups that are worth more than $1B now…
For certain values of “worth”…
Jim
I haven’t been following this thread too closely but I recall vividly and rather worryingly Grantham said last summer something along the lines:
First there will be a collapse of the low quality names. He used the term confidence termites.
Then the confidence termites will spread to the quality assets.
It looks like the first act has absolutely started. I see Netflix is down in a big way today. Is this the beginning of the second act that takes out the quality companies as well. We will see. But it’s looks to me Grantham’s prediction is shaping up nicely.
I have always been an anxious type and my instinct is to sell a little to have more cash. However, I’m 90% Berkshire and will probably ride this out. I have found over the years that when I start selling I eventually sell everything. And that is usually not a great idea. I’m kind of preparing myself for a 50% drawdown in Berkshire. But am taking solace in the possibility that I will not be spending any of my Berkshire for at least 10 or 20 years. Plus as I read through Adam Meads Complete Financial History of Berkshire Hathaway, it is so clear that Berkshire rarely makes major capital allocation moves and that they are almost always during periods when there are no bids for great assets.
Elias, why will people’s mortgages be underwater when they’ve borrowed at incredibly low rates and housing prices have gone way up? I don’t understand your comment.
If your already barely sufficient retirement savings fall in half or more, you are not OK.
A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.
A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.
I’m not so sure about that. Price volatility isn’t risk.
If you are early in retirement, you want and perhaps truly need a positive real return.
Failure to meet the minimum return is a real risk, whereas a transient fall in prices isn’t.
Anyone wanting or needing a positive real return owns zero bonds, as there is almost nothing with a positive real yield.
Especially if there are fees.
There is no reason for a gigantic cash pile.
What does that leave for most people?
Equities fall in price by half pretty regularly, but they’re what you’d want to be the bulk of the portfolio.
So, from that point of view, I wouldn’t say anyone was doing anything wrong being exposed to a 50% drop.
I’d be wondering more about the people who foolishly traded returns they need for steadiness they don’t.
Sales done over a very long period will inevitably get very average valuation multiples.
The only exception I can thing of is that the pension pot is much to small, and going to run out soon, long before you’ll likely croak.
In that situation, a big drawdown is a big issue.
You’d probably want a barbell portfolio: tons of cash, an a small allocation to “lottery ticket” investments that just might pay off in multiples.
If you’re nearer the end of your retirement, it’s a different story.
Jim
Whatever the case, how could you put an innocuous explanation to the intentional manipulation of asset prices over the last 20 or so years?
Well, recessions hurt, and economists think they can make them hurt less.
I’m very slowly reading Alan Greenspan’s The Age of Turbulence. Essentially, economists, and fed economists especially believe they can use the tools they have to control the economy for the benefit of society. They recognize that markets can get too inflated, but inflated markets also show an increase in labor participation by people in lower rungs of society, so it’s hard to argue that they let this occur to benefit the rich at the expense of the poor.
A recent example of markets getting too inflated was the real estate run up leading to 2007. But a lot of the policies that inflated the bubble helped middle and low income Americans build wealth they otherwise could not have. At the time, I’m sure it looked like a reasonable tradeoff.
If you are early in retirement, you want and perhaps truly need a positive real return.
Failure to meet the minimum return is a real risk, whereas a transient fall in prices isn’t.
What do you think of a couple year’s expenses in cash to be spent only if your otherwise all-equity portfolio falls 20% or more?
As the Cash Bucket described here: https://earlyretirementnow.com/2018/05/23/the-ultimate-guide…
Thanks, Jim.
“It [the Nasdaq] is down 12.5% from its November high, and still trading at 37x earnings.”
My question is not what to do with QQQ or QQQE. I definitely wouldn’t buy those right now. They will fall farther imo. My question is what to do with an individual stock like INTC. By both my estimate and Morningstar’s estimate INTC is 20% undervalued. What would be the best strategy if I wanted to buy INTC? Buy now? Average in? Wait for the NASDAQ to bottom? Other?
Elias, why will people’s mortgages be underwater when they’ve borrowed at incredibly low rates and housing prices have gone way up? I don’t understand your comment.
If I remember correctly, in 2005 -2007 the accepted belief was that housing prices never fell. That was shortly proven wrong, and, in part because of falling housing prices, in 2009 the financial markets stopped functioning at one point. Banks were merged, investment firms were merged, AIG lost something like $100 billion in one year and nearly failed. If we have a bubble again, housing is overpriced, in at least some cases. The value of some houses will fall below their mortgage amount. The housing purchase prices went way up before their market value went way down.
A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.
OK, what are you going to diversify into today? There has been more than one time in my lifetime when the stock market averages fell by 50%. Are you going to diversify into bonds? With interest rates at all-time lows, bond prices are at all-time highs. If you want to scare yourself, look at how much a 30 year, 3% bond would get marked down with a 100, 200 or 300 basis point increase in rates.
For the seasoned investor, volatility can be a friend. For the vast majority of people who can barely distinguish a stock from a bond, they go by what they are told, understanding it or not. Does society have any obligation to protect its citizens’ financial affairs? When I talk to my friends and relatives I can see they have only a very shallow understanding of investing, even in their 401-ks that they count on for retirement income. I don’t know what to tell them because I can’t tell them enough to impart the knowledge they need to properly financially protect themselves. The subject is too difficult. Is it their fault for not being financially savvy enough to navigate today’s market?
For the vast majority of people, a rather stable market environment where they can periodically invest new funds, earn some return, and then have a dignified retirement is optimal. They buy what they can, which is mostly stocks and bonds. They believe that they are doing the right thing, unaware that the Fed is manipulating assets prices so high that regardless of what they do, they are set up for a big fail when the bubble bursts.
There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?
IMHO there is no place to hide but cash, but most feel that they need to be invested and won’t take that option.
<<There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?
There is another possibility: the value of US dollar comparing to other currencies especially the Chinese will drop significantly, resulting in rising import price and inflation.
The cyclical nature of things is important to consider and I think Grantham to some degree (for years I read his stuff but now I don’t because it is redundant to my own thinking) is going to plug a lot of stuff into his valuation model. When I’m thinking cyclical some things come to mind:
Saul’s board: Not sure how many reading and investing understand how dramatically cyclical and secular hyper growth stock investing is. Not only do people chase and run in groups, they also most often choose to chase different things after those that formerly were chased fell from grace. There’s just so many Amazon’s and such, those that sustain from one euporic chase to the next (before eventually now being chased any longer).
For reference: In the mid 1990’s my investment club bought EMC, the data storage stock. We bought for a split adjusted $1.50 and put $20,000 into it. The stock ran to $105…nobody wanted to sell! Along the way all the members of the club (25 of us) except me bought EMC stock personally. In the end we, the club, sold EMC for $7 making a solid 15% annual return. All 24 other members of the club? They ALL lost money on EMC because they bought at a later time than the club. EMC the business? It just marched along fine, growth slowly fell from 50%, to 35%, to 25%, to 10%…and so forth. Dell bought out the stock eventually.
EMC, once it fell? Never was it chased again! The club voted down one members recommendation to put “all our money into it” when it fell to $35. Thank goodness rational thought prevailed!
Homes/contractors/home builders/Lowes/Home Depot: I have owend Lowes since it came public, it was from my area and we all knew about Lowes. I’ve been selling Lowes and even sold down to the price it sells for today. In 2015 you could buy it all day long for $60. We used to say here, “When the contractors are all buying new trucks it is time to get out.” Well, the contractors here not only have been buying new trucks every year since 2014 (about when housing here began to sustain in a really solid manner) …they now routinely buy $75,000 Ford trucks with features made for space travel (kidding of course). Lowes doesn’t look expensive on a PE basis; Lowes IS expensive.