vinod1

It is said that the last refuge of scoundrels' in patriotism. I find the last refuge of underperforming investment managers/investors is blaming the fed. Low rates, fed is enriching the rich. High rates, fed is hurting the poor. The fed did get a few things wrong. Some of their choices are a bit baffling, but not entirely so if you can just try to think from their point of view. I think they are doing a wonderful job. Perhaps the best of any government institution in USA.

I agree completely that you should do what gives you the most peace of mind. After all what better use of the money? That said, you are leaving a lot of money on the table. If you have a $500k mortgage at under 3% rate for 30 years, you are going to have about $500k less after 30 years due to this - using average balance over the years and 4% higher rate of return than mortgage rate. Also you still have the real estate taxes that need to be paid. So it is not exactly free and clear ownership even if you paid off the mortgage. It is only a question paying less. Personally I get a kick out of knowing I am paying 2.5% rate, as even the most credit worthy Governments cannot get this rate for most of history for borrowing over 30 years.

Dimon wrote in one his annual letters that when the Fed asks him to buy out another financial entity he would say "No Thanks".

Almost! 20 percent! increase! in! exclamation! points! from! 2021 AL! 27 to 32!!!!!!!!

It is bit concerning to think OMG! The only reason you are not murdering your neighbors and raping women is because the Invisible Man said so? If for some reason, they were not mentioned or if there is a over-the-air update to the rules from the Invisible Man in the future which allows these things, you would merrily go along?

Buffett has never let his macro views influence how much of his portfolio would be in stocks versus cash. Even when he went out of the way to warn about high valuations in the broad market, possibility of sustained high inflation, and large dollar devaluation, he did not let these concerns influence his portfolio. In retrospect, it is clear that he would not have had his record if he sold out of stocks every time he thought the market or even his holdings were fully priced. The perfect example is in 2009: We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall. -Buffett

Perhaps Buffett is confused about these too... Don't pass up something that's attractive today because you think you will find something way more attractive tomorrow. or Charlie and I don’t pay any attention to macroeconomic predictions. We don’t know the future of the “macro” and I can’t remember a single investment decision that hinged on the macro. We have a little conceit, that if we don't know, who would? But people do it all the time: talking about the macroeconomic future—but this isn’t productive. They don’t really know what they’re talking about. To ignore what you know to listen to what someone else who doesn't know, doesn't make sense. People will do well if they own solid businesses (if they didn’t overpay). If they attempt to time their purchases, they will do well for their broker but not for themselves. or Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. or A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor profit from them. or Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

There is a good article that is worth reading called "What if You Only Invested at Market Peaks?". Basically about a guy who saves all his money up to that point and ends up investing just the day before start of the last 4 major bear markets and what his results where. I did not check the data but passes the smell test. https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Read Grantham's latest. His fair value for S&P 500 is 3200. His assumption on required return is 6.5% real (not stated in article but I have been following him for 20+ years and understand his methodology). So about 9% nominal. Change to 8% and fair value ends up being 3600-4000 range which is my estimate. Vinod

There is no government manipulation of inflation data. It is just a difficult thing to measure and the bureaucrats actually do a pretty good job. One of the few. Inflation is highly personal and each of us experience differently. As they say our personal experience trumps any data. I bought a Camry LE in 1997 for $19,500. Another Camry LE in 2011 for $20,000. PC's, phones, cameras, etc. All cheaper and better. There are a lot of clothes, shoes and other stuff that were outsourced and quality went down but they got cheaper. They became more of a use a few times and throw. There is a billion prices project that produces inflation figures similar to official data. http://www.thebillionpricesproject.com/ Vinod

Thanks!

I am talking about estimate for transaction/expenses/etc prior to the 1950s for holding diversified portfolio of stocks. I follow Damodaran's work and learned more from his "Investment Valuation" book than from CFA exams.

Not very familiar with agency mortgage bonds but I would think that the 6% bonds would be called if rates dip again and you would end up with reinvestment risk. Please correct me on this. Vinod

Inflation is never good for any financial asset. The argument is what holds the most value long term in case of massive inflation. Just for kicks, if you model an inflation of 10% for 20 years in US. Real GDP growth of 1 or 2%. Profit margins collapsing by half to 6% range from 12% now. PE multiples falling to 10. You still end up with 9-11% equity returns. Not good at all. But most likely far better than bonds. If inflation is going to be 10% over such a long period means Fed is likely not keeping rates high. In which case, cash would suck as well. Vinod

S&P 500 earned $153 in 2018 and $157 in 2019. Definitely closer to peak but not a fluke or from something totally unsustainable. So let us say, an average of $155 in 2019. Nominal GDP is 18% larger in 2022. In addition, about 4% of net share buybacks took place over this period. Adjusting for this gets to $190 per share in 2022. The massive boost to earnings you are talking about is gulp $10 more on a base of $190! Less than 5% might a tad excessive to call it a massive boost. Early last year my assumption was exactly like you, that there must be a massive boost to S&P 500 earnings. It just made sense, what with all the nonsense going on with SPAC, Crypto, ARK and the general sense of exuberance. But when I looked at the data, I could not make it out in the earnings numbers. I do agree that to grow from here is going to be a real headwind. Vinod

I was an indexer from 2001 to 2005 and thinking/researching ERP one of my favorite hobbies (isn't it sad?) and I picked this up somewhere in that timeframe. It might be something I read somewhere or it might be my own thinking but hardly any of my thoughts on investing are original. One of the reasons I got interested in stock picking is because of the low ERP. Anyway the argument has definitely been made by Siegal and Philosophical Economics which reinforced my own conviction (no confirmation bias, of course ). But I did not see anyone make estimates of this. Vinod

+1 Damodaran has a spreadsheet you can play with. Assuming $200 earnings in 2023 and 75% total payout (which is about average of last few years) to get free cash flow of $150 and using your 3% risk free rate and 3.5% ERP, IV of S&P would be 4800ish. His model is internally consistent unlike many others from wall street. For example, long term earnings growth is limited to the risk free rate. So in above the valuation is based on S&P 500 earnings growing at 3% rate over the long term.

No. Earnings yield is not your return. In a crude and approximate way you can say the earnings yield is your real return. So total return is earnings yield + inflation, again in an approximate way.

If the argument is S&P 500 is going down "X" percent this year because of "Y" reasons, you are just pissing over everything Buffett, Munger and Graham taught.

Many pension funds, insurance companies, endowments have a 7% return target or need to fund their expenses. If treasuries are going to get 5%, high grade corporates and other investment grade bonds are going to be yielding 6% to 7%. Many of these institutional investors would be all over these bonds in that case. So I think treasury yield of 5% is sort of the upper limit and most likely would remain in the 3% to 4.5% range. Put an equity risk premium of 3.5% to 4%, a PE of 20 would look pretty attractive. S&P 500 earnings of $180 should be a conservative estimate. So a value of 3600 to 4000 should be quite reasonable.

Hussman is the worst. Not sure how he is managing money with a straight face telling investors that he is protecting their money while showing negative returns over 10 and 15 years!

In 2011/12 when S&P 500 reached 1000 or so there were worries that it got too expensive and many reduced allocation. Profit margins too high, PE too high, yada yada. I was sure profit margins would go back to their historical range of 6 or 7%. I wrote it down in my investment journal. I also noted that if profit margins again came back to 10% that I would change my mind as that would mean something else is going on. I am one of them. I got bailed out of that madness because bank stocks got cheap and I was able to invest my portfolio into BAC and other financials. Then profit margins came back up, I was already invested, so it did not hurt me as much as it would have. Now I see people falling for the same type of thinking. S&P 4000 must be expensive, etc.

Many people here would say you just need to hold good businesses over the long term. Very few companies exist more than 100 years. Less than 20% of the S&P 500 companies survived 60 years. I cannot think of a better business than the total stock market. Compared to it, Berkshire has the moat/riskiness of a lemonade stand. I do hold Berkshire. Just pointing out the riskiness compared tot he market which is virtually indestructible. Backed by the 7th fleet and nuclear arsenal. So what should one pay for such an extraordinarily resilient business? I do not see why a PE of 20 is too high.

Think of this another way. People invest in Berkshire at 1.3x BV licking their hands and most would argue fair value is about 1.5x BV or a bit more. These same people assume BRK would beat the market at most by 1% or 2%. Buffet and Munger likewise say the same. So one is willing to buy BRK at 1.5x BV for something that is going to return maybe just maybe return 1 or 2% more? What does that say about the market valuation?