vinod1
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Posts posted by vinod1
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4 hours ago, james22 said:
Sure. That's the Dow 36,000 argument: once stocks are recognized as less risky than now thought, they'll correct upward.
Very different.
Their argument is that stocks and bonds have the same level of risk. Hence stocks do not need any equity risk premium i.e. a equity risk premium of zero.
What I am saying is historical risk premium of 6.5% is too high and going forward it should be lower.
I will lay out my reasons - not actually mine, but these arguments are quite well documented by many for the last 20 years. Shiller, Philosophical Economics, etc.
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2020 taught us the power of Fiscal and Monetary policy. When faced with a potential for another Great Depression like scenario a $3 trillion fiscal dose + $5 trillion monetary dose produced a robust economy all for a 20% inflation hit.
Come another major risk to economy, all the players now have a playbook.
Tail risks are now much lower than in the past. This has got to be extremely bullish for stocks over the next several decades.
Now that I said it, the markets are going to tank. To all the bears: you are welcome.
Vinod
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S&P 500 Earnings are $160 in 2019. Nominal GDP is up 20% over the last 3 years - about 14% inflation and around 4%ish real GDP growth. So earnings are about $190 per share in 2022 if earnings kept up just with GDP and inflation in 2022. Now add around 4% in net buybacks and you are close to $200 per share. Does not seem to be too far out of line.
Or take a look at the top 50 companies by market cap and identify which ones are "peak earnings" or overstated earnings or high PE. Except Tesla, hard to find anything obvious.
I actually went through the exercise of looking at the top 50 companies, then looking at each industry as a profit share of the S&P 500, adjusting them up and down to come up with a rough estimate. My arguable conservative estimate comes to $180 in 2022.
Now, this is the only recession that I know of where everyone and their pet is predicting. Whereas in the past, recessions have been more of a surprise. Companies started making adjustments long before the actual recession even starts.
Maybe, just maybe, we have a recession and it may produce only a small earnings dip or might not actually produce any earnings dip. Heck, earnings might even increase slightly in the midst of a recession. Consumers are still pretty flush with cash, companies have locked in low rates, banks in strong financial position. Unless we get some really spectacular corporate failures, or a major geopolitical blowup somewhere I just do not see any issues.
In 2001/2 we had 9/11 and Worldcom/Enron/Adelphia scandals. 2008/9 we had GFC. Unless we have something similar I do not see any impending doom.
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13 hours ago, TwoCitiesCapital said:
Only if buying short-term ones. The problem with the TIPS is the duration risk/price fluctuation.
You only get the real yield by holding something close to maturity of the bond. iBonds provide no price risk and liquidity at any point after 12 months without taking principal loss. If the market goes down 20-30% from here over the next 12 months, I'm going to want to be able to sell and buy stocks and it's not clear where I come out owning TIPS with the price risk.
Agree but unlike nominal bonds, there is going to be a limit on how high real yields can go. In 2000's when TIPS were brand new and there is not much experience they went up to 4.5%. They were like $20 or $50 billion in TIPS for the first couple of years and liquidity is not there at all. The whole academic world was awash in research on this strange behavior and what it means. Tons of papers where published about this phenomenon. I dont think we would evergo back to a TIPS rate of 4% and I expect an upper limit of 3% at most with 2.5% being more likely top. So the downside from here is limited.
A ladder of TIPS to me is the ultimate in safe securities outside of i-Bonds with 1% or more of real yields.
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54 minutes ago, Dalal.Holdings said:
I wouldn't buy any fixed income w duration greater than 5 years due to rate risk. If there is a repeat of the '70s and '80s where Fed went sky high with rates, you'll be decimated.
I-bonds are good choice obviously but limited.
I think cash is often derided with inflationary times, but guess what? S&P 500 is down 25% YTD (nominal terms). Cash at 0% return YTD is beating the market by a whopping 25 percentage points. Bonds haven't done as well either. I guess that's what they call "alpha".
If I-bonds are a good choice, TIPS are even better in a non-taxable account.
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2 hours ago, thepupil said:
i find the direction of flows out of the bond market puzzling. TIPS yield 1-2% REAL across the curve. treasuries pay 4% across the curve (which is not out of line w/ long term inflation so are no longer negative real LT rates. Mortgage spreads very wide, can buy a fully government guaranteed 6% or so...which i find attractive whether its a 10 year or 20 year cash flow. IG spreads are decent.
I recognize no one wishes to fight the fed, but am still somewhat surprised at the collective cowardice of savers.
Man up and buy some bonds, you little bitches.
but rates may go up? who cares, all the more reinvestment income on which to gorge.
but inflations? if you think inflation is going to continue to roar buy tips. not like stocks are going to do well at sustained 8% inflation...but in that scenario you could lock in 10%/yr at whatever duration you want.
but regime change? yes the regime changed. unclear if it will change more.
i feel like an island on this and am probably way early per usual (and was early and knew it).
this is a long way of saying is i think we may be past the theorretical "natural" rate of interest already and am more concerned about not being able to earn these rates on safe stuff for a while than about rates going up more. but no one...and i mean almost no one...agrees with me on this.
I am with you on this. I just opened 529 accounts for kids just for this reason. Buying TIPS fund in this account.
I have invested in I-Bonds way back in 2000 when real rate was 3% and 3.6% and you can invest $30k per year per person. TIPS went to 4.5% real but was thumb sucking and did not invest.
Now TIPS are roughly at 1.75% real yield if look at total TIPS market. I doubt if they can get more than 2.5% in the future and of course then it would be a terrific opportunity.
Vinod
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Mistaking Absence of Evidence for Evidence of Absence
“There is no evidence that masks work”, I kept hearing repeated to me by the usual idiots calling themselves “evidence based” scientists. The point is that there is no evidence that locking the door tonight will prevent me from being burglarized. But everything that may block transmission could help. Unlike school, real life is not about certainties. When in doubt, use what protection you can. Some invoked the flawed rationalization that masks induce false confidence: in fact there is a strong argument that masks makes one more alert to the risks and more conservative in behavior.
https://medium.com/incerto/the-masks-masquerade-7de897b517b7
Taleb article, The Masks Masquerade
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I do have concerns that private schools are so expensive and lots of money to pay before she goes to college. But WA is pushing sex education to Kinder garden, which makes me furious. And 90% of that sex education is about LGBTQ. >:(
My kids went to good public schools in Massachusetts and New Hampshire, but If I had to do it over again, I think I would have put them in a Montessori type school in the younger grades. Kindergarten for sure. Forcing young kids into desks for hours on end had got to be the most unnatural thing we do to them. Sex education of any type at 5 years old is insane as well. Let kids be kids. By the time high school comes around any good school private or good public will do. My kids used to come home from school and tell me how their teachers or administrators were trying to brainwash them. Simply being raised right by you should be enough of an immunity to that type of nonsense.
Nailed it. Agree 100% with everything you said.
I was trying to figure out what exactly I wanted out of education for my children. I ended up realizing that my goal as a parent should be to give them an education and family life such that they would end up at the top 5 percentile of income and top 5 percentile of happiness. They may end up doing whatever they want but at least I want to give them a chance at this.
I think you can do that with either public or private school.
Vinod
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I do have concerns that private schools are so expensive and lots of money to pay before she goes to college. But WA is pushing sex education to Kinder garden, which makes me furious. And 90% of that sex education is about LGBTQ. >:(
In our children's school we are able to opt out of this stuff. Been opting out since 1st grade. Speak up, talk to the Principal. Worst case say your religion prohibits your child from participating in that class. If this is your main concern, it should be easy enough to opt out.
Vinod
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So let me ask this - since everyone seems to be on the "low rates = high multiples" train of which I'm still yet unconvinced:
If inflation goes to 5% per annum, but the Fed represses all interest rates to continue being below that nominal figure, do equities rally because interest rates are low? Or collapse because a 3-4% nominal earnings yield is still a negative real return to equity investors?
Low interest rates are contingent on low inflation.
IF one believes inflation is going to be a low and further interest rates are also going to be low, say for the next 50 years. Who knows, but if you assume both of these, why should stock market as a whole not trade at very high multiples?
Really the key is low inflation and low interest rates for a long time. But if this turns out to be true, then why shouldn't stocks be worth a lot more?
To put some hypothetical numbers:
Inflation of 1%
Interest rates of close to 0%
10 Year Treasury yield of 0.5%
GDP growth of 1%
If we know for sure this is how the next 100 years are going to look like, what multiple would make sense for the S&P 500?
I would think a PE of 40 times normalized earnings is going to be pretty reasonable. A 2.5% earnings yield with say 20% retention that is a 2% payout, add in a 1% GDP growth and 1% inflation, that is a 4% nominal return or 3% real return.
The overall bond market is going to return something like 1.5% nominal (1% more than 10 year Treasury) or 0.5% real.
That is an equity premium of 2.5%. It would not make sense for equity holders to be getting 5%-6% real returns while bond holders make only 0% to 0.5% real returns. We should not expect bond holders to stupidly allocate money that way.
The real fly in the ointment is inflation. People got used to low inflation for a long time and expecting it to continue. I am agnostic on this. Who knows if and when inflation rises? So I would not pay up for 40x as it leaves little margin of safety, but I can understand why many would be willing to pay if there is a very high probability of low inflation.
Vinod
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I use to have a very simple screen to eliminate fund managers: did the fund manager have a positive performance in 1999?
The really good fund managers who identified the most undervalued stocks at the beginning of 1999 have lost money. You can retroactively see which stocks are deeply undervalued at beginning of 1999. So if the manager had a positive return in 1999, then he is no good at picking stocks.
A similar approach now would be helpful, this time those that picked the right stocks for the right reasons 10-15 years ago.
Vinod
A thing that's not discussed here is that when you move into high net worth (and a lot of these active managers manage high net worth) out-performance is not the be all and end all. Performance is important, that's for sure. But the fit between the client and the IM in terms of temperament and risk taking is important as well. What the money goes into is important.
I don't know for how long has underperformed but I don't think that Gates is about to fire him and go all index.
I agree completely with you. There is a lot of value that an advisor/IM can bring to a client. Very few people would be just able to hold on to anything for any sustained period of time. Just being able to stick to indexing without constantly tweaking or jumping in and out, is something I think the majority of the people cannot do.
Vinod
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The man who does rich, dies disgraced.
I’d therefore put it in Hussman Strategic Growth
I think you mean Hussman Strategic Growth & Capital Depreciation fund.
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Agree with index funds. Look at all of the great, smart, hardworking mangers (Longleaf, Sequioa, Fairholme, etc). Literally, like a who's who of awesome performers. Everyone loved them 10 years ago or whatever. Everyone of them has gotten smoked by the S&P 500 over the past 10 years (yeah, yeah bull market, growth has down better). I'm not saying there isn't some truth to that but heck, Longleaf has now underperformed since inception...but perhaps 33 years isn't long term enough. :P
I believe Longleaf (alone with Primecap and Dodge and Cox) were 3 active managers John Bogle actually liked, too! Primecap is the only one that has done well.
Longleaf, Sequoia, and Dodge and Cox, I understand and can sympathize. But Fairholme is an absolute head scratcher. It is like he has completely lost his mind.
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I use to have a very simple screen to eliminate fund managers: did the fund manager have a positive performance in 1999?
The really good fund managers who identified the most undervalued stocks at the beginning of 1999 have lost money. You can retroactively see which stocks are deeply undervalued at beginning of 1999. So if the manager had a positive return in 1999, then he is no good at picking stocks.
A similar approach now would be helpful, this time those that picked the right stocks for the right reasons 10-15 years ago.
Vinod
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If you could no longer invest and you had to pick 3 fund managers to invest all of your money with for the rest of your life, who would you pick?
Given the two constraints (1) all you money and (2) rest of your life, hands down index funds would be the only choice.
Any other choice is going to be vastly inferior from a risk/reward perspective.
When looking at 30+ years, markets are likely to go through many changes as economy evolves. The managers you are going to select now are all going to have terrific current long term records. As they go through tough times you would be faced with a decision whether to stick with them or change. To evaluate active fund managers you need be as good at picking stocks as them to make that decision. So picking active managers means being active to some extent and it cannot be a pick and forget.
I have been tracking 20 mutual fund managers since 2001. It is partly to know my ability to identify superior managers and partly to invest in them as a portion of my portfolio is restricted to mutual funds. My intent is to jump into the underperforming managers from this select set of to get some additional alpha. On the whole it has been a small net positive and that too with benefit from a bit of luck.
So many funds have changed their managers, that the stock picking approach changed significantly. Clipper fund manager in 2001 used to be Jim Gipson, who is absolutely first rate stock picker but he retired. Same with T Rowe Price Capital Appreciation.
If I had just stuck with my initial subset of those 20, it would have been a significant underperformance.
Vinod
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More selfish, science denying Trump supporters
https://www.yahoo.com/news/florida-sheriffs-office-releases-footage-203833828.html
LOL, that women “dancing” in front of the police car.
FWIW, if I were to guess the demographic that is mit likely to skirt mask rules based on my limited observations, it would be a young black male in his twenties.
I dont even think its politics or race. Young people will do what they want, and be rebellious. Immature middle aged(30-45 years old) will do what they want. This is a YUGE portion of the population. My greater point is that trying to place politics around much of this, is a sure fire way to....not get anywhere remotely useful in terms of solving the root of the problem. Is Cuomo responsible for the block parties in Astoria? Of course he isn't. He is somewhat respibsle for Cuomo chips though. If anyone read the article..."when asked for comment, an official Cuomo spokesperson commented that:
Cuomo senior adviser Rich Azzopardi said Friday that buying $1 chips complies with the food-requirement rule.
“It’s consistent with the guidance — but you have to be seated,” Azzopardi said.
Sooo. WTF is the point of even having the "no bars" policy then? Is it really just politics? So you can say "you did something"???
EDIT: Disney now updates rules after guests take advantage of "eating and drinking" while walking to skirt mask rules....Fucking Trump
Teens and even some percentage of adults are always likely to make some reckless choices. No doubt.
Some percent of teens are likely to take drugs, even if both parents are well meaning and do all the right things. But now imagine, if the parents say, drugs are no big deal, they might be fun to use once in a while, etc. I would think those teens are much more likely to take drugs.
Same applies here. Trump has influence on a big enough segment of the population that his example would be emulated. Even if say 5% or 10% of population end up wearing masks because of him it would be helpful.
So no, I disagree with your backhanded support to Trump that none of that would make any impact.
Vinod
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“what exactly is he supposed to do?”
You can’t be serious.
Telling states to reopen before they are ready? Remember “Liberate Michigan!”?
Politicizing face masks “...Americans might wear face masks not as a way to prevent the spread of coronavirus but as a way to signal disapproval of him.”
I don’t think that Americans understand how pissed off the rest of the world is at the US.
This epidemic is a world epidemic. Allowing the virus to run rampant among 328,000,000 people is a threat to the whole world. Wouldn’t you be pissed off if the people living next to you all had Covid-19 and they just continued to go about their daily business while you bit the bullet and did everything you could to protect yourself and stop the spread?
Is there any rational person who doesn’t think Trump’s handling of Covid-19 has been deplorable?
Is it not the Presidents responsibility to lead the country and set an example. Yet his approach is to “ignore it and it will just go away”.
There is no way Trump gets a free pass on this.
Is there any rational person who doesn’t think Trump’s handling of Covid-19 has been deplorable?
There is indeed such a group. The only group that I find more deplorable than pedophiles. Trump supporters.
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Excess death data for Spain, Italy, UK, Belgium:
Also, how crazy is this:
Hospital data on coronavirus patients will now be rerouted to the Trump administration instead of first being sent to the US Centers for Disease Control and Prevention, the Department of Health and Human Services confirmed to CNN on Tuesday.The move could make data less transparent to the public at a time when the administration is downplaying the spread of the pandemic, and threatens to undermine public confidence that medical data is being presented free of political interference.
What if this administration worked as hard at trying to contain the virus (like how almost every other country has done) instead of trying to contain information and science and play propaganda games?
Are there any numbers on beach goers for the past two months? Haven't been able to find any detailed numbers.
Might be an unpopular opinion, but the protests certainly aren't helping. An estimated 26 million people have participated.
Not advocating for Trump, but what exactly is he supposed to do when the majority of lock down orders and "mandates" come from the state level? I agree with you on the concerns of the suppression of information you listed above.
This past month and a half has been quite the catch - 22
Poor Trump, what can he do? It is not like he is in the most powerful position in the world or anything like that.
Just a wild, wild guess, on things he could have done:
1. Maybe listen to experts. Stop giving retarded medical advice to start. I don't know injecting bleach might not be a good idea?
2. Stop politicizing wearing of masks. Ask people to take it seriously. If you want economy to get back to as close to normal as possible, masks are the vaccine we have.
3. Get behind increasing testing at a massive scale.
4. Provide a centralized procurement platform for PPE, medical supplies, etc. Make them available to the states.
Trump has been passive aggressive on this issue. Sending a consistent message would have helped.
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Talking to another parent in my child's school and he was saying how even if there is an approved vaccine for use in US, he would wait for the European Union to also approve the vaccine before getting it for his children. He is worried that a vaccine would be approved due to political pressure in the US.
It is sad to see that the preeminent agencies in the USA that the entire world used to look up to, have been castrated due to pressure from an incompetent retard in the white house.
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Here is what I hope everyone is starting to understand (and I'm seeing some signs, sort of). This situation is so complex with a lot of uncertainties, not a single stat, or a chart can be used to fully explain what's going on. Yet, if you have a political lense, every data point can be interpreted to support your narrative. It's just completely unproductive but this seems to be the norm in many media outlets.
Yes. You can also make a few points
1. Injecting bleach is not a good idea.
2. Masks are the vaccine we have. They make a difference.
I think everybody can agree to the above. Except of course, some retards who believe otherwise.
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What is a good book to read on this subject?
Thanks!
Hands down Investment Valuation: Tools and Techniques for Determining the Value of any Asset by Aswath Damodaran. Spent several months on this. This is after I passed all the CFA exams. It just goes into all the nitty gritty that is not covered well elsewhere. Some prefer McKinsey's Valuation book.
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You can play with the #s however you like, the point is that companies which can grow earnings without reinvesting capital (and therefore can distribute it to owners) are much more valuable.
Ok, I totally agree with you there. I feel like that’s where my 6% growth assumption comes into play. I’ve seen growth assumptions from others as high as 8.5%.
But, I’m pretty sure Buffett would not have stopped buying back shares in Q1 if he thought long term growth of 8.5% was feasible.
I model out for 7 years. So my forecast is over the next 7 years starting from end of March 31. BRK portfolio had slightly higher expected returns from the prices on March 31 and it providing a bit of tailwind from re-rating over 7 years.
The 8.5% is not from here to eternity.
I did a valuation for YE 2009 and my estimates for 10 year, BV and price. See below. I then reconcile every 5 years to see why it differed. I had not put up the reconciliation on my website. But the main book value growth difference is from (1) tax cut changes (2) portfolio returns.
http://vinodp.com/documents/investing/BerkshireHathaway.pdf
Vinod
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I will try one simple exercise to see if it conveys the point. Forget all the earnings models.
Assume BRK has $10 normalized earnings last year. Retains all earnings and does not pay dividends.
It grows at 5% for 50 years to $115 EPS in 2070.
It sells at a PE of 25 or $2875 in 2070.
So if you buy BRK today at $160 (a PE of 16), you would end up earning 6% total return.
The PE increase contributed adding only 1% to the return. Earnings growth per share drives the return. You cannot have vastly different earnings growth and share price growth without PE blowing out to an extreme.
If you want 10% returns from BRK assuming above, you need to buy it at $25 per share. A PE of 2.5.
Vinod
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Sadly, nobody is offering opinions of Berkshire’s valuation.
Further, we seem to be having some sort of a debate over whether the retained earnings of Berkshire’s operating companies and equity investments are valuable and growing. (I’m of the opinion they are both valuable and growing.)
And, there seems to be some degree of general disdain over a private investor’s desire to discount those earnings at a rate greater than the rate he estimates those earnings will grow when he is establishing his own desired purchase price.
Hi Thrifty3000,
You mentioned a lot of good points and obviously very smart and knowledgeable.
A lot of the board members are providing you with good advice. I made a very similar mistake in the past until I realized why there is no earnings discount model. I wish I wrote something that caused fellow board members to point out my mistake. Then I would have corrected it earlier.
You are lucky!
Here we are disagreeing with some very basic financial math. There is not much to disagree on if one understands it. I say it with nothing but goodwill and regards for you.
Vinod
Is The Bottom Almost Here?
in General Discussion
Posted
I think treasury 10 year yield of 4%ish range is quite consistent with 20ish PE on the market.
Historically stocks had a 6.5% risk premium. But the vast majority when this premium was earned was when no one can actually earn that much. Just not possible during this time.
In 1880s or 1900s or 1920s or 40s you would have no way to assemble a portfolio of diversified stocks at low cost. You would have to take a train to a city to a brokerage house, then have your broker buy stocks that he is familiar with at large brokerage costs, bid spread costs, etc. Then store the stock certificates safely. There is limited financial information. Limited investor protections. All these end up costing investors in returns.
One could have gone through investor trusts. They had what 5% loads and 1 to 1.5% annual fees. And they would have underperformed the market.
Say they underperformed the market by 1%, then you lose about 2% in fees annually over the lifetime of the investment. An equity risk premium of 6.5% would end up being 3.5% for the investor.
Now you can get diversified exposure at near zero cost. An equity risk premium that should be demanded by investors is probably in the 3 to 4% range.
Vinod