vinod1

This is cherry picking! A very specific time period that coincides with end of a historic bear market! What you are saying is stocks lose during bear markets! Yes they do. Stocks lose even over 10 years sometimes. The best example you can pick is a negative 0.5% annual return. That is just about keeping up with inflation, roughly. Cash and bonds did pretty much similarly to stocks at that time if I recall not much difference. For stocks to perform badly (not just compared to bonds) you need one of three conditions (1) war that devastates the economy (2) high and continuing inflation (3) financial crisis. Outside of these 3, stocks perform well. Which of these are you betting on? Vinod

This specific example of Lexington Corporate Leaders is no doubt survivorship bias. We do not know how other funds with a similar mandate would have performed. This is just such an interesting example, I threw it out there. But I accept survivorship bias is a very valid argument. I dont disagree at all. I did not follow the fund since a long time and dont know what might have changed after it was bought out by Voya. Vinod

To answer this specific point. I say correlation is not causation. In 2021 profit margins were at 13.3% - a historic outlier. A number that is vastly higher than any in the entire corporate history of US. Many reasons - stimulus, opening up, pent up demand, etc against a supply constrained economy. Those margins are not going to hold - inflation or deflation or disinflation. Margins went down as they normally do. You are pinning this all on "look this is all due to inflation". If we had deflation instead, profit margins would still have contracted. Or do you genuinely believe that deflation or heck even stable 1-2% inflation, would have kept profit margins high even now? Vinod

+1 BRK -> BNSF Railway Company -> Atchison, Topeka and Santa Fe Railway

Almost by definition nominal GDP growth has to translate to nominal revenue growth to corporate sector. Nominal revenue growth to corporate sector implies nominal GDP growth. You cannot have one growing and one falling. A little bit of leakage happens to make it not exactly 1.0000 to 1.0000 correspondence. You just need to believe in addition and multiplication. If you agree, then earnings have to grow in line with revenues - adjusted for profit margin changes. If over 30 years inflation is 5x and profit margin gets cut to half, real GDP growth is say 2%, you still end up with about maintaining earnings in line with inflation despite the margin compression. No real surprise. That is why bonds lose, again and again and again over the long term. Vinod

Thank you for making my point clearer than I was every able to make! I would add just one more point. They might not keep up with inflation exactly in the short term. Margins change, tax rates change, etc. But roughly and over the long term, it is just as near a certainty as you can get in investing field. In fact I would challange anyone to find a single country where stocks were not confiscated or wiped out by war, where earnings did not keep up with inflation. One single country for any 30 year period. Vinod

Quick comment. I went through these calculations in detail while completing CFA exams. It does not work like what you are thinking. There are all sorts of adjustments made to account for this. I passed the exams in 2008-2009 period (right in time for GFC) and I forgot all about them until you brought this up. Take the Total Stock Market Index for example, it invests in just about every single available stock investment. That is close to 4000 stocks. Some go bankrupt and drop to zero. Index value reflects that. A new company is IPO'ed and TotStockIndex buys it with some of the funds. The process is dynamic. Winners get big, losers get wiped out. There is not survivorship bias in the sense that you are using the term. Look at the long history of S&P 500 and it matches the performance of total stock market very closely. Heck if you pick a 100 stocks at random out of the 4000 with some limitations given to picking say at least 50 of them from the top 100 stocks by weight, you get pretty much close to index performance. Take a look at Lexington Corporate Leaders fund which is formed in 1935 I think to invest in the leaders of the stocks of that time with the mandate that no new stocks can be bought or sold ever. It now survives as Voya something fund. It matches the overall stock market performance roughly. Vinod

We are not talking about individual stocks. I am talking about the broad market. Every company goes bankrupt at some point but the overall corporate profits go up. When you invest in a broad index, you own pretty much the overall economy. DOW returns incorporate the effect of companies going bankrupt. As is the total stock market or S&P 500. The methodology specifically accounts for this. Last I read about it, only 57 companies in the original S&P 500 still survive today. The S&P 500 return during this period accounts for this fact. So if you are talking about that specific survivorship bias, it is 0%. When Buffett put 90% of his wife's portfolio is in S&P 500, it would be worthwhile for every investor to spend a few months pondering over this fact. Vinod

Literally a sample size of one, from which you are drawing a very broad conclusion. You might as well make a similar statement "When a Chinese spy balloon crosses continental US, stocks do xxx". There are many things going on in the 70s and cherry picking time periods does not make for drawing much of any conclusions. Small value too did very well in the 70s. Except during massive deflation, which means falling revenues across the corporate sector, when bonds are going to be far superior to stocks, in all other cases, stocks are always going to do much better compared to bonds. If PE's go above 40, then it might take a reeeeeelly long time, but even then they are going to beat bonds at 3 or 4%. Vinod

Not much. Unless you are talking about world ending events not happening. In which case it does not matter, what the stock returns were. Look at every single country in the world with stock markets and look at the returns. Well, we have that. Read 101 years of stock returns but Dimon, et all. Say inflation is 10,000% or prices increase 100 fold. What happens? Corporate revenues increase roughly 100 fold. It has to, otherwise there would be no inflation. We are looking at the two sides of the same coin. Lets say profit margins get cut in half and PE multiples get cut in half. You end up with some fraction of your wealth. Stocks would benefit from some real growth that is occurring and the debts they take gets wiped out (thanks to bond investors). Bond investors get wiped out. This is what happened in other hyper inflation episodes which are an extreme case. So there you have it. In the next to worst case scenario (worst case being economy totally destroyed as in total nuclear holocaust or a meteor wiping out earth, communist takeover), stocks are still the best investment compared to bonds. Equity premium is actually pretty high in this case! Vinod

A good paper that deals with some of this is, Equity Risk Premiums (ERP): Determinants, Estimation and Implications - The 2023 Edition https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4398884

You are slaying a strawman that no one is arguing about. Over the long term earnings of companies in the economy as a whole do better than keep up with inflation. Please do note the two points I bolded and underlined. Nothing is guaranteed. Earnings do not increase in lockstep with inflation. Profit margins go up and down. Inflation or deflation happens. But over the long run, corporate earnings as a whole keep up with inflation and then some. PE multiples go up and down. That is a separate factor. The point I am making is, you don't compare corporate earnings (which go up) and its yield with bond market yield which is fixed. This is exactly the error made by the investment community as a whole until the 1950s when they used to compare dividend yield of the market with bonds. You can read more about this if interested. When someone says "earnings yield" of stocks as an approximate return, they mean real return not nominal return. For bonds, the yield you get is the expected nominal return. Both assuming no changes in valuation. Now you do not go about comparing these two as if they are similar, they are not. This is so widely understood and utterly uncontroversial, I am surprised that I need to highlight this. Vinod

The author is making an elementary mistake - comparing a stock earnings yield with a nominal government bond yield. Comparing a real number with a nominal one. If you are going to compare use TIPS.

A lot of wisdom packed into this paragraph. Agree 100%. There had been a 25% correction in stock prices due to inflation beyond what you see on the nominal S&P 500 index value. People talk about now getting 4% on cash while waiting for the stock market to correct and are happy to be getting "paid" whereas in the past they have to settle for 0% returns. If one is thinking in real inflation adjusted terms, now they are worse off actually - getting paid 4% on which you pay taxes while inflation is 5% is worse than losing 1% on inflation while earning 0%. I was in London and Paris the past week and restaurant prices seemed about same or slightly cheaper to me than in the DC metro area. I can eat out at a restaurant overlooking Notre Dame for the same price as at a mainstream chain in a US suburb. This seems crazy to me. US did experience very significant inflation in the past couple of years. Vinod

Every idiot who underperforms blames the fed. This has been the theme for the last decade.

This is the Great Imaginary Financial Crisis (GIFC) of 2023. It seems a lot of people just realized that bond yields and bond price are inversely related and particularly this seems like a magical revelation among the tech bros. Banks are in good shape. As always, any bank that has a run will collapse. If a bank has a run and still does not collapse, it is doing something wrong. If we are going to have financial drama, I am all for it.

There is a difference between Statutory Accounting Principles (SAP) used by insurance regulators to assess an insurer's viability vs. GAAP which focuses on financial reporting of economic profits. SAP is more focused on solvency and per my understanding uses amortized cost not MTM. GAAP allows either based on HTM or Trading Assets and profits are reported based on this classification. So yes, to the extent that any insurance company did not use HTM, they would have booked gains and now have to book losses. But insurance regulators are not looking at GAAP book value, they are looking at Statutory Surplus (Statutory Book Value if you will). Many P&C companies have 5-6 year on average for payout. So any given year you are looking at 15%to 20% of portfolio that needs to be liquidated at a maximum and that if the company is in runoff. Most likely it is at least maintaining its book of business which means that much in cash in coming on for new investments. So I do not see much impact from bond losses to P&C companies. Even if you assume they liquidate 20% of bond portfolio and that fell 15%, we are talking about a 3% hit to overall portfolio. Simply no way P&C can be compared to a bank which is subject to runs. Most P&C companies use ALM strategies. In fact that is a core function. Their payoffs closely match the bond portfolio. My biggest position is FFX for little over an year. First bought sometime in 2005/6/7 I think at $106, completely exiting in 2011 at $418, sat out most of the last decade except for a cigar puff buy and sell for tiny bumps. I did not trade any stocks in all of 2021 and did not look at the market and hence did not realize how cheaply it was trading. I went to all index in 2020 soon after the pandemic to focus on my kids as I knew if I have any individual stocks I would sucked into spending a lot of time on 10K's. I again started looking at individual stocks in 2022 and bought FFX again and this time, for a longer term hold. I am not arguing FFX strength at this time. But that does not mean other P&C companies are somehow in trouble.

Insurance is really different from banking. The insured cannot claim hurricane damage for the year and ask for the money to be paid. The liabilities are pretty predictable. That is why ALM is a big deal at P&C's.

The level of ass kissing is nauseous. Cost of doing business in India.

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?