mvalue
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Posts posted by mvalue
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Anyone who thinks 20% regularly is no big deal with 1m+ and has the record please get in touch with me and I'll get your fund set up.
Are you a lawyer? A fund salesman?
Neither - just a person who knows how rare that kind of talent is.
And also just making the point that looking at +20% as making decent money this year is a sort of crazy standard.
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Anyone who thinks 20% regularly is no big deal with 1m+ and has the record please get in touch with me and I'll get your fund set up.
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Minimum investment is $1m. Sounds a bit like IBKR to me, but not sure if that position is 'new' to them.
IBKR was my thought except that it's arguably been "proven" through a recession in contrast to his description...
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I do not think a lot of thought was used before he made that comment. Look at Philip Morris international, they can borrow at 2-4% and retire shares with almost a 5% yield. - Absolute no brainer!
I doubt he'd disagree with you that there are exceptions.
I think his point is that majority of companies are borrowing money to buy back expensive shares. When downturn comes they might be hit with double whammy: stock drops but they don't have money to buy back cheap shares and they have to pay interest on debt.
+1 Clearly some companies maybe borrowing prudently. By and large however, these companies are acting irresponsibly and will face consequences down the road. My guess is 2-3 years.
Can someone here give example(s) of companies with low returns borrowing at high rates to buyback shares?
Of course not - any company paying nominally high interest rates in this environment is distressed and not in a position to use those funds for buybacks.
The question is how the prices being paid for repurchases will look a few years out. If you borrow at 2% and buy stock at trading at 20x it's ostensibly brilliant and highly accretive. It doesn't mean it will prove so later - it might or might not. Cheap funding is a boon if the prices being paid are good. If cheap funding just drives prices higher, it might not be such a blessing. On average are we clearly at least into a grey area if not worse.
Ok let me rephrase.
Can someone give example(s) of companies where
1/PE - i is dangerously small.
where i is the borrowing interest rate.
In other words, what companies will be the first to blow up in 2-3 years when it does happens as the OP predicted.
I can't speak to companies going bust, only to the risk of aggressive/poor capital allocation going on. I don't think the spread between borrowing rates and 1/PE is going to be a very good way to identify those companies. It is more likely to me that cases where the spread looks most superficially appealing might be the most prone to overdo and overpay.
Think of companies buying stock today at 20x on what might prove to be cyclically high earnings. Imagine in 2019-2020 that debt has to be rolled over at much higher rates, the stock is at 15x, and earnings growth over the full period has been modest or zilch.
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I do not think a lot of thought was used before he made that comment. Look at Philip Morris international, they can borrow at 2-4% and retire shares with almost a 5% yield. - Absolute no brainer!
I doubt he'd disagree with you that there are exceptions.
I think his point is that majority of companies are borrowing money to buy back expensive shares. When downturn comes they might be hit with double whammy: stock drops but they don't have money to buy back cheap shares and they have to pay interest on debt.
+1 Clearly some companies maybe borrowing prudently. By and large however, these companies are acting irresponsibly and will face consequences down the road. My guess is 2-3 years.
Can someone here give example(s) of companies with low returns borrowing at high rates to buyback shares?
Of course not - any company paying nominally high interest rates in this environment is distressed and not in a position to use those funds for buybacks.
The question is how the prices being paid for repurchases will look a few years out. If you borrow at 2% and buy stock at trading at 20x it's ostensibly brilliant and highly accretive. It doesn't mean it will prove so later - it might or might not. Cheap funding is a boon if the prices being paid are good. If cheap funding just drives prices higher, it might not be such a blessing. On average are we clearly at least into a grey area if not worse.
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I'd be careful on being too confident about about euphoria and market crashes. There wasn't market euphoria in much of the market in 2007. Perhaps in emerging markets and real estate but not in the general market. People were concerned that high oil costs would derail the economy. Even without all the euphoria, 2008 was still worse than the dot com meltdown (for the overall market).
Absolutely - not sure where people get the idea that everyone has to be out of their minds bullish for a downturn. I will never forget Bill Miller and Leon Cooperman near mocking the worriers in 07. On the other end, plenty of smart people knew the late 90s were nutty and said so.
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I wouldn't fall in love with this thesis or work too hard on looking for anecdotal measures of euphoria - when we have viewpoints we tend to latch on to the confirming. Shark Tank has been on for several years, so I don't think that's instructive of anything.
That being said, you will get a lot of pushback about valuations being reasonable. They aren't. Everyone and their uncle is trotting out a "reasonable" 17x forward, operating multiple on the S&P because 17 sounds ostensibly ok. They ignore the fact that forward operating multiples are not comparable to true PE multiples and should be very low. 17 for that multiple is a rare occurrence, even in the relatively high valuation period of the 90s and 2000s. This puts aside all issues with current earnings margins/ROC vs history - I don't think anyone has a firm grasp on whether or when those could revert.
Worse than this is that unlike the late 90s/2000 it's just hard to put together a solid portfolio with disregard for overall market valuation. Low quality stocks have high multiples, too. What was once 9x "value" might be trading at 12, 14, or 16x. 2000 was much better in this regard, because small cap value was very cheap and ignored. You could easily put together a portfolio of decent quality companies at single digit multiples. The rub was you could easily turn in NEGATIVE performance in 1999 when the market was roaring. Analytical slam dunks were there but the psychological pain was immense.
I also take issue that every analyst/publication justifies current valuations by comparing to 2000. Who cares? Of course valuations can be overdone without topping 2000. Just because we're nowhere near a once in a generation madhouse euphoria doesn't mean prices aren't high.
People like Nate (oddball) will note you can always find deep value lurking. I completely respect this viewpoint but am speaking to stocks larger than that for those who won't or can't take meaningful positions in the super illiquid. I think once you move out of that realm it is very hard right now.
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https://us.spindices.com/indices/equity/sp-500
Click on the "Additional Info" button and select "Index Earnings"
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I remember how obvious it was in 2009 that higher inflation was an imminent unavoidable hangover from all the Fed juice. It was painfully obvious. Everyone smart you could look to said so, too.
No one knows what will happen. It's true that all else equal if rates stay low for a very long period the market is not clearly overvalued, and certainly not relative to other asset prices. Unfortunately all else is never equal. Further, if you knew what rates were going to do you could make a ton of money on that information without having to bother with the stock market.
Edit: to clarify, this means justifying 16.5x ebitda because of rates is questionable to me
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His original post mentioned Korea, which IB does not support...
Hmm.. Correct. Also Greece is not supported.
Do you think Fidelity is ok for a hedge fund? I know fairholme fund uses Fidelity.
I heard IB has an automated reporting sheets that makes hedge fund reporting to clients super easy. Not sure if it is true and not sure if Fidelity has that same thing.
Why use Prime brokers? They will be much more expensive than discount brokers like Fidelity and IB. What kind of advantage are you expecting from them?
IB has great functionality. I think the major reason is once you get into raising money many people will simply not accept IB. They want to see a big name custodian (Goldman, Pershing, etc), period. If you have an investor base of individuals who don't mind it's the cheapest and possibly best route, though.
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I don't fully understand the buybacks->eps growth->valuation chain as presented here and recently on the Philosophical Economics blog. If all companies reinvest their profits into buybacks EPS growth will surely be higher than a historical figure, all else equal. But you're also not getting those dividends and therefore your theoretical discounted payouts from now to eternity are pushed further out.
Say you own a widget making company that can reinvest profits in more widget making machines at 5% ROC. Also say you can find alternative investments that yield 5% if you receive dividends instead. Is the widget company worth a higher multiple because it decides to reinvest, grow earnings, and not pay out a dime (some tax efficiency aside)? Would it warrant a lower multiple if it retained no earnings and paid out all profits?
In aggregate aren't buybacks essentially this - investments that produce returns that will just equate with what investors in aggregate could/would do with dividends?
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Klarman was quite bearish a couple years ago - yes, even when you read his entire letters. He alluded to his feelings about the system crashing and a bunch of other things.
Seems so odd to single out bloggers given that he was pretty unequivocal about that stuff.
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"When my grandfather died, they used a trust to transfer the shares to Bill Gates."
The human mind at work...
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He does totally different things (not necessarily that they are high return) than almost all other mgrs mentioned this board. He was buying CRE and a quarry at one point. He holds more cash than any other mgr that i know of. He goes where ever he sees a bargain.
I was about to say the same. I think Klarman doesn't say anything revolutionary at all, and I think that is Nate's point. You read his book, and here his interviews, it's all basic stuff.... good but basic, for sure.
But I'd argue that he is probably the most inventive manager I'm aware of. Foreign stuff, Russian stuff, direct ownership, private equity, joint ventures, credit default swaps, gold options, interest rate hedges and spread bets, on and on.
And that's just the stuff we know of!
I also respect him because he seems to be the most nervous / paranoid investor, as said above, with tons of cash, but he still finds enough stuff to make his returns good. I mean he's done this for 30 years, never down more than 5% in a year I think. His 1990 letters are amazing in how wrong / conservative he was and how much opportunity lost he had... yet still, the results were good over time (10+ years) beating any relative benchmark you want to use.
But agree, what he says is simple, "obvious" stuff.
I agree that his ability to produce results with extreme conservatism and macro gloom is unparalleled. One item to note is Baupost actually drastically underperformed the S&P from 1990-2001 - more than 10 years! He didn't waver one bit and obviously blew past it later, which is all the more remarkable, but his mindset definitely can lead to prolonged periods of relative underperformance.
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AAPL (what was Jobs' stake - really low AFAIK)?
I don't remember the exact number, but it was low. It's because he sold all but 1 of his shares after he was forced out of the company. He made most of his money from selling Pixar to Disney, actually.
But he had an owner's mindset (more than many people who own large % of companies), so the number of shares he owned didn't matter in this case...
True but at the time people pointed to the terms of his options and Gulfstream jet gifted from the company as glaring examples of the worst of corporate governance, and many people refused to consider Apple in a turnaround phase just under the view that the view to shareholders was highly unfriendly and even unethical. Only in hindsight is the mindset more appreciated...
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Using median and means of markets I think is the issue. If these metrics were used, you would miss out on material appreciation from mispriced securities. Also, I do not think there is a strategy using these metrics to get in and out of stocks that can out perform an stock index.
Packer
Always a fair point. For me, it's the hardest time in my career finding appealing investments.
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Just theoretically speaking, what would you do assuming most markets do reach 2007 levels? Would you hold cash or some sort of alternative currency or just buy the cheapest stocks in an expensive market?
Valuations, at least on a median basis, are materially higher than 07.
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Interesting viewpoint, I've always been with the maybe-consensus view that Europe is pretty intensely screwed. (To your analogy, it's guy in the back room at the party violently arguing with his wife about whether he is ok to drive home who will end up hitting her as well as the friend who was trying to calm him down).
I think not only is the common currency a cyclical curse if nothing else, but many of the individual countries have social obligations as significant/greater than the US as well as labor and economic cultures that make dealing with them properly highly unlikely.
That's completely and utterly wrong. It's exactly the opposite. It is the US who started first to adjust and is doing better now while Europe hasn't even began to do what they should be doing. They CANNOT adjust under current system, that's the main issue. Especially as the surplus country Germany who should take upon itself higher unemployment and higher household consumption is not willing to do so something which is obviously very difficult politically to do. So they'll have years of high unemployment or maybe even some extreme political parties will rise to break it.
The USA as a deficit country will get out of it faster anyhow compared to other surplus countries. But regardless, it's really the complete opposite. This European EQ or whatever is not going to help them.
I tend to agree, but this is the super standard consensus view that is repeated ad nauseam in every newspaper, on television and on every website. So even if this is correct it might very well be priced in already given the strong USD, CHF, weak EUR, low European stock prices, etc. and we shouldn't feel to smug about our macro insights. Basically we are just following the herd. At least Nate is original :) . And he might just be ruffling our feathers a bit.
Let me flesh this out a bit further. I'm thinking much longer term. The US when you consider all of our promised obligations like social security and medicare is deep in debt. I know most economists 'forget' about those because they're off balance sheet. That's fine, but putting them off balance sheet doesn't mean they'll never need to be paid or settled.
Europe is deeply in debt as well. We're both in a similar spot. But right now Europe has realized they have a problem and are doing something towards it. The US hasn't done anything to solve our long term insolvency issue. I'm not thinking 12-18mo like most financial media is thinking, I'm thinking the next 20-30 years.
For a brief period in the US we were talking about getting the debt in line. But the truth (mentioned above as well) is no one cares about the debt, they just care about the deficit. How much extra debt we're incurring per year.
Maybe since we're a larger and prominent country we're a special snowflake and will never have to deal with this. I don't know. We haven't had to so far, and maybe we never will. It's similar to the Japan situation, they still haven't dealt with it, so we might have another good 20-30 year run without this problem plaguing us.
The best analogy I can think of is this. Both Europe and America are at a party and drunk, but Europe has realized they're drunk and has begun the process of calling for taxi's. The US claims it's not drunk at all and keeps drinking. One day the party will end and we're going to need to go home, will any taxi's be left? Maybe we'll luck out.
For my own sake I hope that the US is the luckiest country, I live here, it seems like a nice place. I'd rather have a nice and prosperous life without any external problems whatsoever. I'm not sure I can count on that though...
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POD (payable on death) titling of accounts can add considerably more coverage at each bank and require no extra effort as long as you don't mind naming beneficiaries. Use https://www.fdic.gov/edie/calculator.html
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Great point that always bothered me - people who talk about only buying 2-3x'ers are obviously "wrong" on most investments vs. their stated expectation, and frankly I think when they're successful it's not due to any great insights or handicapping abilities.... Totally agree that however you describe that kind of investing, it's something other than seeking and successfully buying 2-3x'ers.
Some people with decent returns using that construct would probably say it doesn't matter if they still produce solid returns. True if the returns last for the very long run I guess, but still not sure that 2-3x investment criteria is a high quality mental filter if it proves so incorrect/misguided for most investments. There is probably a better way to define what one is seeking that would also more accurately gauge success vs. expectations for each investment.
Sometimes I think the 2-3x mantra in two years really means something else. It means that people are looking to hit it out of the ballpark, but tactically admit to themselves they feel it's unlikely. But at least if they swing for the fences they have a chance of hitting a 20-30% return. It's a gamble, and over the last few years of the bull market it's worked out. I prize consistency myself. I'd rather eat at a restaurant that's consistently good verses one that's either the best meal ever or unedible. Investors love to roll the dice so I can see the attraction to the high returns.
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race,
I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.
One thing to note with Marks--he is required to be fully invested. When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash. I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).
With regard to using it for cash holding purposes, it sounds perfectly reasonable. The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results. Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy. I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.
I don't think Marks is required to be fully invested whatsoever - that goes against everything I've ever heard about his firm and his style. Their most recent fund was specifically raised with a view towards the next default cycle. I'm sure they might have some product that is fully invested, but I am almost certain that's not true at all for the vast majority of their assets.
Well, I watched an interview with him where he stated what I just said above--that when money is raised it must be fully invested. I guess it is possible that he was referring to something in particular, but it didn't seem like it. Perhaps he means it has to be fully invested when called.
Here he is saying basically the opposite of that.
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race,
I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.
One thing to note with Marks--he is required to be fully invested. When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash. I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).
With regard to using it for cash holding purposes, it sounds perfectly reasonable. The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results. Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy. I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.
I don't think Marks is required to be fully invested whatsoever - that goes against everything I've ever heard about his firm and his style. Their most recent fund was specifically raised with a view towards the next default cycle. I'm sure they might have some product that is fully invested, but I am almost certain that's not true at all for the vast majority of their assets.
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Right but the market is not 16x it's 19x. People saying 16 are using operating earnings. I don't understand that.
Carl Icahn: Danger Ahead
in General Discussion
Posted
I can't imagine HYG would have a comparable composition/price level of underlying holdings compared to 2011, so I think that doesn't have a great deal of meaning. Probably better to look at credit spreads and HYG holdings' prices relative to par.