mattee2264

I think it is Prem's idiosyncractic investment style depressing the share price. Insurers with comparable (or worse) underwriting records trade around 1.2x book and are mostly invested in fixed income. And a large investment universe isn't necessarily a good thing as it gives them more opportunities to make head-scratching investments. Obviously he is trying to achieve outsized returns with his equity investments. But I think it would be in the shareholders' benefits to adopt a more conventional investment portfolio, achieve the easy target of average investment performance, and let the quality of the insurance operating businesses shine through and you will get the double whammy of a re-rating to at least 1.2x book value as well as book value growth on top.

Simple answer is that either the market is pricing in a dividend cut and/or is negative on long term prospects so the high dividend is really a return of capital and you are unlikely to get your principal back. And in sectors where dividends are pretty safe such as utilities and consumer staples you are only getting around a 3% yield that isn't going to grow much and if interest rates eventually normalize there is going to be significant multiple compression. But of course in situations where you think a dividend cut is only going to be temporary or the market is too negative on long term prospects there could be opportunities.

I can't see the Fed taking away the punchbowl. They are gonna keep interest rates low for longer and will be forced to continue to print money to fund government borrowing. They've essentially ruled out pre-emptive tightening which they made a half hearted attempt at doing a few times post-crisis. And they've made it pretty clear they don't care what the stock market does. Big Tech right now seem to offer growth, defence and safety. No wonder they are one decision stocks. As COVID has forced everyone to move online and decimated their offline competitors they have benefited from increasing adoption as well as increasing usage. And with increasing returns to scale that massively increases their earning power. But there seem to be multiple ways to lose. My first concern is that they've borrowed against the future. A lot of late adopters have jumped onboard. They've taken business away from offline competitors by fiat. Usage has increased because we are spending most of our lives online now. So while this year you will see an acceleration in revenues because of this there will soon be a slowdown in revenue growth and that could trigger a sell-off. And this could be true even if the new normal is working from home, streaming all our entertainment and doing most of our shopping online. You can only consume so much cloud and so much TV and so much groceries etc. And I suspect that once a vaccine is developed people will want a bit more of an online-offline balance. Most companies will want their employees to come into the office at least a few days a week which will allow them to economize on cloud usage. People will start going to movie theaters, nightclubs, bars more often and spend less of their time bingeing Netflix. And retail therapy will give way to more travel and nights out. My second concern is that in a lot of their new markets they are in competition against each other. That isn't a big deal when those new markets are growing very fast (helped of course by COVID-19) but eventually they will collide. I'm thinking cloud and streaming in particular. I see this as more of a longer term headwind. My third concern is the law of large numbers. As market share gains become harder to achieve GDP growth will become more of an anchor and I think we are still stuck in a low growth world. My fourth concern is that if the economy takes another hit they aren't gonna be immune because consumers and businesses have already reallocated much of their budgets towards Big Tech so if their incomes and profits decline further they will have to cut spending on Big Tech. My final concern is that even if there is a V shaped recovery and it doesn't result in a massive lurch from online to offline spending this will probably lead to a rise in long term interest rates which reflect inflation expectations which should be a lot higher in this scenario. This should lead to some multiple compression which will hit growth stocks hardest. Although I expect that this will be more of a long term tailwind. But I think while a sell off is probably on the cards at some point it won't be extreme. Perhaps a 20-30% decline. I think a greater concern is that long term returns are probably going to be disappointing. I think with traditional value stocks what is gonna happen to them will depend on the course of the virus and the economy. Most of them have already recovered quite nicely from the March lows and seem to be pricing in a quite optimistic recovery scenario. So while traditional value stocks may look relatively cheap I do not think they are that cheap in absolute terms the way they were as a class in the late 90s. And where they are they are perhaps justifiably so.

I think the buybacks are a reflection of realizing that his businesses were holding up a lot better than expected and that is shown in the Q2 numbers. And of course the gains on Apple helped to prevent a decline in book value. So Buffett was probably buying back stock at around 1.1x book value and past form shows that is the level where he is willing to do an aggressive buyback. And of course he raised some cash through selling airlines and trimming banks so the buybacks haven't really reduced the cash cushion he is keen to maintain. Also buybacks are a residual use of capital so I think they also indicate that as he said in the AGM even after the market decline he didn't really see that many attractive opportunities out there.

I've been reading the Q2 2020 fund letters and quite a few guys are bullish on commodities generally and in particular gold, copper and energy. I've summarized below the kind of arguments they are making. The general argument is that real assets have never been cheaper relative to financial assets and they tend to do very well in an inflationary environment and especially one characterized by currency debasement. e.g. Gold: money printing and negative real interest rates and newfound capital discipline in the sector and a wave of consolidation as rather than spending on new mines companies are preferring to buy their competitors. e.g. Copper: supply very tight with very few new projects in the pipeline and incentive prices a lot higher than the current price. Demand likely to be robust especially if EVs take off in a big way. Also because of its scarcity in the same way as gold will be worth a lot more as fiat money gets debased. e.g. Oil: a lot of supply destruction due to shut-ins with some of that production never coming back online. Shale productivity already showing signs of decline and high grading has reduced the room for capex cuts without the price of steep production declines. Banks are no longer willing to extend capital to fund production growth so companies are showing a lot more capital discipline and talking in terms of free cash flow rather than production growth. Demand will eventually recover. A lot of the majors and big service companies trading at similar levels to 20-30 years ago. A lot of negative sentiment because of popularity of ESG investing and hype about electric vehicles. And of course oil is trading at $40 and very few companies are making any money. e.g. Gas: will be beneficiaries of production cuts and shale productivity declines because of the loss of all the associated production and demand is robust and growing over time as gas takes more share of total electricity production. Sector has been in a really long and really deep bear market. I also note that in decades where stocks have gone nowhere e.g. the 1970s and 2000s you often see commodities do very well. So it does seem worth having about a 10-20% allocation especially as the major indices such as S&P 500 now have a very low exposure. Also note that I am primarily talking in terms of owning commodity producers and associated service companies rather than the commodities themselves. Is anyone else interested in this space and able to offer any thoughts or insights or expand on the bull thesis or counter with the bear thesis?

My guess is he has soured on banks because they are trading much where they were a year ago despite lower interest rates and mounting credit losses in the pipeline so they haven't really priced in the pain to come. They've been proactive taking large provisions and have very strong capital positions and have been stress tested for some pretty dire economic outcomes but they are still going to take a big hit. It is interesting he hasn't trimmed Apple. I wonder if he is making the same mistake he made with Coca Cola. Wonderful business and very dominant with a lot of pricing power but 35x forward earnings is very expensive

Problem is that most of the companies with the desirable features you mention (pricing power, low capital intensity etc) are very expensive and in general inflationary periods are associated with multiple compression. There were some very good companies in the Nifty Fifty and they weren't immune from the carnage caused by all the inflation in the 70s. So you would want to make sure that earnings growth can offset that multiple compression to some extent.

There has always been a divide between "glamour" stocks and "value" stocks and that hasn't prevented value outperforming over successive market cycles. And during rare times when companies in mature industries such as telecoms and energy suddenly become high tech and attract a lot of capital things don't end well e.g. dot com boom and bust and shale boom and bust. Reason being that too much capital results in too much competition and overcapacity. When value investing works it is because it exploits negative sentiment towards industries and individual companies that usually reverses because the problems are either cyclical or temporary or have little impact on earnings power. These days unfortunately negative sentiment is usually justified because there are a lot of industries facing disruption and other secular challenges. This market cycle where I think you are seeing the outperformance is because of the unprecedented quality of a lot of the dominant growth companies and the extent of their runways. Their moats are massive and their addressable markets are huge and they enjoy increasing returns. And they are disrupting a lot of the traditional industries where value companies reside so people scooping up low P/B and low P/E stocks rather than seeing reversion to the mean are seeing earnings and book values evaporate! Buffett has never been promotional in the sense of talking his book. Certainly in his early days he often took an activist approach to realize value when the market didn't cooperate. But he wouldn't even tell his own partners what he was invested in! And there are stories about how his friends would want to know what he was buying but he never told them because he didn't want the price to go up in case he wanted to buy more! He only became a household name much later on and while he helped to popularize value investing we can see from the records of people like Graham and Schloss it worked perfectly well before Buffett became a media darling.

I think back in May Buffett was worried about psychological and economic scarring and therefore a difficult and protracted economic recovery. But helped by generous government handouts and a cavalier approach to reopening the economy consumers are back to their free spending ways and that is driving a much faster and stronger recovery than anticipated. Plus Berkshire's operating earnings held up pretty well and there was of course a nice non-operating unrealized gain from Apple's astounding ascent. But even so I wouldn't say he is bullish. He sold out of airlines and trimmed some of his bank positions and purchased his own stock at a modest discount to intrinsic value and did a small private transaction buying some gas pipelines. Meanwhile he still has almost $150B in cash.

Also interesting that base metal prices such as copper and iron ore have not only fully recovered but are well above 2018 and 2019 lows. Also suggestive of currency devaluation from all the money printing. I think modest inflation isn't going to worry central banks and will be somewhat helpful in easing the debt overhang from Covid-19. The danger of course is that historically inflation has a habit of getting out of control. But things are different from the 70s. Firstly, there is a deflationary impact from COVID-19 for some time. Once it fades away and there is a meaningful economic recovery then the Fed will be able to raise rates and that is already priced in (10 year treasury yields below 1% but S&P 500 earnings yield still around 3-4%) Secondly, cost-push inflation is unlikely to be a major worry. Wage pressure is very muted and unions aren't a big factor any more. We are also a lot less reliant on commodities. Thirdly, there is massive inequality in society both at a corporate and individual level. Rich companies and individuals are saving not spending. Poor companies and individuals are having to operate on a shoestring.

Interesting point about mean reversion no longer operating the way it used to. I think that goes a long way towards explaining why value investing doesn't seem to work as well and also why the stock market has rebounded so strongly as investors realize the pandemic has strengthened the competitive positions of a lot of the biggest companies. I disagree with the surreal stock market comment. The stock market is valuing a stream of earnings stretching 20-30 years while economic data reflects a deep but ultimately self-limiting recession that calls for extraordinary policy measures which are helping to limit the overall damage. So the seeming disconnect is to be expected. Especially as for a lot of the biggest companies that 20-30 year earnings outlook has actually improved as smaller competitors fall by the wayside and technological shifts have been brought forward.

Lots of liquidity and Federal government stimulus can keep markets high long enough for the economy to improve. It is difficult to foresee either the Fed or the US government removing the punchbowl especially as they seem to be working in tandem. Government and corporate debt levels look scary at first sight but so long as interest rates remain very low there won't be a near term reckoning. Also roughly 20% of the S&P 500 is represented by FANGAM stocks who are seen as major beneficiaries from the virus. Other components of the S&P 500 such as healthcare stocks, consumer staples etc are also relatively unaffected. Meanwhile banks are still 50% or so off their pre-COVID highs, airlines and other travel stocks as well as energy stocks have been decimated etc. So there is some logic to the valuations and it is not predicated on things going back to normal in the near future and does reflect a pretty bad economy. I would agree there doesn't appear to be a huge amount of further upside. The FANGAM stocks have borrowed against the future as COVID has accelerated the shift online and will eventually see a slowdown in their growth rates and they might sell off. On the other hand financials, energy and travel names will eventually recover somewhat. Eventually interest rates will rise somewhat which will cause multiples to contract somewhat. But this won't happen until there are real signs of a recovery in the economy which will have an offsetting effect as earnings rise back towards pre COVID levels. So more of a stock pickers market. There is of course a lot of uncertainty which will cause some volatility so a correction or a melt up might be on the cards. But I do not really foresee a further market crash. That will probably come much later down the line either if we run into stagflation at some point or the government and Fed decide to get tough when they feel the economy is out of the woods.

I think the political message is just that Covid-19 is something we are just going to have to live with for a while longer. Eventually either a vaccine will be discovered or something approaching herd immunity will be reached. And in the meantime just as during wartime government will have carte blanche to spend as much as it wants with little political repercussions. So especially with an election looming another generous stimulus deal will get done.

Hi Gregmal. I'm seeing the same thing in the UK. The younger generation are happy mingling on the beach and in the parks and outside pubs with little effort to distance themselves from their friends or even complete strangers. The older generation are back to seeing friends and family. A lot of people are also booking foreign holidays following the introduction of air bridges. On the other hand most people are still working from home and even at rush hour the subway is probably only at 10-20% of normal volume. And while the job market is picking up unemployment levels are still high. It is a difficult situation. It is one thing to give people the choice of going to bars and restaurants and turning a blind eye when they fail to socially distance. But quite another thing to force people to go back to the office which I think ultimately does have to happen to get the economy back to full speed.

https://markets.businessinsider.com/news/stocks/stock-market-outlook-biden-win-republican-senate-best-investors-jpmorgan-2020-3-1028995167 JPM are suggesting a Biden presidency could be good for stocks so long as there is a Republican Senate.

V shaped would just mean a return to pre-COVID GDP within the next year or so. The economy was hardly firing on all cylinders before COVID and not showing signs of overheating. Also the Fed had to reverse its last tightening cycle so I think even if there was a recovery they would probably accommodate too long and only act if inflation reared its ugly head and forced its hands. Another reason interest rates probably will not go up any time soon is because of the debt overhang from coronavirus. Another reason is that when everyone else in the world has low interest rates it is difficult to raise interest rates as doing so would result in an even stronger dollar and I think that other countries probably won't see as robust recoveries as the US will. Also valuations are to a large extent psychological. If the lesson taken from this is whatever happens the Fed and government have your back and the uncertainty related to the virus clears then that could support even higher valuations.

I think in the US you are seeing a failure to properly contain and suppress the first wave. Other countries are having a lot more success on that front. Provided laggard countries get their act together the virus could burn out by the end of the summer. That will reduce the risks of a second wave that gets out of control especially as there is now some degree of population immunity. I agree that the second wave risk will still be in the background. But markets seem to be trading based on the headlines. I don't think a V shaped recovery is being priced in. If it was then markets would be a lot higher because you'd expect a much higher multiple on pre-COVID earnings to reflect significantly lower interest rates and Fed commitment to keep them that way indefinitely. I think what you are seeing priced in is a partial recovery with lower earnings offset by lower interest rates (and therefore higher multiples) as well as optimism about a vaccine and no further lockdowns being required. And yes as the perceived uncertainty fades away and the economic data starts to improve that could propel markets even higher as could the usual bull market psychology and accompanying rose tinted spectacles. Of course there are significant risks that markets seem to be ignoring so I'm also intending to sit on the sidelines. Firstly, I think there is a risk of overheating as productive capacity remains suppressed and a fiscal stimulus does little for the supply side so you get the classic inflationary set up of too much money chasing too few goods. If inflation does take off the Fed will have to tighten and it won't be pretty. Secondly, I think deleveraging and a focus on cost control will be the modus operandi for some time which will constrain a recovery. Thirdly, market psychology can change and a more balanced or indeed pessimistic view might start to prevail especially as there is a lot of crappy company data on the way.

In 2018/2019 Grantham was warning about a melt-up. Now he is saying we are forming a bubble. I think it is quite possible the market could go a lot higher if a V-shaped recovery does materialize and coronavirus fears subside either because a second wave doesn't materialize or a vaccine is discovered. Especially with continued supportive fiscal and monetary policy that is very fertile soil for a melt-up. Economists in general are very sceptical about the V-shaped recovery idea and expect that the disconnect between the markets and the economy will correct. But what if it is the other way around and the animal spirits alive and well in the stock market spread to the real economy?

Interesting to know how much of the reduction in spending is going into the stock market. Given the extent of the rally there must be some pretty nice wealth effects which should create a lot of pent up demand for entertainment and holidays in the future.

Re-opening is a series of steps. So the logical response to a rise in cases is to take a step back and see if cases stabilize and if they don't take a further step back. And if cases explode take a leap back. I think containment is the goal rather than expecting to achieve zero cases and I also think that in re-opening it is to be expected there will be a rise in cases. So agree that a few thousand cases a day isn't going to set off any alarm bells and watchful waiting is going to be the most likely response. And yeah so long as the virus is in circulation a lot of people are gonna continue to WFH if at all possible and it will be difficult for businesses to force them to come into work. Especially in a big city reliant on public transport I cannot expect people being willing to brave the rush hour. And WFH will probably depress productivity and discourage all but essential hiring. And yeah I think we are going to see risk-on/risk-off trading for a while. That isn't enough to cause a crash or a melt-up. But could create some good buying opportunities especially as while the S&P 500 may only correct 10-20% the more cyclical stuff such as energy, financials, travel related stocks etc are going to have much bigger moves.

I think the main similarity is the "New Economy" narrative. Technology companies are seen as unstoppable and immune to the economic cycle and deserving of very high valuations and make up a significant proportion of the indexes. In both cases an accommodating monetary policy helped to support high valuations and allowed the stock market to inflate to very high levels. But the main difference now is that part of the New Economy narrative is belief in the Fed's omnipotence. That is the biggest wild card here.

https://www.marketwatch.com/story/warren-buffett-is-an-idiot-says-investor-who-claims-daytrading-is-the-easiest-game-ive-ever-played-2020-06-09?mod=home-page Echoes of 1999?

https://www.theguardian.com/commentisfree/2020/may/28/coronavirus-infection-rate-too-high-second-wave Beautiful quote from Harvard epidemiology professor Bill Hanage “A fire burns fast at first but the embers take a long time to die down.” I think that is a real risk of re-opening economies too soon. An uptick of cases is to be expected but will probably stabilize at a fairly low level that governments may see as an acceptable trade-off vs the economic cost of lockdown. But that stabilization means that the virus will continue to circulate throughout the population ready to flare up in the winter. Maybe the hot weather and some degree of social distancing and build up of immunity will be enough to kill it off over the summer so this risk does not materialize. But the scary thing is that people and governments could get lulled into a false sense of security in the meantime-socializing more freely, going back to work, taking holidays, losing the masks etc-increasing the likelihood of a second wave.

I'd agree that value investors don't deal with it well. Buffett looks for sure things and no brainers. That is fine up to a point but requires amazing powers of judgement and results in a very limited opportunity set especially as markets are a lot more competitive these days. It can also result in thumb sucking as lingering doubts can prevent him from pulling the trigger. Pabrai looks for limited downside (heads I win, tails I don't lose much) but this can often lead to judgement error because if a stock truly had virtually zero risk of loss (and some chance of gain) it would be trading at a bond-like multiple. And if upside is fairly limited then your winners can't offset your losers so you are very vulnerable to bad luck or mistakes in judgement. Other concentrated value investors fall into confirmation bias and overconfidence traps and get burnt when they miss something in their analysis or get unlucky. The Graham approach is to treat investing as an insurance operation. Provided the overall underwriting is good you will do pretty well even if quite a lot of the individual investments do not work out. But there is a lot of adverse selection going on these days so a lot of the low P/E stocks and low P/B stocks that in yesteryear would have mostly turned out pretty well these days more often than not end up being value traps. Most value investors try to be more selective and try to filter out potential value traps but this is no easy task.

Controlling the spread is not the same as herd immunity. I think the argument these scientists are making is that there may now exist some level of immunity in the population that will allow containment of the virus even as we re-open economies and societies. This level of immunity may vary by community due to factors such as demographics, general health of the population, climate, patterns of social behaviour etc. Of course the hard evidence is not really there as mass antibody testing hasn't been done and the tests have their limitations. But compliance with lockdowns has been far from perfect and even those following the rules have still had some exposure to the virus as a lot of interpretations of lockdown still allow people to leave their houses so I think the theory that quite a lot of people have already had exposure/developed immunity has some merit. Also helping matters is the biggest rule breakers tend to be healthy young people who are among the least vulnerable and therefore best suited to a de facto partial herd immunity type approach. They are also probably the least likely to volunteer for antibody tests which might lead to some sampling error in the test data. There has been an increase in cases/deaths in some of the countries as they have eased lockdowns. But this is to be expected in the same way that there are going to be more car accidents now that more people are taking to the roads. So long as the case rates/death rates stabilize at a low level and then resume a natural decline rate then re-openings can still be considered to be successful. That is still compatible with containment.