mattee2264

Agree you also have to consider what was required to do to earn the wealth. A lot of wealthy people are crooks. They may have obscene amounts of material wealth but morally and spiritually they are bankrupt. People who get wealthy the honest and hard way such as partners or law firms and other big professional service firms had to sacrifice family life, hobbies, social life, health to work the punishing hours required and be at the beck and call of clients and a lot of them hate the work. And part of the reason they became so wealthy is they never had any time to spend their money and were lucky enough to avoid the expensive divorce or sugar babies. And even people who love their jobs can unwittingly become workaholics and lose the balance in life and the second they retire they drop dead because they have little else to live for. Warren has the right idea. It is about finding work you enjoy and if you do that you will naturally work hard at it and eventually keep working not because you have to but because you want to. But it is also about having people who love you and strong connections and a sense of purpose. There is a great book "The Second Mountain" by David Brooks which covers these kind of ideas and gives a playbook for the 2nd phase of your life for after you are done chasing career success and material wealth and want to find a real sense of joy in later life.

Reminds me a bit of the FIRE community. They work hard, save about half their income, so they can retire at 40. But it requires huge sacrifices both during the accumulation phase but also during the "retirement" phase because the only way you can retire early with $1m is if you are prepared to live of $30,000 a year. That doesn't go far and requires you to live in the middle of nowhere, never eat out, have campervan holidays, home school your kids and basically live like a pioneer. And probably at the back of your mind you are still worried that the historical returns do not hold up and you risk running out of money. It is a romantic lifestyle that appeals to some but I do not think you'd classify these guys as wealthy by any means. Then there is super-wealthy which entails yachts, gold diggers, private jets, a household of chefs, butlers, nannies and the like and other ways to burn through millions a year. But it is somewhat above your average middle class retiree so you can eat regularly at fancy restaurants, live in a big house in a nice area, go on luxury holidays staying in five star hotels, perhaps have a holiday home where you can spend the winters, and enjoy things like weekly massages and spa visits without batting an eye. Then your is your average baby-boomer retiree who through being frugal and working hard and investing sensibly has amassed a nest egg of a few million, has a home worth probably a similar amount and a defined benefit retirement plan throwing off an annual income some high percentage of their final salary. Kids have flown the nest. So if they wanted to they can eat out whenever they want at fancy restaurants, spend the winters in the Caribbean and the summers in Europe, fly business class, stay in 5 star hotels, have a weekly massage and belong to a country club, and basically never have to worry about money or sacrifice in any way. That is probably what I would think of as wealth. Then again the irony of wealth is that the people who are wealthy do not usually have the lifestyle you expect because the habits that made them wealthy are difficult to break so instead they just leave behind a huge inheritance.

I think Howard Marks said something along the lines at "At Oaktree we are allowed to have macro opinions we just don't trade on them"

The white knighting is painful to watch. The internet age equivalent of "my pen is my sword"

I think it is all about Mag7 and the rest. NO-LANDING: Mag 7 will do badly and the rest will do well (except for interest rate sensitive sectors e.g. financials). S&P 500 will probably go sideways. SOFT-LANDING: everything will do well with Mag7 probably leading the pack. S&P 500 might go up 10-20% or something. HARD-LANDING: everything will do badly with Mag7 outperforming as its earnings are more resilient than more cyclical sectors and lower interest rates are very bullish for long duration stocks. And so long as AI hype continues investors will probably look through any cyclical weakness in Mag7 earnings. S&P 500 might go down 10-20% or something. Possibly more if something majorly breaks. But I think that the Fed put will limit the damage. What I have observed is that since COVID investors have been treating Mag7 as a safe haven. And because growth has been scarce and Mag7 are the only companies growing their earnings it is understandable investors are willing to pay a big premium for their earnings. The wild card is AI. If it becomes clear that a wave of lawsuits and regulation are going to stall progress then that could dampen enthusiasm for Mag7. Tech earnings expectations are pretty ambitious with AI presumably expected to contribute and if it does then we could be in for a mid 90s melt up and an even more two tiered market.

There are a few guys out there usually keen on commodities who are talking up the idea inflation isn't dead. Clearly there is a lot of noise in the inflation data and the measures of inflation are imperfect. But I still feel the short term trend for inflation continues to be lower. Firstly, companies/landlords took the piss with price increases during the COVID period taking advantage of the extra spending power consumers had with all the COVID handouts and their excess savings and the strong economy and using the supply chain issues and material cost inflation as an excuse. Those price increases are unlikely to stick. And a focus on the rate of change ignores that compared to pre-COVID prices are up at least 20% and double that in many instances and that is going to result in a lot of price resistance and pressure for price cuts. We already saw Black Friday a ridiculous amount of discounting across the board even in sectors that have absolutely nothing to do with retail. Secondly, while rate increases are pretty weak, they do have a lagged impact so their full impact hasn't been felt which should exert some modest downward pressure on inflation this year. And even in a soft landing it implies weak economic growth. Medium term though inflation will rebound because emergency fiscal spending seems to be entrenched and once the economy recovers that is going to add far too much fuel to the fire and the Fed is bound to sacrifice inflation for financial stability and slash rates too far and commodity prices will rebound once the global economy (especially China) starts to recover.

I think you want blue chips stocks with legs that have survived a few cycles but do not look as though they are heading towards the decline phase of the industry life cycle. MICROSOFT seem the safest tech bet. They've navigated multiple technological transitions and they are trusted in enterprise software where companies prize reliability and familiarity. Interestingly of the top 10 companies during the dot com bubble Microsoft was the only one to replicate its former glories. History would suggest very few of the Mag 7 will be magnificent 30 years from now but Microsoft might be the exception. NIKE has always been the coolest sports brand and has seen off various competitors and the Nike swoosh is iconic. And with their money they can sponsor the best athletes and sports teams and run advertising campaigns and so on. EXXON is a blue chip oil company and should navigate the energy transition as well a anyone and return enough in dividends that you will do well even if fossil fuels eventually do get replaced. And you want some commodity exposure to balance the portfolio. Berkshire I think will fail to do as well over the next 30 years. A lot of managers in their subsidiaries work hard even though they have enough money to retire because they love working for Warren and Charlie. Capital allocation is also something Warren and Charlie did superbly. Their successors are probably good as they've been handpicked. But the successors of the successors might not be as good. And a lot of their businesses are commodity businesses so dependent on good management and capital allocation to do well. Not the kind of businesses any fool could run.

"The good news, however, is that in only 24 hours, Neri’s lawyers use the Wayback Machine to check MIT's plagiarism policy back when Neri wrote her thesis in 2009. It turns out that MIT's Academic Integrity Handbook did not require citations or even mention Wikipedia until 2013, four years after Neri wrote her dissertation and used Wikipedia for the definitions of 15 words and/or terms. Bear in mind that 2009 was still the early days for Wikipedia" The above is laughable. Even if copying from Wikipedia was not covered in MIT's plagiarism policy at the time it clearly goes against the spirit of the plagiarism policy and even a high school teacher would be pissed if a student copy pasted segments of his homework from Wikipedia. And this is a PhD thesis at MIT. At best you can say it is sloppiness and laziness on her part. Deserving of a retrospective slap on the wrist but clearly nothing on the scale of what Gay has been accused of.

Reminds me of the UK aristocracy. They have huge estates handed down the generations. But with all the upkeep not to mention death taxes they have to keep selling Old Masters just to keep the lights on and eventually hand over the keys to the National Trust. With some exceptions they certainly aren't living the high life as a result of having far too much house. My mum lives in a rich neighbourhood. Rich people buy million dollar houses. Then spend another million knocking them down and rebuilding them and making endless extensions and improvements. So the house is always full of workmen and covered in scaffolding and I do not know how much actual utility they get from it. I suppose it is "an Englishman's house is his castle" and everyone wants the biggest and fanciest castle. But it is an expensive ego trip. Something I also see is people move out to the suburbs/commuter towns for more "house". Then end up spending lots of time commuting and they miss all the entertainment and culture of a big city. And to go anywhere or do anything even if it is only grocery shopping you need to get in your car. Another thing is the "holiday house". It is a status symbol. But locks you into going to the same place every year. And then you have the hassle of renting it out when you aren't there and staying on top of maintenance and so on. And while many see it as a potential retirement home who knows the state of your health when you retire or the kind of lifestyle you want. We are very bad at predicting what our future self wants.

So China is a bit of a basket case and outside some of the tech companies is considered un-investable by most investors. Question is what impact will Chinese economic malaise have on the ROW and specific stock sectors? The failure of China's reopening has clearly depressed commodity prices as China drove the super cycle. Possibly some benefits for other exporters that can pick up some of the slack. But maybe some contagion to neighbouring countries such as Japan? Probably not great for Apple and Tesla which unlike the other Mag7 countries have a heavy exposure to China. Definitely not good for luxury goods companies (which we are already seeing in results of Burberry/LVMH) Any other thoughts?

I don't think the Fed really care about the last mile. Financial stability and getting Biden re-elected (so Powell keeps his job) are more important priorities. Although I do expect them to start QE again before they start cutting rates. Also the Fed have already covered themselves by saying that the path to 2% will be "lumpy and bumpy" so they will continue to focus on the past trend of disinflation and will only consider raising rates when the cat is out of the bag again. But I agree that 2024 is likely to see higher inflation. The economy is resilient and consumers keep spending and the fiscal impulse continues to add fuel to the fire and the Democrats will do everything they can to pump up the economy pre-election. Everyone is hoping for a big wage increase in 2024 and while there are some layoffs especially in technology they aren't on a sufficient scale that workers feel happy just to keep their job and accept whatever crappy pay increase they receive. All the conflict in the world is going to cause supply chain issues. Shipping costs already are rocketing. And if China shows any signs of recovering then commodity prices will take off. As I said Big Tech and long bonds are probably not where you want to be. Commodities, cyclicals and value and small stocks might do very well especially if you believe there will be no-landing or a take-off.

What I find extraordinary is that people hyper focus on the Fed's every move and uttering and completely ignore the influence of fiscal stimulus of $500bn a quarter and the expansion of government jobs which is fully offsetting the impact of any private sector weakness and job cuts. A recession requires an output gap and that isn't going to happen when you have such a massive fiscal plug. And if the private sector were to recover and the ROW (especially China) see an economic recovery then that is going to result in a lot of inflationary pressures which will result in another inflation shock. Especially as all the conflicts in the world are going to cause supply chain issues. And of course everyone is positioned in long duration assets such as Big Tech, long bonds etc. anticipating continued disinflation and rate cuts.

There is a funny twitter post summarizing the bull case: Millennials holding 50% of their net worth in bitcoin = $2,500 Boomers holding 5% of their net worth in bitcoin = $250,000

1st level thinking is there is a massive and self-serving incentive now for financial institutions to promote the idea that every portfolio needs a 5-10% allocation to bitcoin and that will create a huge amount of demand for the ETF. Not to mention that individual investors can now speculate in bitcoin in their retirement accounts. And if the ETF can get a bit of momentum out of the gates it will be very easy to draw in more and more money. And precisely because it is impossible to value then there is nothing fundamental such as earnings etc to tether its valuation. So it is difficult not to imagine this ETF doing very well.

Above from TSOH Investment Research partially answers your question about valuation metrics. Although to a large extent the drift lower in FCF yields probably reflects multiple expansion in their initial investments and their buy and hold approach. It is a very popular fund so I do wonder how they deal with the issue that most funds face of the most new money coming in when market valuations generally are elevated and money tending to exit at the very time that valuations are becoming attractive again.

Think there is a difference. With the search engines companies can gate any content they do not want freely available for search. With YouTube the content creators upload their content in the same way they do on social media sites. This seems a bit more analogous to Napster. And as GIGO applies then it only seems fair that producers of high quality informational content (OK maybe that is stretching it for journalism but at least they fact check and have highly informed sources) should consent to their content being used as training data and compensated accordingly.

For most of long bull markets stocks trade above 20x earnings. So long as earnings keep going up (which they will do absent a recession) and inflation and interest rates remain moderate it is sustainable. The basic idea is that if interest rates are 4-5% then that is equivalent to a PE ratio of 20-25x. So long as growth is assumed then there isn't any real requirement for an equity risk premium. It is only during times of heightened fear that investors demand a high equity risk premium because the safety of bonds is preferred to the prospect of never ending losses in stocks. Clearly that mentality does not exist at the moment. We've seen the stock market recover from the GFC, from the Euro debt crisis, from COVID, from the most aggressive Fed tightening cycle in the last 40 years and countless smaller bumps in the road. And of course there are other reasons to support higher than average PE multiples such as changing market composition (more growth/quality/defensive, less cyclicality), more interventionist monetary and fiscal policy, and perhaps even a generational change in investors as the old timers who remember the Great Depression have been replaced by Gen Z whose motto is "YOLO" and crowd into tech companies they are familiar with.

Consensus for 2024 seems to be: -Bonds are still a buy because rates are definitely coming down -Stocks are going up because of a combination of lower interest rates and EPS growth expectations of 10% -We are going to avoid recession (aka soft or no landing) Would not surprise me at all if markets got this very wrong as well. Bond market has already priced in a pretty optimistic picture of Fed rate cuts. And ignored the fact that the yield curve will un-invert at some point so Fed funds rate would have to fall a lot for the long bond to go much further below 4%. So IMO bonds are only a screaming buy if you think we are headed for a hard landing or the Fed completely capitulates and reinstates ZIRP to bail out the financial system or allow corporations/governments to cheaply refinance maturing debt. Stock market has already priced in interest rate cuts (which haven't happened and are even greater than the Fed is guiding) and 10% EPS growth seems pretty optimistic in a soft landing scenario. And Mag7 will have to do a lot of the heavy lifting. Which I suppose is possible but not something I would count on. As for the recession call. Obviously the bears have been wrong so far. But I think that in a myopic stock market neither bears nor bulls seem to understand policy lags which are around 1-2 years. When the first rate hike was only in early 2022 and in the previous few years we'd had ZIRP huge amounts of QE and unprecedented fiscal stimulus (which is ongoing if less effective than the pandemic handouts) it was far too premature to call for a recession and understandably bears have lost any credibility. So if a recession does arrive in 2024 and 2025 when the impact of the tightening in 2022 and 2023 is felt in full and fiscal stimulus continues to wear off then it will catch markets by surprise. The other possibility is while we avoid recession inflation takes off again and the Fed does another U-turn and long bond rates might go a lot higher than 5%. And with all the corporate and government debt maturing higher for longer is not an outcome that anyone wants. Falling inflation has given the Fed an excuse to pivot while maintaining some semblance of credibility. But if inflation takes off again they'd probably have to backtrack. Or something else entirely might happen.

So generative AI doesn't seem to understand the concept of copyright. And copyright infringement could become a major issue with a lot of lawsuits. NYT has already sued OpenAI/Microsoft. Disney seems also to be weighing up filing a lawsuit. Seems like it could be something that could slow the progress until it gets sorted out and perhaps pour some cold water on the Ai enthusiasm in 2024. Any thoughts?

What are the high growth developing markets trading at 7-8x earnings? MSCI emerging markets has a forward PE of around 12x. Still a lot better than the 20x for developed markets. But not as obviously cheap and a lot of that cheapness is coming from China which has additional risks.

I think the limitation of being a valuation expert is that most stocks are efficiently priced based on the general consensus as to their prospects and their track record etc. What you will be missing is the non-consensus insights that make the difference and is where the real money is made as that requires deep industry knowledge, expert judgement, predictive powers and pattern recognition that only the special few have. For fun over the years I used to read investment pitches in Outstanding Investor Digest, Value Investor Insight, Value Investors Club and so on. Most of them were well written and convincing and identified either deep undervaluation or obscene overvaluation. But if you were to see how things turned out in most cases these ideas would have done no better and often worse than just holding the S&P 500. Also the DCF framework which is orthodoxy in modern finance while theoretically correct has some serious practical limitations and the quest for false precision which is necessary for an intellectually satisfactory valuation is going to inevitably result in mistakes. To me it makes a lot more sense to just pay what looks like a fair price for a company that is fairly certain to see its earnings increase over the next 5, 10, 20 years. That doesn't really require a formal DCF and shortcuts such as PE multiples can often do just fine after adjusting earnings for any obvious distortions. Or alternatively look for situations where investors are clearly being far too pessimistic and short-sighted resulting in cheap valuations and good profit potential for a clear-minded and patient investor happy to wait for the dust to clear and sentiment to improve. It isn't textbook but it seems to be how good investors tend to do it in practice.

What people got wrong is the type of inflation. QE policies led to asset inflation. Not consumer price inflation. It was also a bit naive to think that the Fed would ever make any serious attempt to reduce its balance sheet and do QT in a meaningful way. Higher for longer is probably wrong. The global economy is weak and now the pandemic stimulus is wearing off there goes all the demand pull inflationary pressure. The supply side inflation was always going to be transitory. Longer term probably there will be less efficient supply chains, deglobalization to some extent and resource shortages. But because they are supply side what will eventually happen I think is that central banks will just come to accept 3-4% average inflation. The slowdown this year will get inflation back to 2% and allow the central banks to declare a win. And then if inflation drifts up when the economy recovers there will be some half hearted attempts to bring it down and eventually a new inflation target will probably be adopted or the concept of "average inflation targeting" will be made more popular.

What is a little bizarre is that talking heads are still talking about soft landing potential when with markets close to all time highs even a soft landing will probably result in some downside as it will mean slower growth and in a market dominated by growth stocks that is going to hurt as much as lower interest rates help.

I think a lot of bond "investors" are just speculating on rate cuts rather than investing for income. There seems to be a presumption that we are heading back to zero interest rates. But the Fed only aggressively cuts when something breaks or the economy is heading south. If you read the Fed comments it has basically said that it feels that current rates are restrictive and they don't want to overshoot so there is a little room to cut rates next year. But if you assume that a normal term premium is around 150 basis points then for 4% long bond rates to make sense you need the Fed to slash rates by at least 200-250bp and absent a recession or something majorly going wrong in the financial system that is difficult to imagine. And locking in 1-2% real returns does not feel enticing from an income perspective. I prefer short term bonds. History shows that cash is not always trash and there are periods when Treasuries can outperform stocks. And with the CAPE at 30x a 100% equity allocation seems unnecessarily risky.

I have a sneaking suspicion that Mag7 will once again handily beat the market especially if the Goldilocks scenario plays out (not too hot to put upwards pressure on inflation and interest rates and encourage a rotation into cyclicals not too cold to result in earnings disappointments that growth investors tend to punish severely although even in a recession scenario I suspect that they'd continue to be viewed as a safe haven ) And if AI enthusiasm persists and inflows continue into broad market index funds that will also support higher prices. Although would avoid Tesla and Nvidia as they don't have the same quality as the others and bear uncanny resemblances to go-go stocks of the dot com bubble era and do not have the same kind of provenance as the others. I still have a large holding in oil and gas stocks. While they say they are for trading not owning they are attractively priced and in inflation adjusted terms the oil price really isn't that high and demand isn't going away anytime soon while supply will eventually fall as no one is making long term investments anymore and shale while prolific in the short term doesn't have longevity. Emerging markets ex China looks like a good long term bet. Especially if you add to it some of the Chinese tech stocks which have been massively beaten down. Valuations are a lot cheaper than the USA. Growth prospects are better and you don't have the same government debt worries. Commodities are well represented and will do well if growth and inflation pick up again. There are also tailwinds from friend shoring and Western countries trying to do less business with China. Room for improvement in policies. And if inflation comes down then interest rates will come down and that will support higher valuations too. Emerging market bonds also look interesting.