SHDL
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Like globalfinancepartners said, this isn’t enough to “restart the game” completely, and I’m sure Buffett knows that. It is a step in that direction, however, and it also accomplishes a few other things along the way.
One thing in particular that I think gets less attention than it deserves is that it probably helps reduce the likelihood of something like a communist revolution taking place in the US.
All in all, I think it’s another very smart move by Buffett.
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I’m in the so-called DMV (DC-Maryland-Virginia) region, and Crystal City sounds extremely plausible to me. Not that I really want them to come, but I perfectly understand the rationale. The pairing with LIC makes it sound even more plausible — there are so many ways in which LIC is to NYC as Crystal City is to DC.
The DMV region isn’t especially known for its strength in tech, but there’s actually a pool of pretty good talent on the data analytics front that they can probably poach if they really wanted to. Not to mention the fact that this is the place to be if you want/need to engage in serious lobbying. Plus, speaking of Tinder, I expect the female surplus in the dating market here to be very helpful for them should they choose to recruit tech nerds from around the nation.
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If you’re literally planning to buy now and hold for 10+ years, I think it’ll be pretty difficult to beat Berkshire. I don’t have anything useful to say about it beyond what’s already been discussed here, but I am happy to bet $5 that it will absolutely trounce any broad market index going forward.
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What Greg said above, plus, if you want to know more, the big public pension funds (like Calpers and such) generally have websites where they disclose quite a lot about their operations. Not confidence inspiring material (if you care about public finance), but you will probably find some insights along with nuggets of comedy gold.
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1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.
My sense is that some of these institutional investors just love diversification so much that they will happily put a portion of their funds in almost anything as long as its returns are expected to be uncorrelated with what they already have in their portfolios.
More generally I think it’s a good sign that you are asking these questions. It is IMO worth spending some time studying the behavior of these investors, as they tend to be big suppliers of market inefficiencies that good and nimble value investors can profitably exploit.
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Some very good posts above.
One thing I would add to complement Vinod’s point about cycles is the following:
Roughly speaking, you can think of any given company’s value as consisting of two parts: the value of profits now and the value of expected profits in the future. Stable companies have a decent amount of both, fast growing companies often have little of the former but (hopefully) a lot of the latter, and declining companies may have some of the former but usually little of the latter.
The way the DCF math works is that when long term interest rates go down, it not only makes all companies more valuable but it also makes the value of future expected profits rise in relation to the value of current profits. So “growth companies” tend to benefit the most from it, stable companies benefit too but not as much, and declining companies benefit very little.
Also, generally speaking, static valuation metrics like P/E and P/B tend to be positively correlated with future growth prospects (as they should).
So if you put these pieces together it’s not hard to see how this could cause something like a purely mechanical quantitative value fund to underperform a broad market index when long term interest rates decline in a big way like they have post crisis. The “problem” with the value fund here is not that it is following an unsound strategy; rather it is that it doesn’t capture the full benefits of reduced interest rates that the index enjoys. And this is something that may well work in reverse when interest rates start to rise again.
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Good times ahead for active investors!
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Hoping for a diversity of opinions
Me too! :)
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Cigarbutt,
What I meant when I said “lenders” is something simpler. If I have a pile of cash now I can lend it to the US treasury for 3 months and earn a >2% yield. 5 or 6 years ago I could only get perhaps 0.2%. And I, as a lender, am benefiting from that change.
With banks it’s more complicated because they are both lenders (by making loans) and borrowers (by taking deposits) at the same time. You’re right that it’s not so easy to predict what will happen to their profitability as the Fed further raises rates.
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Cigarbutt, I don’t have any strong objections, but one thing I would like to mention is that if interest rates go up borrowers will experience pain but the lenders will gain. So it’s not just pain all around.
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So why did the Fed do what it did? A short answer is: they wanted to avoid repeating Japan’s experience since the 1990s-. (I don’t have time to write about it here but you can look it up, it’s very interesting.) Given what I know about this, I am squarely in the camp that thinks the Fed has done an excellent job post crisis.
Q: Why did the Fed leave interest rates so low for so long?
A: Because sometimes the people that work at the Fed just suck, as history has shown many times. They are not as good at forecasting or understanding the economy as they think they are.
It would not be the first time they fuck up the economy by messing with the interest rates.
'the natural state of the markets/economy is disequilibrium', this is something people working at the Fed are unlikely to accept so by trying to have things nice and flat and delaying the inevitable they end up causing a bigger mess.
It’s true that they know way less than they would like to. Whether they f- things up again this time, we shall see. So far the economy is booming and inflation is not too high — and to me that’s all I want from them.
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Thanks folks for the interesting discussion. This space is generally too difficult for me but it’s certainly fun to read and learn about.
On the Berkshire guys though, didn’t they actually try to make an investment in Uber recently?
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Some thoughts:
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Why is the Fed not making an effort to keep the yield curve from inverting?
I think that is because they don’t really care.
Now it is certainly true that inverted yield curves have historically tended to predict upcoming recessions and that the Fed wants to avoid recessions. But there is no sense, as far as I can tell, in which an inverted yield curve caused any of those recessions. (As they say, correlation does not imply causation!) I therefore find it hard to believe that the Fed would do anything just for the sake of keeping the yield curve nice and steep.
(If anyone has a convincing theory as to why inverted yield curves are bad for the real economy, I’m all ears.)
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The Fed continues to get a lot of scolding in certain circles for waiting so long to raise rates. That is understandable.
So why did the Fed do what it did? A short answer is: they wanted to avoid repeating Japan’s experience since the 1990s-. (I don’t have time to write about it here but you can look it up, it’s very interesting.) Given what I know about this, I am squarely in the camp that thinks the Fed has done an excellent job post crisis.
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Some additional comments:
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In case somebody’s wondering: Yes there is some empirical basis for this type of “forecast.” In short, the IRRs estimated like this are highly and positively correlated with the inverse CAPE ratio and so they inherit the latter quantity’s predictive power with regard to future long term stock returns. And when IRR estimates have fallen as far as they have now, future stock returns have tended to be in the low single digits on average after adjusting for inflation.
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What Liberty said is of course also true — nobody really knows anything about the future. (In fact I can’t even predict what I’m going to have for dinner tomorrow…)
But if you do this type of calculation and data work you’ll see that you will need some pretty serious deviations from historical norms to get, say, double digit real returns on the S&P over the next 10-20 years.
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I had the same feeling as TwoCitiesCapital — that a crash followed by a recovery was more likely than a long stream of consistently low returns — and I am happy to report that I was actually able to find some evidence supporting this view.
That being said, long term dead money in equity markets is not entirely unheard of (e.g., the Nikkei 225 — oh, the horror!).
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One exercise I like to do when assessing general US market conditions is to run a few simple IRR projections for a buy-and-hold-forever investment in the S&P 500 and compare the numbers with current long term bond yields.
To do this you need to have some notion of what the future ROE and real earnings growth rates are going to be for the S&P, and of course nobody knows for sure what those are going to be, but since they have historically been in the mid teens and low single digits respectively over long horizons (without any obvious increasing or decreasing time trends), I tend to assume something like ~13% for the former and ~3% for the latter.
Anyway when I did this exercise recently I got IRR estimates in the 3-7% range adjusted for inflation. Now that is by no means terrible, but it is certainly below its historical average, and it is not particularly attractive either when compared with, say, the yields you can get on certain long term investment grade corporate bonds (already in the mid single digits, and likely to go up a bit more in the near future).
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Hard to say... In terms of the general US stock market I personally do expect pretty mediocre/bad returns going forward, but that doesn't mean it can't keep going up 2% per year for 10 years, in which case where we are today would not be the "top."
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Generally speaking, a company can do this by:
1. Improving net margins (most obviously).
2. Improving capital efficiency. (I.e., finding ways to generate similar or greater net income with less capital employed). This helps because it frees up some capital that can be immediately distributed to shareholders and also because it can improve the returns on future retained profits.
3. Buying back shares. This alone doesn’t make the company as a whole more valuable (unlike 1. and 2.) but it does increase value per share.
For companies like Apple, the recent tax reform was a big deal because it helps them on all three fronts (lower corporate tax rates improve their net margins; lower tax rates on cash repatriations help them improve their capital efficiency; and both provide some extra cash for accelerated share repurchases).
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The WSJ had an article a short while ago on this topic which I thought was very informative:
https://blogs.wsj.com/cio/2018/09/07/deep-learning-is-it-approaching-a-wall/?mod=hp_minor_pos6
It's not bad article, though it simplifies things a lot (for popular consumption). You might be better off with the actual source https://arxiv.org/pdf/1801.00631.pdf that this article summarizes (it goes from 27 pages to half page, so there's that 8)). Although even source article is IMO biased towards issues, but then that's the goal of the author. 8)
I totally agree.
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Cool stuff on the robotics side (from Japan):
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LOL. I think diversity has its benefits but this is silly.
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The WSJ had an article a short while ago on this topic which I thought was very informative:
https://blogs.wsj.com/cio/2018/09/07/deep-learning-is-it-approaching-a-wall/?mod=hp_minor_pos6
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So, to me, this whole thing going on right now is indeed sad to observe.
I think so too. In fact I bought my TSLA puts partly because I wanted sadness insurance.
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These are really good stories to read and think about.
I may dislike the Chinese for doing it, but I must admit that their strategy of trading domestic market access for IP with foreign firms was genius. I’m reasonably certain that that was a significant, if not dominant, contributor to their recent economic success.
Going forward though, I’d expect foreign firms (the best ones at least) to wisen up and come up with better ways of protecting their IP.
This all reminds me of a moment (around 2011?) when I was looking at AAPL and had questions about how secure their IP really was from the Chinese, given how virtually all of their devices were assembled there. But then I read a story somewhere about how Apple actually manufactures the most critical precision machines and tools that workers at Foxconn use to assemble their iPhones. That adds a nice layer of protection. It also helps that they have a number companies in Korea and Japan, as opposed to say one single company in China, produce their key components.
I know Trump is trying to help with his tariffs and everything but in the long run I think the best American companies will do just fine even if his tactics fail.
Amazon's new HQ poll
in General Discussion
Posted
NYC and NoVa it is:
https://www.wsj.com/articles/amazon-chooses-new-york-city-and-northern-virginia-for-additional-headquarters-1542075336?mod=hp_lead_pos1