RuleNumberOne
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Posts posted by RuleNumberOne
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Couldn't agree more.
I think what is different this cycle is the Euro. When the cycle ends, the Euro would collapse because nothing has been fixed there since the crisis erupted in 2010. Postponing the end of the cycle doesn't change that, but the IMF and ECB (along with Trump) put a lot of pressure on the Fed to not raise rates.
Even with money managers who have experienced a bear market, they are investing other people's fickle money. They need to get their 2-and-20 as fast as they can before the OPM gets taken away. The only logical thing for them is to buy momentum stocks with the temporary OPM.
This explanation of fewer public companies is several years old, keeps appearing in different media outlets from time to time. We need to look at the market cap of the entire stock market.
We have $4.9 trillion in market cap in the big five tech companies. In 1996 you didn't have that concentration.
I think the reason stock prices keep going up without increased sales is the percentage of investors who have never experienced a bear market keeps going up everyday. I was just reading Howard Marks writing about the 1990s - the players "moving the market felt no fear."
@LC The same CNN article says this:
"Also, there is so much money sloshing around Silicon Valley that some unicorns have achieved jaw-dropping valuations that would be hard to replicate on Wall Street. Just recently, investors balked at WeWork's lofty price tag and questionable practices, forcing the company to abandon its IPO and eventually seek a bailout from SoftBank.
"Capital is locked up in the private market at inflated prices. It can't get out at reasonable prices," said Kathleen Smith, principal at Renaissance Capital, which runs the Renaissance IPO ETF (IPO). "They are trapped. They want another way to get out."
I know there are MONEY MANAGERS who have never experienced a true bear market!
It is one thing to read about bear markets and collapsing sectors...it is another thing altogether to actually go through it. To lose money, to lose your job maybe, to lose properties or businesses. I knew people who went through the Great Depression and it changed them forever.
There are also a TON of real estate people starting to pop up today who weren't active in 08/09/10 when prices cratered.
The government has intervened WAY TOO MUCH with interest rates and the markets. Every so often, you need a recession to clear out stupid/weak companies, businesses, projects, investors. Since it has been so long since we've had a recession, there are lots of overvalued/stupid/weak investments/projects/businesses going on.
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In hindsight all of us should have done many things at the height of the GFC. In hindsight there are many stocks we could have bought at different times.
I am not a fan of MA because their ROC is not attained by any science/engineering prowess. They pay their engineers half of what other tech companies pay.
Their moat can be removed at any time by an anti-monopoly regulator.
I personally thought Q4 2018 was a mild one because the duration was small. A long bear market would have you go over the waterfall many times.
@Gregmal,
You flew off the handle with a lot of incorrect assumptions.
- The combined IRAs of myself and my wife have been multiplied by 10x during this bull market.
- I am fully invested right now but might get out anytime. In the last year alone, I have made somewhere between 40-45%.
- But all of this has happened with long durations of sitting out of the stock market and timing the market.
- I am referring to the amount of insanity in the financial market. When it gets too much I get out.
I have already made my money in an IPO and I need to make sure I don't lose it speculating in an insane stock market full of newbies.
- The December 2018 correction was a mild, minor correction. It is like a 5-minute wash cycle. A bear market is like a 1-hour wash cycle. If somebody hasn't gone through a bear market, December 2018 may have been a traumatic experience. But it was quite mild if you were mentally prepared for it.
- I am not waiting for once-in-a-generation crash. But neither do I agree with investing in a stock market that goes up every week despite zero sales growth.
- I was using margin during 2007-2009 just like you do right now. But I would have made more money if I hadn't used margin. Things like margin work during a 5-minute light wash cycle, not a 1-hour heavy wash cycle.
I think the reason stock prices keep going up without increased sales is the percentage of investors who have never experienced a bear market keeps going up everyday. I was just reading Howard Marks writing about the 1990s - the players "moving the market felt no fear."
And just the same, you have an entire generation of investors who are still scarred by 2008 an just spent a decade plus sitting on piles of cash and whining about how valuations were out of line or using any excuse they could think of to write off making investments.
With regard to your perspective or mine, one involves things remaining the same, and another involves things changing.... I'd just point out that last November and December's market crash certainly brought about fear to many. Just go read the threads about how many even here and on other platforms for investors where losing their minds. How many were clamoring about Fed policies and rate hikes and all this other excuse laden jargon from the past decade as "reasons" the market was going down. As if, for the first time in history, investors collectively just woke up and decided the sky was falling.... turned out to be more of the same from those folks. False cries of fire in a crowded room.
So I also think the claim about investors not having seen a bear market or whatever is again somewhat misleading. Or at the least, symptomatic of the same fear thats held plenty back over the past decade. H2 of 2011 was certainly no cakewalk. We've had multi year periods of stagnancy, we've had oil market taking historic plunges, Q1 2016, multiple flash crashes, and December 2018 which was historically one of the most violent drops ever.
So I dont really know what many of you are waiting for? You guys missed the boat and continue to do so and what? Claim to be waiting for once in a generation type crashes, which history has shown, even if you invested the day prior, you'd wait MAYBE a few years to get back to even with, even assuming you didn't average down ONCE along the way? And using outliers like WeWork as the basis to kick the can down the road on PLENTY of otherwise wonderful and healthy businesses...does what exactly?
Then again, if it wasn't for this behavior maybe we would be in a bubble...
Which it seems you did as well with respect to the assumptions.
I would agree with you regarding the timing of market moves, I've stated plenty of times Im winding down exposure quite a bit as well.
But when you talk about the insanity of the markets, you're grossly misrepresenting things. Painting the entire market as if it's a sushi roll consisting of Wework wrapped in Beyond Meat with some Theranos sprinkled on top. Maybe some Peloton too. This is hardly the case.
If you want to talk about the unicorns and Saas stuff, sure. But stuff like this has always existed. This time is nothing different.
You dont need to tell me about handling November/December of 2018, I was 150% right playing that as many here can attest to. But to talk about what was easily one of the worst stretches in the history of the stock market, not to mention the reactions to it of many, many "pros".... its laughable hindsite/armchair confidence. Or at least, an arrogant oversimplification. Just as it is to say the market "goes up every week despite zero sales growth"....
Plenty of things can grow or gain value despite growth in sales. This is where supply and demand is important to understand.
Margin does not always mean balls to the wall long. Its also a way to hedge or eliminate risks. Its also a way to take more shots that dont necessarily have to correlate and if you're a good shooter, you will do fine.
People can do what they are comfortable with. And sitting on cash for a little while is fine if you arent able to find anything better to do with it. But after a while, call it a year, 3 years, 5 years, whatever, your opportunity cost significantly outweighs whatever you think and hope to be able to do when "the big one happens". Its the price to pay for being wrong. There were people who were still calling for downside with S&P below 700 in 2009.
In regards to the topic of the thread though, it makes perfect sense. Basic supply and demand. Much of tech is winner take all, or most of. You have dominant high quality stuff there commanding tons of capital and premiums, for many of the reason you describe. They have all the resources and almost all of the talent, or at least access to it. You were complaining about MasterCard in another thread, but outside of Visa and MA, maybe you've got a tiny few "others" on the periphery...what do you think thats worth? Now incorporate low rates. Decline of cash use. You're looking for what? Multiple contraction? MA ended 2013 at a mid $80's print. Its spent several years consolidating and doing little by the way of appreciating in share price to any wild degree despite continuing to exhibit dominance and hold a death grip on commerce along with Visa. So yea its gone on a bit of a run, and it might be a bit extended, but thats how the stock market works sometimes. Its hardly emblematic of a chicken little scenario. As I said before, you could have bought MA right into the GFC, at the highs, and been whole, plus some, within TWO YEARS! after not having added a share! And thats with a once in a generation type event. If that doesnt occur, then what? You're worried about MA in a regular old run of the mill bear market? LOL Come on.
Recessions and collapses just clear out the weak. So owning the best of breed, high quality and dominant players...you could make the case that the less skilled investor or one not interested in timing the market should just buy it at any price and put it away. At any point in the cycle.
And there's plenty of companies similar to MA that the above apply to. And as they continue to consume any worthwhile competition, not to mention make so much money that they can afford to piss money away buying out the bad ones too, that dominance will just get greater, and when the supply of competitors for them dwindles and the investment alternatives for investors does as well... its kind of obvious what the result will be, until the government decides to intervene.
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Buffett cannot get in and get out without moving the price drastically. In other words, he has a wide bid-ask spread. Mike Burry was right about the lack of liquidity in many stocks.
Momentum hedge funds want their 2 and 20. They don't care if the stock price crashes on the way out - they just want a few quarters/years of 2-and-20 and they are satisfied. Buffett is investing his own money.
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@Gregmal,
You flew off the handle with a lot of incorrect assumptions.
- The combined IRAs of myself and my wife have been multiplied by 10x during this bull market.
- I am fully invested right now but might get out anytime. In the last year alone, I have made somewhere between 40-45%.
- But all of this has happened with long durations of sitting out of the stock market and timing the market.
- I am referring to the amount of insanity in the financial market. When it gets too much I get out.
I have already made my money in an IPO and I need to make sure I don't lose it speculating in an insane stock market full of newbies.
- The December 2018 correction was a mild, minor correction. It is like a 5-minute wash cycle. A bear market is like a 1-hour wash cycle. If somebody hasn't gone through a bear market, December 2018 may have been a traumatic experience. But it was quite mild if you were mentally prepared for it.
- I am not waiting for once-in-a-generation crash. But neither do I agree with investing in a stock market that goes up every week despite zero sales growth.
- I was using margin during 2007-2009 just like you do right now. But I would have made more money if I hadn't used margin. Things like margin work during a 5-minute light wash cycle, not a 1-hour heavy wash cycle.
I think the reason stock prices keep going up without increased sales is the percentage of investors who have never experienced a bear market keeps going up everyday. I was just reading Howard Marks writing about the 1990s - the players "moving the market felt no fear."
And just the same, you have an entire generation of investors who are still scarred by 2008 an just spent a decade plus sitting on piles of cash and whining about how valuations were out of line or using any excuse they could think of to write off making investments.
With regard to your perspective or mine, one involves things remaining the same, and another involves things changing.... I'd just point out that last November and December's market crash certainly brought about fear to many. Just go read the threads about how many even here and on other platforms for investors where losing their minds. How many were clamoring about Fed policies and rate hikes and all this other excuse laden jargon from the past decade as "reasons" the market was going down. As if, for the first time in history, investors collectively just woke up and decided the sky was falling.... turned out to be more of the same from those folks. False cries of fire in a crowded room.
So I also think the claim about investors not having seen a bear market or whatever is again somewhat misleading. Or at the least, symptomatic of the same fear thats held plenty back over the past decade. H2 of 2011 was certainly no cakewalk. We've had multi year periods of stagnancy, we've had oil market taking historic plunges, Q1 2016, multiple flash crashes, and December 2018 which was historically one of the most violent drops ever.
So I dont really know what many of you are waiting for? You guys missed the boat and continue to do so and what? Claim to be waiting for once in a generation type crashes, which history has shown, even if you invested the day prior, you'd wait MAYBE a few years to get back to even with, even assuming you didn't average down ONCE along the way? And using outliers like WeWork as the basis to kick the can down the road on PLENTY of otherwise wonderful and healthy businesses...does what exactly?
Then again, if it wasn't for this behavior maybe we would be in a bubble...
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Yeah, you are right. This Renaissance IPO ETF was a real IPO pumper, they make their money from IPOs. Their idea of "reasonable" is different. At the start of 2019, Renaissance IPO ETF was talking completely different stuff.
"Capital is locked up in the private market at inflated prices. It can't get out at reasonable prices," said Kathleen Smith, principal at Renaissance Capital, which runs the Renaissance IPO ETF (IPO). "They are trapped. They want another way to get out."
I a guess it’s trapped because they can’t get out at unreasonable prices. I am certain they could get out at reasonable prices with the last rounds going into a loss.
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There are some product areas where there are at most 2 or 3 teams in the entire country that can build a quality product. For example, no college grads have entered operating systems related areas since the Google IPO 15 years ago, they have all gone into Big Data and AI.
Right now capital is unlimited (e.g. Gusto just raised $200 million Series D for head-on with WDAY).
But you can't find the teams to build certain products, another example would be networking products - routers/switches. In such areas you find high GAAP profitability and dividends because competition is limited.
These are very tricky times. We have a whole generation that hasn't seen a bust, the bull market is closing in on 11 years.
I see several narrow moat companies (at least as defined by Morningstar) with very high market share. Why does this happen? Say Vmware. There are several huge and smaller competitors. Is it just a temporary switching cost issue?
Also some companies in biological lab equipment, reagents, genetic sequencing (e.g. Ilmn). None of them are making anything that can't really be produced by anyone else. Why do competitors have trouble making inroads in such situations or is it just "a matter of time"
Because the high market share Is the moat. I know it’s sort of a circular answer.
VMW might be toast longer term (let's discuss on VMW thread though). It did have a huge first-mover advantage, great (way better than others) tech, real switching costs, and a real moat through now though.
I think ILMN also has a large first mover advantage and possibly better tech than competition and likely switching costs. But I know that area way less than VMW.
Like others said, "narrow moat" is still moat. And large market share may lead to some moat (of network effect, switching costs, low cost provider, etc.).
And getting capital for head-on competition is very tough. Getting capital for something that is different and may displace the incumbent by a side swipe is possible and easier though. So no guarantees for long term.
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This explanation of fewer public companies is several years old, keeps appearing in different media outlets from time to time. We need to look at the market cap of the entire stock market.
We have $4.9 trillion in market cap in the big five tech companies. In 1996 you didn't have that concentration.
I think the reason stock prices keep going up without increased sales is the percentage of investors who have never experienced a bear market keeps going up everyday. I was just reading Howard Marks writing about the 1990s - the players "moving the market felt no fear."
@LC The same CNN article says this:
"Also, there is so much money sloshing around Silicon Valley that some unicorns have achieved jaw-dropping valuations that would be hard to replicate on Wall Street. Just recently, investors balked at WeWork's lofty price tag and questionable practices, forcing the company to abandon its IPO and eventually seek a bailout from SoftBank.
"Capital is locked up in the private market at inflated prices. It can't get out at reasonable prices," said Kathleen Smith, principal at Renaissance Capital, which runs the Renaissance IPO ETF (IPO). "They are trapped. They want another way to get out."
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Permanent capital loss for momentum speculators in less than 6 weeks!!! It will take him/her 33 years to recover the lost amount - assuming the bond prices don't go down further and inflation is zero. LOL.
AAA-rated Sovereign debt is not supposed to lose 20% in a month. The buyer got a yield of 0.61%/year. These are the so-called "institutional investors" such as pension funds and insurance companies and banks.
The FT has 100% love for Mario Draghi and 100 % hate for Trump/Brexit. FT hasn't said a word about the bond bubble implosion, instead they gave breathless coverage about the Trump impeachment. I terminated my subscription with them.
Barrons Nov 7 edition:
"By late August, the Austria “century” bond hit a price of 210 as the total amount of negative-yielding global bonds hit a peak of $17 trillion. Austria’s bond at that price provided a yield of 0.61%, at least with a positive sign. That bubble has been deflating, although not bursting, in recent weeks. By Wednesday, the bonds were down to a price of about 168, which results in a yield of just over 1%."
Barrons Sep 27 edition:
"In not quite three months, that 1.08% yield to maturity has fallen to 0.72%. The price has reciprocally rallied—no, the word is leapt—to 197.7 from 161, up by 22.9%. You’d think that the bond was a stock."
https://www.barrons.com/articles/the-bubble-is-deflating-for-100-year-bonds-51573122603
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ScorpionCapital,
Your question is a very wise one. Such companies are wide-moat, not narrow-moat (though someone like Morningstar may see things differently).
There are a very limited number of people with the specialized skills to build these products. And it takes years to build them even with those specialized skills. Someone who has a large amount of financing would have to still be able to hire away employees en-masse. It is the accumulated talent and experience that gives them the moat. You might have cases where no college grads have entered that field for 10-15 years because they have been lured somewhere else.
For people who work in the same industry, it is easy to see which moats are wide and which aren't (i.e.. they track where their former classmates and colleagues are working, watercooler conversations).
For people who don't work in that industry, GAAP profits are a good indicator of moats. This raises the question - why do VMW and NOW have almost the same market cap. VMW's FCF is almost the same as NOW's revenue. They say VMW is an on-prem company and is getting bypassed due to the move to the cloud. Yeah, but my reply is would NOW ever be able to make a GAAP profit to justify its $56 B market cap? They are an app on AWS, and the number of AWS app companies are in the hundreds. High-tech wide-moat companies should not have any trouble showing GAAP profits.
It is kind of like the negative-yielding debt. The momentum is the only justification for a while. A bond is supposed to pay interest, stocks are supposed to show a profit (at least eventually). $17T of -ve debt suddenly went to $12T of -ve debt, can't hear even a whimper from Draghi-loving FT.
Also, such specialized skills employees do get hired away by cloud companies like Amazon, Microsoft, Google. They bypass VMW by changing lanes to the cloud (i.e. attack from a different angle). Around 10 years ago VMW debated whether or not they should build their own cloud, and elected not to.
BTW, I am not invested in VMW currently.
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Interesting. That makes the debt-to-GDP problem worse because we need people working and paying taxes in Italy so that the sovereign debt can be paid.
Do you find it suspicious that the last 7 GDP reports for Italy reported growth of 0.1%, -0.1%, -0.1%, 0.1%, 0.1%, 0.1%, 0.1%? How can GDP growth get fixed at 0.1%?
If Italy cannot pay its debts, the European banking system gets wiped out. French banks own hundreds of billions of euros of Italian debt.
Take a look at the working age population graphs for the US and Italy.
US: https://fred.stlouisfed.org/series/LFWA64TTUSM647S
Italy: https://fred.stlouisfed.org/series/LFWA64TTITQ647S
Italy GDP is lower than 2007. Debt to GDP as high as ever, even with negative rates.
Their quarterly GDP growth rate figures: 0.1, -0.1, -0.1, 0.1, 0.1, 0.1, 0.1. They have the highest amount of sovereign debt issued in Europe. Eurocrats must have told them to fake their GDP growth rate reports.
Will Italy die rather than leave the Euro? They want to be part of the Euro so badly that they are willing to kill themselves rather than leave? If they do leave the Euro, financial markets will crash.
I take it from your statement that you don‘t live in Europe. Also, you seem to imply that it is the Euro which is responsible for Italy‘s malaise. That’s debatable.
In the words of Robin Williams “I made you short?” :)
Clearly it doesn’t help to be in fiscal system which doesn’t allow you to devalue when your productivity sucks, and yoking countries together this way is the original mistake of the Eurozone - but there is more to Europe than the Euro, and that’s what Italy (and many Brits, actually, are after). What you’re seeing in this chart has more to do with outward migration as low growth means whoever can go and work elsewhere does. Where do they go? To other parts of Europe, mostly ... which was the idea of the ‘free movement of labour’ principle enshrined in the EU common market. The problem is that Italy’s productivity in many sectors is comparatively low, they have a lot of red tape, etc., etc.
All of these things wouldn’t magically disappear if they left the Euro (which also means they’d have to leave the common market and start negotiating bilateral trade agreements). Of course, they could then devalue, but that doesn’t fix the structural issues.
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Take a look at the working age population graphs for the US and Italy.
US: https://fred.stlouisfed.org/series/LFWA64TTUSM647S
Italy: https://fred.stlouisfed.org/series/LFWA64TTITQ647S
Italy GDP is lower than 2007. Debt to GDP as high as ever, even with negative rates.
Their quarterly GDP growth rate figures: 0.1, -0.1, -0.1, 0.1, 0.1, 0.1, 0.1. They have the highest amount of sovereign debt issued in Europe. Eurocrats must have told them to fake their GDP growth rate reports.
Will Italy die rather than leave the Euro? They want to be part of the Euro so badly that they are willing to kill themselves rather than leave? If they do leave the Euro, financial markets will crash.
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40% of Stanley Druckenmiller's 13-F is in these four stocks: MSFT, AMZN, NOW, WDAY
"The fear of missing out unleashed on investors already raw with tech envy during those fateful 16 months was more than many could bear. Perhaps most famous among them is billionaire investor Stanley Druckenmiller, who scooped up internet stocks in 1999 after betting against them earlier that year. Drunk with success, he plowed an additional $6 billion into tech stocks just before they collapsed in early 2000, handing him a $3 billion loss. Druckenmiller later recalled, “I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself.” He may as well have been speaking for an entire generation of investors."
A lot of multiple expansion has been with high quality stocks. MA, V, FISV, MSFT various SAAS/cloud plays like WDAY, NOW, rollups like SHW, ROP, POOL, CSU-TO etc.
Oddly enough, some fangs like GOOG and FB aren’t all that expensive compared to above. They haven’t really seen multiple expansion lately either, as their share price has roughly followed their growth rate.
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Yeah, I think rates cannot and will not go up. Last year we saw what happens if the Fed hikes rates. Every Eurocrat, Trump, every financial journalist, every politician, European Mutual Fund (aka IMF), Jim Cramer scream at Powell.
I think the collapse of the Euro is what will bring down this market. Italy's GDP office must be fudging their GDP growth figures (the last 7 quarterly reports were 0.1, -0.1, -0.1, 0.1, 0.1, 0.1, 0.1). What a circus! Everybody was talking of the great capital gains when negative-yielding debt reached $17 T. Now everybody is silent about capital losses with the negative-yielding debt totaling $12T. $5T debt went from negative to positive in 2 months, but the Financial Times is completely silent. Only Barrons recently wrote that the 100-year Austrian bond collapsed from 210 to 168.
French, German, Austrian banks and pension funds own Italy's debt, third highest stock of sovereign debt in the world. Italy's GDP is lower than what it was in 2007, their demographics show a dying country. European rates cannot go up. I don't know how long Europe can cover stuff up and hold on.
https://www.multpl.com/s-p-500-pe-ratio
This used S&P reported earnings
Currently at 23x earnings which is relatively high but with low interest rates and low tax rates may be justified.
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Mastercard is the fourth entry for the multiple expansion contest.
After reporting Q3 GAAP EPS $1.82 last year, MA was at $197. 15% revenue growth
After reporting Q3 GAAP EPS $2.07 this year, MA is at $291. 14% revenue growth
48% increase in stock price with just 14% increase in both EPS and revenue.
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I skipped 2013 because that was a great year for the stock market. If you start from January 1, 2013, P/S expansion is even more glaring:
Over the last 7 years:
P/S went from 1.31 to 2.25 today
S&P went from 1426 to 3153 today
121% rise in the S&P, 72% rise in the P/S, just 28.5% rise in sales.
So the P/S expansion was 2.5x times the rise in sales from Jan 2013 to today.
Also, note that every Dem wants to reverse the corporate tax cuts. No other way to pay for exploding entitlements with imploding demographics.
I am not saying we need to go back to 1980 or 2000, just go back 7 years.
P/S remains a good metric to avoid the use of non-GAAP P/Es everywhere.
Why not just use P/E which does conform to GAAP?
the more bearish like to use price to sales because margins/tax rates/interest rates have all moved in a way that is favorable to earnings.
the more bullish like to use PE as simple TTM and forward PE's appear to be, for the most part, reasonable under any historical context and pretty cheap in today's rate environment.
The truth is probably somewhere in between. Corporations are probably over-earning, but to assume complete mean reversion in margin, interest burden or tax rates, is likely to make one overly bearish of stocks. There have been legitimate shifts in sector composition that hsould lead to structurally higher margins, the trend in lower tax and interest burden appears structural to a certain extent, etc. etc. Google should have a higher long term margin than the top index components of 2000, 1990,1980, etc. At least in my opinion.
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MSFT is the third entry for the multiple expansion contest.
After reporting 18.6% revenue growth in October 2018, MSFT was at $107.
After reporting 13.7% revenue growth in October 2019, MSFT is at $152.
One-year performance: stock price went up 42%, GAAP EPS went up 21%, revenue went up 13.7%.
Where is Jim Bullard when you need him?
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AAPL is my second entry for the multiple expansion contest.
October 30 2018: AAPL reports 20% revenue growth. Market cap $1.003 T. Stock price $207
This year's quarter: AAPL reports 2% revenue growth in the latest quarter. Market cap $1.202 T. Stock price $266
Fully diluted market cap expanded by 20%. Stock price expanded by 28.5%. I didn't calculate EV, but EV would have gone up somewhere between the market cap expansion and stock price expansion (buybacks reduce net cash on balance sheet)
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Hard to find - the adjustments depend on the analyst or analysis firm. E.g. Value Line may adjust differently compared to Yardeni Research.
But i could use the fundamental data from a source like Quandl and compute S&P 500 GAAP P/E myself i guess.
P/S remains a good metric to avoid the use of non-GAAP P/Es everywhere.
Why not just use P/E which does conform to GAAP?
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We could collectively prepare a list of stocks with fascinating multiple expansions.
My initial contribution is ServiceNow - the latest company to enter the prestigious S&P 500.
To remove the effects of the Q4 2018 correction, I am comparing Q3 2018 to Q3 2019.
- After reporting 39% revenue growth in Q3 2018, NOW fell to $166.
- After reporting 33% revenue growth in Q3 2019, NOW rose to $281.
That is a rise of 69% in the stock price. The revenue deceleration resulted in P/S expansion of 27% (1.69/1.33 = 1.27). The P/S went from around 13 to 17 even with slowing revenue growth!
I think this multiple expansion contest could be an entertaining one.
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The S&P 500 increased 72% in those 6 years (Jan 1 2014 to the present).
S&P 500 sales increased 27.5% but the P/S multiple expanded by 35.5%
Jim Bullard, the guy who wanted a 50bp cut immediately, has gone silent.
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The S&P 500 Price to Sales ratio has jumped by 36% from Dec 2013 to the present. It is at a 20-year high.
https://www.quandl.com/data/MULTPL/SP500_PSR_YEAR-S-P-500-Price-to-Sales-Ratio-by-Year
P/S remains a good metric to avoid the use of non-GAAP P/Es everywhere.
As always the bubble is bigger outside the S&P 500. But no central bank or politician has the courage to raise rates anymore. Trump has beaten the Fed into submission.
How big can the P/S get before it blows up?
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Of course I support Trump in goosing the market. He needs to do whatever it takes to keep the liars and thieves (Elizabeth, Bernie, AOC) away from the White House.
Ben Graham was an active investor at a time when bullshit accounting was widespread. Before 1934 there was plenty of fraudulent accounting and securities crimes. Graham and Buffett principles are always valid and timeless. They are few and simple - e.g. the sun rises in the east and sets in the west and that is not going to change.
Can't blame NZS or others to try to make a living by trying to get attention. That is the only way for them to put food on their tables.
But more relevant for us - I think bullshit accounting is very widespread right now. Revenues need barely advance, but "non-GAAP profits" can be made to grow in a variety of ways:
- shift from cash compensation to stock compensation
- capitalized R&D expenses through acquisition followed by non-GAAP writeoffs
Even GAAP results can be faked by the standard practice of granting pre-IPO stock at an artificially low price and reporting artificially low GAAP expenses for several years post-IPO.
If investors don't want to get obliterated, they have to ride momentum stocks thriving on bullshit accounting. It becomes self-fulfilling and can go on for years.
P/Es and P/S ratios have been increasing rapidly without sales growth. If the Fed tries to arrest this, Trump tweets and threatens Powell furiously every hour, the IMF head (aka the European Mutual Fund) starts issuing dire warnings, financial journalists scream at the Fed. Meanwhile Italy's GDP growth gets reported as 0.1 -0.1, -0.1, 0.1, 0.1, 0.1, 0.1 over the last 7 quarters. Italy with the largest stock of sovereign debt in Europe can wipe out the European banking system. Lots of bullshit going on right now everywhere.
Very dangerous times. As Buffett says, speculation is most dangerous when it looks easiest.
It's interesting that this thread, which is about a redefinition, barely touches on the father of the definition (apart from a brief indirect mention in reply #6).
How you define the margin of safety and its relevance may be epoch-specific. Mr. Graham went through a vertiginous rise during the new era period and became a portfolio manager in 1926. His capital grew, mostly from capital appreciation, and went from 450K to 2,5M in three years. The following three years meant a 70% loss. The fact that he survived with grace is, by itself, an accomplishment but he was wise enough to think about the whole thing and come up with some definitions. A fact that is not well known is that, after the dreadful period, he often acted as an expert witness helping cases to argue that market quotations actually undervalued many businesses. His experience was unique and perhaps not repeatable but the atmosphere of the period helps to understand his tone and his anchor points for definitions. It seems that he was able to grasp concept of resilience, optionality and the nature of growth but he chose to focus on past quantifiable measures, put a high price on downside risk and respected the limitations of evaluating the outcomes of the future which, invariably, are tied to the general level of business conditions.
An argument could be made that such a confluence of events won't happen again, that he was unable to recover from the permanent bruising and that we was, in the end and perhaps because of this attitude, an average investor (if one forgets Geico which is an investment that didn't fit his margin of safety definition) but it seems that Mr. Graham was at least right in the need to remain humble and the contrarian side of me wonders if his teachings are not the most relevant when it is felt that he no longer is.
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Public company stock is not illiquid. In fact, in the Bay Area, mortgage lenders count stock compensation as equivalent to cash compensation when determining how much can be lent within regulatory limits. No difference between cash and RSUs as far as lenders as concerned.
Pre-IPO stock is illiquid. But we are talking about public companies. When a public company hires an engineer, at least one-third of the starting compensation is in RSUs, sometimes half (true for all the companies people in CoBF invest in). People rely on selling their stock compensation to meet expenses.
I think as this bull market goes on, more cash compensation will shift to stock. Otherwise any given company will find it hard to compete as its competitors shift to stock, report high non-GAAP EPS, higher stock prices, attract candidates to their companies. Only-cash companies will lose employees to non-GAAP companies.
Why don't activists move companies away from all-cash to all-stock compensation for their employees?
That way the non-GAAP profits would shoot up. If this is done gradually, it might even come across as "expanding operating margins".
Because employees need cash to live, probably don't want to take quite that much risk, and during early stages, that stock is highly iliquid.
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Ben Graham was an active investor at a time when bullshit accounting was widespread. Before 1934 there was plenty of fraudulent accounting and securities crimes. Graham and Buffett principles are always valid and timeless. They are few and simple - e.g. the sun rises in the east and sets in the west and that is not going to change.
Can't blame NZS or others to try to make a living by trying to get attention. That is the only way for them to put food on their tables.
But more relevant for us - I think bullshit accounting is very widespread right now. Revenues need barely advance, but "non-GAAP profits" can be made to grow in a variety of ways:
- shift from cash compensation to stock compensation
- capitalized R&D expenses through acquisition followed by non-GAAP writeoffs
Even GAAP results can be faked by the standard practice of granting pre-IPO stock at an artificially low price and reporting artificially low GAAP expenses for several years post-IPO.
If investors don't want to get obliterated, they have to ride momentum stocks thriving on bullshit accounting. It becomes self-fulfilling and can go on for years.
P/Es and P/S ratios have been increasing rapidly without sales growth. If the Fed tries to arrest this, Trump tweets and threatens Powell furiously every hour, the IMF head (aka the European Mutual Fund) starts issuing dire warnings, financial journalists scream at the Fed. Meanwhile Italy's GDP growth gets reported as 0.1 -0.1, -0.1, 0.1, 0.1, 0.1, 0.1 over the last 7 quarters. Italy with the largest stock of sovereign debt in Europe can wipe out the European banking system. Lots of bullshit going on right now everywhere.
Very dangerous times. As Buffett says, speculation is most dangerous when it looks easiest.
It's interesting that this thread, which is about a redefinition, barely touches on the father of the definition (apart from a brief indirect mention in reply #6).
How you define the margin of safety and its relevance may be epoch-specific. Mr. Graham went through a vertiginous rise during the new era period and became a portfolio manager in 1926. His capital grew, mostly from capital appreciation, and went from 450K to 2,5M in three years. The following three years meant a 70% loss. The fact that he survived with grace is, by itself, an accomplishment but he was wise enough to think about the whole thing and come up with some definitions. A fact that is not well known is that, after the dreadful period, he often acted as an expert witness helping cases to argue that market quotations actually undervalued many businesses. His experience was unique and perhaps not repeatable but the atmosphere of the period helps to understand his tone and his anchor points for definitions. It seems that he was able to grasp concept of resilience, optionality and the nature of growth but he chose to focus on past quantifiable measures, put a high price on downside risk and respected the limitations of evaluating the outcomes of the future which, invariably, are tied to the general level of business conditions.
An argument could be made that such a confluence of events won't happen again, that he was unable to recover from the permanent bruising and that we was, in the end and perhaps because of this attitude, an average investor (if one forgets Geico which is an investment that didn't fit his margin of safety definition) but it seems that Mr. Graham was at least right in the need to remain humble and the contrarian side of me wonders if his teachings are not the most relevant when it is felt that he no longer is.
Negative interest rates take investors into surreal territory
in General Discussion
Posted
I am fully invested right now. I think this cycle will be prolonged as long as possible because the wipeout of the European project is what happens at the end of the cycle.
My guess is the stock market goes higher and things get crazier.
The European banks look dead, their economies seem to be dying, but they blame Trump for everything.