TwoCitiesCapital

I've said it before, I'll say it again. Bonds had a better return in the 70s than equities did. Short term absolutely. Intermediate did so too with some basic assumptions (didn't buy at the extreme highs, owned corporates instead of just treasuries, etc). Equities are NOT a good inflation hedge - their duration is significantly longer than most fixed income investments and thus they're way more sensitive to accelerating interest rates and inflation. They work best when it's low and stable. When it's moderate, they suffer more than bonds do (like in 2022 and in the 1970s). When it's high, stocks do "well" in that nominal returns do exceed bonds, but they don't come close to maintaining real purchasing power like necessary commodities do. You want a bet on deflation? It's bonds. You want to bet on stable/low inflation? It's stocks. You want to bet on inflation? It's commodities - particularly food and energy. If you're that terrified of hyper inflation, you're buying the wrong thing. If you're terrified of moderate inflation, you're still buying the wrong thing. My ownership of Bitcoin isn't inflation related - the inflation impulse of Bitcoin is absolutely trounced by its secular growth curve and the changes in speculation within it. This is also why BTC went down significantly in 2022 despite inflation. There are multiple things driving BTC's return - inflation will not be significant amongst them until you have global adoption/acceptance. We're a long way from there. Not sure what you mean here? As in did I outperform the benchmarks for fixed income? I imagine it depends on which one you want to select? The Agg? A short term fixed income benchmark? A high yield one? An emerging markets one? A weighted benchmark of all of them that changes each time I change my allocation? I own bonds in all of these categories and generally believe more in absolute returns than relative. I also own equities and crypto that may, or may not, need to be considered. I also work in Finance meaning my compensation is heavily tied to markets so I may be more cautious than most. I dunno which of these considerations is relevant to your question, but I generally believe in absolute returns - not relative. Nobody is happy when they're down 30% and the index is down -35%. Relative returns seem to only be a bull market consideration, but I invest across the cycle.

Not too bad. I'm positive across all of my accounts - even th fixed income ones. Owning fixed income in 2021/2022 was crazy. Owning it in 2023 hasn't been too bad - even with subsequent rate hikes. Rates haven't moved much except at the front end and because there basically isn't any duration at the front end the coupon yields made up for higher rates.

It's less timing and more systematic. I sell a small portion of each position at it rises by 10-20% pending it's historical volatility and where it's RSI is at. I've been trimming Fairfax ever since we passed $650 USD. Haven't had much opportunity to repurchase it yet so maybe this one is a bust that doesn't work out. But I trimmed Altius at various points all the way up to $20 USD and have purchased nearly all of those shares back. Have pulled thousands out of the position while retaining similar ownership. Eurobank has been trimmed by ~25% over the last year - I have just successfully bought the tranche of shares I sold for ~0.85/share for ~0.75/share. I have other limit orders out to buy more back if the price keeps falling to rebuild that 25%. I've been systematically trading Whitecap Resources a ton since 2021. There have been probably a have dozen opportunities to sell shares between $10-12 and repurchase them back between $8-9 over the last 18-24 months. I've done this with nearly every position I own or sold covered calls against them with premiums going into fixed income. The name of the game is to compound as quickly and as much as possible. I'm not afraid of stocks - I think my returns will be better in fixed income. I'm motivated by greed- not fear. I'm the same guy who owns sizable portfolio allocations to Bitcoin, was buying Sberbank after the sanctions, and has been sitting on Fannie Mae preferreds for a decade. I'm comfortable with high risk. I'm comfortable with high drawdowns. But only when I feel I'm being compensated for it via the potential upside. Point is, volatility doesn't scare me - I just want to get paid for accepting it. Im buying bonds because they pay well for the the downside potential I expect. Stocks, on average, pay poorly for the downside potential I expect. Outside of a handful of individual equities, I expect bonds to outperform.

I mean I own a ton of Fairfax and Exor. They're my two largest positions. But do you recall what happened to them in 2020? Fairfax went down to like $250 USD per share and was -50+% off its recent highs even while holding a ton of cash and insurance doing reasonably well. Exor also fell by 50+% to trade at a level less than the cash they expected from the previously announced sale of Partner RE - let alone all of their other investments/brands. A receding tide will lower most, if not all, ships - regardless of how cheap those ships were to start with. Sometimes you can buck the trend like Fairfax did in 2022, but most of the time you get taken out to the woodshed and killed worse than average despite starting cheaper than average. When I expect trouble in equities, I try not to hide out in equities. It's possible Fairfax and Exor both double while the market falls 20% - it's why I still own them - but it's not an outcome I'm gonna go all in betting on. I'd rather make 5-10% in bond funds, sell the funds, and buy Fairfax/Exor/whatever for 20-30% less in 15 months time. I am continuing to buy what is cheap. I buy dips, trim on rips, and have been slowly allocating more and more of the profits to fixed income.

I just don't believe it's gonna get 6% on the S&P. Requires average earnings to go up 5-6% per annum and NOT contract on multiple. Earnings are already contracting and accounting moves are becoming more aggressive to hide the extent of the shrinkage judging by the difference in GAAP profits and tax receipts. A large chunk of the EPS growth we've seen over the last decade came from 1) expanding margins and 2) repurchases. Not organic revenue growth. Neither of those are sustainable into perpetuity as trends. Margin expansion will have to stop, at some point, if not outright contract. Repurchases? Currently generating a 3-4% ROE based on the earnings yield - so way below the 5-6% you'd need as a hurdle rate. They'd be better off repaying debt or keeping cash on hand to pay off the debt when it comes due. You remove those things and the engine that resulted in the bulk of EPS growth over the last decade is gone, or operating in reverse. I don't see how we get to 5-6% without significant nominal inflation to goose revenues. Which, if we get, you will NOT see 25-30 multiples on infinite duration assets like equities - it'll be another 2022. So...you're still gonna take a f*cking beating up front which may then set the stage for equities being attractive again. And all of this is trying to get to 6%. Why not buy mortgages, corporates, HY, and EM all which yield more than that to start and call it a day?

This is why I'm buying bonds. Even if you're not bearish on equities like I am, the assumptions you have to make on earnings growth are herculean to outperform spread fixed income. 6-7% in mortgages, 6.5-7% in IG corporates, 8-10% in EM and HY. You starting at 2-3x the implied return for the S&P 500 without making any assumptions on price returns, multiples, and interest rates. I don't think bonds are the biggest no-brainer on an absolute basis, but relative to equities it is hard to make a case for not owning them. Especially if the Fed KEEPS raising rates as a ton of duration has been removed from the market already - each rise in rates is going to do more for future reinvestment and income than price hits to bonds.

Considering most EM funds are flat-to-down in USD over that period of time, I'll take 8.5% annual alpha, after fees, to let Fairfax manage a large chunk of that exposure for me. 8.5% after fees is exceptional in that environment and we HAVEN'T IPO'd the crown jewel yet. Paired with the fact you can buy it at a 30+% discount to that NAV, it's a no brainier.

just sold some of my cash position in ZROZ and rolled the proceeds into March $100 calls on TLT. Kind of feels like we're at an inflection point. Fed still says they're hiking again, everyone has discounted a possible recession, higher for longer is the narrative, consumers still holding up, Atlanta Fed projecting 5+% GDP for Q3, just took out prior highs on 10-year rates, etc etc etc Corporate earnings are still falling, liquidity is still being drained, small banks are hemorrhaging earnings (many down 15-25% YoY in Q2), defaults/delinquencies are starting to rise, credit is tightening, PMIs are still largely contractionary, and China is actively exporting deflation. I think we're going to see a pivot in the next 6 months and I think the market will sniff it out beforehand.

That's not Fairfax's fault. Book value growth has been admirable over that period of time - especially considering EM as a whole hasn't done fantastic and that covid kind of wrecked every for everyone for a year or two. The share price on the other hand - entirely the fault of people. People who were willing to pay a 30% premium to NAV right after it's IPO who are no longer willing to pay a 30% discount to NAV after the team has proved itself very capable. I can't blame Fairfax for that. I can blame other people and take advantage of their myopia. Im glad to see Fairfax do the same with repurchases and tenders

I own both because some of my accounts don't allow me to trade in foreign currencies/exchanges. Can confirm it's not an ADR but rather a foreign stock that trades pink sheets (is why the ticker ends in F instead of Y). No difference in tax withholding or fees - just liquidity.

Yea. I've got the slug of my 2022 purchases to liquidate in the next 2-3 months when the interest in giving up is ~1% that accrued. Have already rolled all of my 2021 purchases into JSCP in various tax free and tax deferred accounts to double the YTM without any tax drag.

Just out of curiosity - does anyone know the cultural comparison of pet ownership in India to the US. I know friends in the US who refer to their dog as their 'child' and spare no expense on them. I would think its questionable to assume it'd be the same in countries with lower relative incomes so am curious how comparable the results will be. Anyone know the culture towards pets in India?

Sure. Starting at what was basically sub-1% rates and then experiencing 9% inflation will do that. Given the starting point, the worst 2 or 3-year return in history makes sense. Just seems very rearview mirror-ish, and unrelated to the returns on 2023 at all, given that all of this was basically also known 9 months ago.

Im not claiming it's make it or break it. Just that someone making the claim that -0.4% constitutes a negative return for the year when you still have 1-4 months left (pending the calendar they use) is being premature. I'd argue annual returns are largely arbitrary to begin with and I tend to focus more on peak to trough type movements. I expect double digit like returns out of 10-year treasuries over the next 12-18 months - not just avoiding the -0.4%.

A bit early to be saying it's gonna be negative for the 3rd consecutive year... we've got a month left in fiscal year and 4 left in the calendar year. In either case, the interest accrual over either time frame is basically enough to turn that -0.4% positive even without yields falling much more than individual basis points. (We've actually already fallen 5 bps since the chart was made eliminating much of that 0.4% loss).

I'm getting 175 on last 4 quarters earnings using Standard and Poor's data too. Q1: 48.41 Q4: 39.61 Q3: 44.41 Q2: 42.74 I think $175/share is right. 4500 price level and 175 earnings is 25.7x without considering Q2 is down ~5% YoY so far. Assuming all earnings come on around that level, we'd be closer to $173 & 26x using current prices and estimations of Q2 earnings.

I don't think it's operating earnings. Y-charts quotes Shiller as their source, but I can't access his website to see the source material. Ed Yardeni also has current trailing S&P 500 earnings in August at 175ish with operating earnings closer to 200/share.

My bad. I hadn't paid close enough attention to what ticker you put in. From what I can see, current S&P earnings are 175. A price of 4500 puts the current multiple at 26x if the contraction stops here. https://ycharts.com/indicators/sandp_500_earnings#:~:text=Basic Info-,S%26P 500 Earnings is at a current level of 175.17,11.49% from one year ago.

P/E is at 25 trailing earnings, but earnings have been contracting for over a year now and I don't see much reason to expect that we'll suddenly reverse to positive growth next quarter. So not sure you can take that at face value. 25-30x is where I expect we currently are they are based on current earnings. Even your chart above estimates YE multiple at 27+ I've amended the above to reflect that range.

Current earnings yield is basically 3-4% with a 25-30x multiple (based on your outlook for earnings continuing to decline or not). 10% growth means next year it'd be 3.3%, the year following 3.7%, etc. That is inclusive of the compounding effect as well. I do think I made a mistake above in not including what 30x the ending earnings would be to include a nominal price return return, so I was wrong about assuming "even if multiples doesn't contract" but I really don't expect to maintain a 25-30x type multiple either. Assuming a reasonable price return for equities at such high multiples still leaves a significantly high bar for earnings growth or multiple retention. Takes a long time to get anywhere near the current rates on spread fixed income like 6-7% in mortgages, 6-7% in corporates, 8-10% in EM and HY, etc let alone to make up for the years where you were earning less.

They gave them out at the annual meeting a several years back. If you didn't attend in person, I don't think you'd have known they were floating around. I don't attend every year, but was fortunate enough to have been there for this one so have a copy on my bookshelf.

I think this is right. Even if we assume equity earnings grow 10% per annum without interruption, and there is no loss of return from contracting multiples, you come out significantly ahead over the next 5-7 years with a core bond fund with YTMs in the 6+% where you can reasonably expect to lock in yields for much of that time. No reduction in rates or contracting multiples needed. For equities to win, you need earnings growth dramatically in excess of 10% per annum OR expansion of multiples well beyond the current 30x. I'm not comfortable banking on either. Perhaps adding some preferred at a discount to par can provide some credit-like spread exposure that is more attractive than locking in long-term credit spreads at the moment.

Finally! A lawsuit has worked out for me Still a little juice to be squeezed out of this, but the big money was made buying at 30-50% discounts back when BTC was trading at 15-20k itself. Still another 15-20% to be made moving back to NAV, but that is tempered by the current fee arrangement of 2+% and the discounting of uncertain timing to conversion. Grayscale has huge vested interest in dragging their feet on any conversion/few reduction as the only revenue stream propping up the DCG empire.

Looks right to me!

How do people think about preferreds? You don't get the same upside as equities nor do you get the same downside protection as bonds. Giving up both in exchange for a yield pick-up relative to both (typically). Obviously, if you think things will go well you buy the equity and if things go south you'd prefer to own the bonds. Do people just buy preferreds when they don't have a strong view either way? Or is it just a way to take some risk while remain "hedged" from a ton of damage downside scenario? Just trying to understand how these should fit in repertoire and when I should view them as attractive relative to the equity/debt?