James Montier: S&P 500 Just Say No

[Cigarbutt]

The quote is about a time when the Market dominated the culture.

 

https://www.bloomberg.com/news/articles/2017-09-05/med-school-grads-go-to-work-for-hedge-funds

 

Either health care sucks or this is a new era in financialization.

 

Perhaps detachment required.

[lschmidt]

A variety of factors, but in short - both. Personally, I think the "health care sucks" hypothesis is more important:

 

 

1) The continuing ~30 year trend of intrusion of payers in the delivery of health care continues to make the practice of health care less attractive, with a steadily declining patient satisfaction. This does not become clear until late in medical school or residency, causing many people to change their minds.

 

2) medical school debts are rising (typically around $200K or more), and the age at which physicians enter the workforce (typically between 30 and 36 years old), there is great pressure to accelerate family life/ buy a home/settle down, etc.  Major cities have dramatically higher housing costs, of course. This is daunting to many.

 

3) envy - the wages of doctors have been fairly stagnant (this mainly applies to primary care docs, as salaries for certain specialists having risen quite a bit due to local pockets of distorted markets), and the wages of their colleagues and classmates who have gone into finance or tech have risen dramatically. Envy takes hold. Is it difficult to see colleagues who have much less training make significantly highter salaries (and stock options, etc.). New doctors find it strange that their college roommates are doing much better than they are financially.

[DocSnowball]

Healthcare does suck financially and the wages of physicians in cognitive or non procedural specialties have been lagging inflation for over a decade now. It is very rewarding when you help people but earnings don't really increase with time, just flatten out and lag inflation.

 

However it does remind me of the scene in The big short when before the house of cards tumbled everyone was out there being a real estate agent or flipping homes. This bull market can make investing look very easy, until it is not. As in the title of the thread, it isn't easy to "just say no"

 

There are over a hundred physicians in my MBA program alone @UMass, myself included, so going for non clinical work is a hot topic right now, investing included. Personally I've been a keen student of investing for only two years now, and until one has seen a few cycles and downturns not sure what one's skill level and behavioral aptitude is like. The best thing imo is to have a rewarding day job that brings in steady cash flows and benefits and invest on the side rather than giving it all up. Just like being a scientist makes one a better physician, being a good investor and capital allocator makes one a better physician leader

 

 

[mattee2264]

 

 

 

Thanks for the thoughtful response Cigarbutt. In response to your questions:

 

  Questions:

 

-When something is true most of the times, is there a risk that you end up thinking that it is true all the time?

 

I'd definitely agree. Just because something has always happened in the past doesn't mean it will happen in the future. Obviously value investors are on safer ground using the broad sweep of past experience rather than extrapolating current conditions as the "new normal". But things do change and the past is not necessarily prologue.

 

-Do you imply that we have reached some kind of plateau in terms of margins, multiples and interest rates?

 

I think plateau is the wrong word to use as the economy and markets never reach a steady state. But arguments that markets are overvalued do seem to rely a lot on the notion that margins, multiples and interest rates will revert towards historical means.

 

Bruce Greenwald has a pretty interesting viewpoints on margins:

https://www.valuewalk.com/2016/11/columbias-bruce-greenwald-corporate-profits-sustainable/

 

Also you have companies like Amazon and other tech companies holding off on monetizing their market dominance as they try to become even more dominant and a lot of investments are going through operating expenses which depresses margins.

 

Regarding interest rates technology and globalization have deflationary effects so could keep inflation below historical norms justifying interest rates not much above current levels. Commodity prices may also be kept low by efficiency improvements, shale technology, a more service oriented economy etc. Also if we are in a slower growth world that will also keep interest rates low.

 

Lower more stable growth deserves to be valued a lot more highly than higher but more cyclical growth as it makes stocks more bond-like. Buffett made the comparison between a no-growth company selling for 40 x earnings (IE US treasuries!) and the current stock market valuation. As Greenwald points out in his article services are less cyclical than manufacturing. And the equity risk premium which depresses market multiples is influenced by psychology so as long as investors are comfortable with higher multiples and willing to accept lower returns (but still favourable with bonds) they can stay high. Also with the dominance of index investing there are perhaps far fewer valuation sensitive investors out there! And technology companies make up about a quarter of the market and sell for high P/E multiples because of things like operating expenses including investments in growth and these companies generally pursuing revenue growth over earnings growth sacrificing current profitability.

 

Of course there are counter arguments you can make. And margins, interest rates and valuations are difficult to predict for this reason. But for the same reason it is difficult to say with any real certainty whether or not the market is overvalued or not. Or that even if it is overvalued that it will crash as opposed to treading water until earnings catch up. So saying no to the S&P 500 just seems a bit risky to me.

 

 

 

 

 

 

 

 

 

 

[Cigarbutt]

Appreciate the link and response.

Will eventually re-visit the issue.

 

I am fairly new to this Board and have found that the search tool to be valuable.

When you read something, think that it's dumb and realize it's you, well, may help in getting better going forward.

 

For instance, profit margins and mean reversion have been discussed in the past.

I would bet that the topic is bound for resurrection at some point.