Have We Hit The Top?

[thepupil]

9 minutes ago, Blake Hampton said:

One of the harder things for me to understand is how asset prices would react to inflation. How would the FED react? They have all these bonds on their balance sheet that they could sell, but who would buy them? How far could interest rates go up?

i think most assets with the exception of cash, short term TIPS are terrible inflation hedges in the short to intermediate term, but good over the long-term. But the short term becomes the long term in an unpredictable fashion. 

 

outside of inflation, being out of the market just leaves you open to your valuation framework being wrong and therefore being permanently left behind. Stocks used to yield more than bonds. that was the frameowrk. more risk = more income to compensate. If you waited for that to come back, y ou'd have gotten left behind. 

 

We think stocks should be at lower multiples, but maybe they shouldn't. being 70% cash you miss ever returning to whatever metric you're waiting for. 

 

Edited August 23 by thepupil

[John Hjorth]

Stated here with all due respect for your proces, Blake, @Blake Hampton ,

 

I would kindly suggest - again, posted here without any kind of, or any stint of arrogance as basis, or effort to patronizing you -, to think about the element of stock picking in your process.

 

It took me a only a bit more than a couple of years in this game to find out, that I would never succeed, nor survive mentally, in this game by buying shares in companies, that I did not - for whatever reason - like [, for my part, based on that I'm personally a pro-business person, to the extremes].

[Blake Hampton]

12 minutes ago, SafetyinNumbers said:

There is such bifurcation between quality and sh!tcos that deeming there to be no value based on the aggregate stats seems like a risky choice.

 

That’s why I thought you might like Fairfax. It’s got almost $2 of cash equivalents with relatively short duration for every $1 of shares you buy. Plus about 80 cents in equities with a high earnings yield because its mostly sh!tcos. 

 

From looking at Fairfax for only a minute or so now, it actually looks quite attractive. $27 billion market cap with about the same in equity, making good money for the last couple of years. That alone is automatically better than 95% of the companies in the S&P.

[Blake Hampton]

3 minutes ago, John Hjorth said:

Stated here with all due respect for your proces, Blake, @Blake Hampton ,

 

I would kindly suggest - again, posted here without any kind of, or any stint of arrogance as basis, or effort to patronizing you -, to think about the element of stock picking in your process.

 

It took me a only a bit more than a couple of years in this game to find out, that I would never succeed, nor survive mentally, in this game by buying shares in companies, that I did not - for whatever reason - like [, for my part, based on that I'm personally a pro-business person, to the extremes].

 

Do you mind expanding a bit further? Do you mean like researching companies that you agree with morally, are interested in their model, etc.?

[SafetyinNumbers]

4 minutes ago, Blake Hampton said:

 

From looking at Fairfax for only a minute or so now, it actually looks quite attractive. $27 billion market cap with about the same in equity, making good money for the last couple of years. That alone is automatically better than 95% of the companies in the S&P.

That’s about all it takes to appreciate the earnings power if one understands the value of float. It’s perfectly set up to buy the dip as well if there is in fact a market sell off. 

[John Hjorth]

2 minutes ago, Blake Hampton said:

 

Do you mind expanding a bit further? Do you mean like researching companies that you agree with morally, are interested in their model, etc.?

 

For my part, both, morally against pure commercial considerations here, boiling down to : Purpose.  In short, there are things that I avoid, and will never touch.

[Spekulatius]

6 hours ago, dealraker said:

Ben Graham retired with 2 or 3 mil which can be extrapolated upwards from his death for inflation.  As Munger says, "Half of it was simply holding one stock named Geico."  And then there's the businessman Buffett, the business owner.

 

Who dun the best...the in-and-outer or the businessman?  

I think one issues with Graham was that he did not care about money any more, once he had enough. He cared about women, writing plays and a few other things.

 

Buffett had one single focus and that was and still is compounding more. Also Buffett was an in and outer through ostmof his career and still is (see his Apple sales), I think he tried with KO and clearly realized his mistake.

[nwoodman]

15 hours ago, Blake Hampton said:

I realize there's no telling with timing on this stuff, but I'm not impressed with current valuations. I'm sitting on about 70% cash and I'll list a couple of reasons for my poor outlook:

• Overstated figures due to unrealized capital gains being recorded as earnings
• High likelihood of a higher corporate tax rate in the future
• Large government deficits that are almost entirely financed with short-term debt, which is essentially printing cash.

As I've said previously, Buffett is sitting with an approximate 50% cash position when you exclude Berkshire's non-financial assets. I'm not calling for a crash or anything, but right now seems like as good a time as any to be bearish.

I don’t disagree.  Could you please expand a little on your first point about cap gains? A link would do.

 

[UK]

12 hours ago, Spekulatius said:

Buffett had one single focus and that was and still is compounding more.

 

Yes, he even said IIRC, that focus was a reason for his success.

[UK]

17 hours ago, thepupil said:

We think stocks should be at lower multiples, but maybe they shouldn't. being 70% cash you miss ever returning to whatever metric you're waiting for. 

 

This. I think being 70 percent in cash is way overdone and seems like a timing (likely futile) bet. Personally I can not imagine and would lose my sleep staying long in such position. Not least because of the PTSD of experience of money losing much of its purchasing power very quickly (like 50 percent or more for a few years). But 20-30 i think is enought if you are scary of averything and want to be prepared (I do not feel very diferently for a while now), because this level at least would not screw you totaly if you are not right. 

 

PS: even if you change your mind, you do not need to adjust your position 180 degree overnight and can do it in a year or two.

 

Edited August 24 by UK

[Blake Hampton]

7 hours ago, nwoodman said:

I don’t disagree.  Could you please expand a little on your first point about cap gains? A link would do.

 

 

The rule is called ASU 2016-01 and it became effective on December 15, 2017, which was also about the same time the corporate tax rate dropped from 35% to 21%. Buffett has written about the accounting change a bit over the last few years in his annual letter to shareholders.

[John Hjorth]

On 8/23/2024 at 2:49 PM, Blake Hampton said:

I realize there's no telling with timing on this stuff, but I'm not impressed with current valuations. I'm sitting on about 70% cash and I'll list a couple of reasons for my poor outlook:

• Overstated figures due to unrealized capital gains being recorded as earnings ...

 

1 hour ago, Blake Hampton said:

 

The rule is called ASU 2016-01 and it became effective on December 15, 2017, which was also about the same time the corporate tax rate dropped from 35% to 21%. Buffett has written about the accounting change a bit over the last few years in his annual letter to shareholders.

 

This ASU 2016-01 talk makes absolutely no sense to me.

 

What is Berkshires earnings on its part ownership of Coca Cola?, i.e. its earnings on its 400 million shares of Coca Cola?

 

Is it the received dividends from the shares owned, or is it [received dividends plus market value changes]?  That  forced change in Berkshires accounting has never mattered one whit before or after 2016/17 for how I value Berkshire.

 

I strongly disagree with Mr. Buffett on this matter, and I have always done so. To me, it's like alleging that Forbes should calculate the value of Mr. Buffetts Berkshire A shares at his historical cost, which would dump him to swim in the waters of toilets where the most of others are paddling around.

 

Value is value. And changes in values are earnings, - negative or positive -, if one is an investment outfit. Now somebody has to convince me that Berkshire isen't an investment outfit. ... 

 

I.e., the progress in value of the Coca Cola position owned by Berkshire is indeed very real.

 

It does not matter to me, if it gradually - measured year by year - hit the Berkshire group income statement, or not [with provision of deferred taxes].

 

Nor does it to Mr. Buffett, no matter what he has written in his shareholder letters - you can count on that. 

[Blake Hampton]

1 hour ago, John Hjorth said:

 

 

This ASU 2016-01 talk makes absolutely no sense to me.

 

What is Berkshires earnings on its part ownership of Coca Cola?, i.e. its earnings on its 400 million shares of Coca Cola?

 

Is it the received dividends from the shares owned, or is it [received dividends plus market value changes]?  That  forced change in Berkshires accounting has never mattered one whit before or after 2016/17 for how I value Berkshire.

 

I strongly disagree with Mr. Buffett on this matter, and I have always done so. To me, it's like alleging that Forbes should calculate the value of Mr. Buffetts Berkshire A shares at his historical cost, which would dump him to swim in the waters of toilets where the most of others are paddling around.

 

Value is value. And changes in values are earnings, - negative or positive -, if one is an investment outfit. Now somebody has to convince me that Berkshire isen't an investment outfit. ... 

 

I.e., the progress in value of the Coca Cola position owned by Berkshire is indeed very real.

 

It does not matter to me, if it gradually - measured year by year - hit the Berkshire group income statement, or not [with provision of deferred taxes].

 

Nor does it to Mr. Buffett, no matter what he has written in his shareholder letters - you can count on that. 

I feel like the problem is it makes earnings a useless figure now for valuing anything. If earnings are warped year to year by market fluctuations, you might just cause a bunch of ignorant people to buy or sell things using the justification of low or high P/E ratios. Operating earnings are far more representative of how an actual business is performing. I completely agree with Buffett.

 

I also think that you could see a situation where rising stock prices create a perpetual growth in earnings, furthering price increases. Eventually this might lead to a bubble fueled by “fake” earnings.

Edited August 24 by Blake Hampton

[Spekulatius]

4 minutes ago, Blake Hampton said:

I feel like the problem is it makes earnings a useless figure now for valuing anything. If earnings are warped year to year by market fluctuations, you might just cause a bunch of ignorant people to buy or sell things using the justification of low or high P/E ratios. Operating earnings are far more representative of how an actual business is performing. I completely agree with Buffett.

 

I also think that you could see a situation where rising stock prices create a perpetual growth in earnings, furthering price increases. Eventually this might lead to a bubble fueled by “fake” earnings.

Berkshire provides you with all the information you need to value the business in their disclosures. What else do you need?

[Blake Hampton]

9 minutes ago, Spekulatius said:

Berkshire provides you with all the information you need to value the business in their disclosures. What else do you need?

People who know what they’re doing aren’t the ones who worry me. I’m curious, how do you feel about it?

[John Hjorth]

1 minute ago, Blake Hampton said:

I feel like the problem is it makes earnings a useless figure now for valuing anything. If earnings are warped year to year by market fluctuations, you might just cause a bunch of ignorant people to buy or sell things using the justification of low or high P/E ratios. Operating earnings are far more representative of how an actual business is performing. I completely agree with Buffett.

 

I also think that you could see a situation where rising stock prices create a perpetual growth in earnings, furthering the increase in prices. Eventually this might lead to a bubble fueled by “fake” earnings.

 

This is - to me - an academic discussion [and frigg**' old news, to be honest, in short, today a 'nothing thingy'].

 

What prohibits anyone or anybody from doing like Berskhire has done in its reporting [separate line reporting on the matter] - since implementing ASU-2016-01 ? - Market participants understand the matter.

 

If this ASU-2016-01 thing causes you to pause investing your capital productively in the actual environment and to stay in cash, I hereby give up explaining it further in this topic.

 

Here on CoBF, we are stock pickers, we really do not care much if some P/E market measure has changed because of some accounting convention was implemented changed years back.

 

The root to all evil in all external accounting is the use [or abuse] of cost accounting, as the alternative to accounting based on a valuation hierarcy, starting with market values, when available.

[nwoodman]

6 hours ago, Blake Hampton said:

 

The rule is called ASU 2016-01 and it became effective on December 15, 2017, which was also about the same time the corporate tax rate dropped from 35% to 21%. Buffett has written about the accounting change a bit over the last few years in his annual letter to shareholders.

Thanks, I was aware of the effect on Berkshire’s reporting but hadn’t considered it in the broader market context. The positive feedback loop you alluded to is worth some further research.

[nsx5200]

On 8/23/2024 at 10:50 AM, Castanza said:

Some variation of these things will almost always exist.

 

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

I think Charlie Munger said something along the lines that the biggest risk is not to be vested in the market (preferably in something like S&P500, with very low frictional cost).  There's a video where the only investment choice in DJCO's company retirement plan is in S&P500 index.

[UK]

9 hours ago, Blake Hampton said:

I feel like the problem is it makes earnings a useless figure now for valuing anything. If earnings are warped year to year by market fluctuations, you might just cause a bunch of ignorant people to buy or sell things using the justification of low or high P/E ratios. Operating earnings are far more representative of how an actual business is performing. I completely agree with Buffett.

 

I also think that you could see a situation where rising stock prices create a perpetual growth in earnings, furthering price increases. Eventually this might lead to a bubble fueled by “fake” earnings.

 

You can look at the progress of BV, which also includes portfolio market fluctuations. You can look at the gaap and  operating earnings and portfolio separatedly, for a two column valuation method. Or you can look at operating earnings and look through portfolio earnings to get some kind of normalised earning power and PE number for BRK. You can compare the outcomes of all three between them and also historically and even with what WB had said about one or another of them (in the letters). You can easily do this yourself (I would encourage) or read ~200 pages of Samper Augustus yearly report, where he puts everything ready for you. Why would anyone worry or care at all about this standard too much or anything else in terms of valuing BRK?

 

Edited August 25 by UK

[UK]

6 hours ago, nwoodman said:

Thanks, I was aware of the effect on Berkshire’s reporting but hadn’t considered it in the broader market context. The positive feedback loop you alluded to is worth some further research.

 

This is a valid point in terms of aggregate market data, but then, there are so many nonsense in it already (like different adjustments to get 'operating' EPS), I think it is just better to simply haircut this EPS of SNP500 by some 10-20 percent, if you want to be conservative, or to take into account FCF data. I think, currently (as at most of the time), these are not very pretty for an aggregate market (but maybe they are still not super scary expensive either) no matter how you look at or adjust them:)

 

Edited August 25 by UK

[nwoodman]

1 hour ago, UK said:

 

This is a valid point in terms of aggregate market data, but then, there are so many nonsense in it already (like different adjustments to get 'operating' EPS), I think it is just better to simply haircut this EPS of SNP500 by some 10-20 percent, if you want to be conservative, or to take into account FCF data. I think, currently (as at most of the time), these are not very pretty for an aggregate market (but maybe they are still not super scary expensive either) no matter how you look at or adjust them:)

 

Fair point, I was just interested in @Blake Hampton’s perspective.  I tend to focus more at the company level but trying to redevelop some larger market valuation guardrails.  It strikes me there are some positive feedback loops that could come unstuck but this is more about managing my own margin levels than slaying “bubble dragons”.  Aggregate margin levels and market valuations indicate to me that this is not the time to be balls to wall, so other thoughts on what might be driving extended valuations are worth noting.

Edited August 25 by nwoodman

[UK]

25 minutes ago, nwoodman said:

but this is more about managing my own margin levels than slaying “bubble dragons”.  Aggregate margin levels and market valuations indicate to me that this is not the time to be balls to wall

 

Same for me/do not disagree:)

[Blake Hampton]

6 hours ago, UK said:

 

This is a valid point in terms of aggregate market data, but then, there are so many nonsense in it already (like different adjustments to get 'operating' EPS), I think it is just better to simply haircut this EPS of SNP500 by some 10-20 percent, if you want to be conservative, or to take into account FCF data. I think, currently (as at most of the time), these are not very pretty for an aggregate market (but maybe they are still not super scary expensive either) no matter how you look at or adjust them:)

 

I've searched but I can't find much cash flow data for the S&P

[Dinar]

There is an offset to this.  R&D spending should not be written off since it is more like cap ex, yet it is.  As S&P becomes more and more R&D intensive, and as R&D grows sharply over time, earnings from this standpoint are understated.  

[Spekulatius]

2 hours ago, Dinar said:

There is an offset to this.  R&D spending should not be written off since it is more like cap ex, yet it is.  As S&P becomes more and more R&D intensive, and as R&D grows sharply over time, earnings from this standpoint are understated.  

Quite a bit of R&D spent is already capitalized.

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/R&D.html