Have We Hit The Top?

[Haryana]

2 hours ago, Value_Added said:

...

https://www.oaktreecapital.com/insights/memo/on-bubble-watch

The following part of it self-discredits the whole memo. 

 

 

Lately, I’ve been repeating a quote I attribute to Warren Buffett: “When investors forget that corporate profits grow about 7% per year they tend to get into trouble.” What this means is that if corporate profits grow at 7% a year and stocks (which represent a share in corporate profits) appreciate at 20% a year for a while, eventually stocks will be so highly priced relative to their earnings that they’ll be risky. (I recently asked Warren for a source on the quote, and he told me he never said it. But I think it’s great, so I keep using it.) 

[Eldad]

Just now, Haryana said:

The following part of it self-discredits the whole memo. 

 

 

Lately, I’ve been repeating a quote I attribute to Warren Buffett: “When investors forget that corporate profits grow about 7% per year they tend to get into trouble.” What this means is that if corporate profits grow at 7% a year and stocks (which represent a share in corporate profits) appreciate at 20% a year for a while, eventually stocks will be so highly priced relative to their earnings that they’ll be risky. (I recently asked Warren for a source on the quote, and he told me he never said it. But I think it’s great, so I keep using it.) 

I thought that was strange as well. I imagined Buffett being annoyed with him.
 

The guy got pretty much every financial cliche quote all in one letter. These guys really need some new material. 

[Spooky]

Howard Marks is a smart guy but all of his stuff is getting repetitive.

[Gregmal]

Marks during covid was pure comedic genius. 

[Gregmal]

Easiest test is whatever one’s macro, micro, or whatever opinion, ask them their top 3-5 ideas. Cash isn’t an idea. Neither is ambiguous crap like rolling options. Neither is day trading pointless fluctuations.
 

Plain and simple, what’s actionable based on what you think? Then time tells us who’s right and who’s wrong.

[bennycx]

Because he has a urge to tell people market is at the top, however fears the backlash if it doesn't happen in the very near future. It is difficult to tell people to be bearish at this point of the cycle

[Spekulatius]

5 hours ago, Castanza said:

The sooner you accept the world has always been and always will be held together by bubble gum and shoe strings the sooner you can get on with life.

Yep, that’s how it works in a nutshell. The system always looks like a yenga stack that it about to collapse and sometimes it does, but it’s hard to predict at which point every time another block is pulled.

It is better to be humble about it that trying to predict something that even economist can’t predict. Keep some rainy day cash around, invest sensibly to the best of your knowledge and hope that bubble gum and shoestring hold together.

[james22]

2 hours ago, Gregmal said:

Then time tells us who’s right and who’s wrong.

 

You'd think.

 

But Value investors will only then tell you successful Growth investors are

 

11 hours ago, frommi said:

probably in for a rude awakening.

 

Or: just lucky.

 

 

Edited January 9 by james22

[Vish_ram]

Using an one dimensional metric like P/E is insane.

1. Growth isn’t part of this value equation

2. ⁠ROE dictates multiples. It isn’t there

3. ⁠Platform cos demand higher valuation, ain’t captured in P/E.

 

Having said that, yes there’s an overvaluation in everything. Blame it on Fed printing. US is the only game in town with growth. So capital is flowing here

[Vish_ram]

I remember the idiot Grantham at GMO was talking about profit margins mean reverting 10+ years ago. He is still waiting. What’s up with these senile permabears who are past their prime and keep yapping the same stuff?

[Luke]

I think we are at a point in time where markets will never have crashes as they did in previous decades, especially not the US markets. There is way too much money involved; stocks became essential infrastructure via pensions, and livelihoods never have been as dependent on them as before. The politicians have massive incentives to keep stocks up, just look at trump who is willing to interfere with the FED to pump markets, or pump even crypto. Seeing what trump pulled off the last year and him being in office for the next 4 with that team should scare every bear. Managements do more buybacks than previously, the index has such a strong earnings growth based on really high quality...i think waiting for a crash or shorting any of these companies is an exercise in futility. I have followed this thread for 3 years now and any bearish comments have been plain wrong and right now i am fully convinced that they will continue to be wrong.

Edited January 9 by Luke

[TwoCitiesCapital]

5 hours ago, Castanza said:

Pretty much every young investor who is genuinely interested in the market and investing outside of index funds in their 401k goes through this phase. Eventually you read some Peter Lynch and come to terms that forecasting is a fools errand. 

 

Lol - yes and know. 

 

I learned about Peter Lynch after Buffett - for sure. But I also remember learning that the average Magellan fund investor during his tenure compounded at less than 1/2 his rate because they were entering and exiting at exactly the wrong times which made me appreciate that human behavior and psychology are the beast to be conquered and NOT security analysis. 

 

I think the best book I've read on the subject - and that has formed much of my opinions on the market - has been the book Unexpected Returns by Ed Easterling of Crestmont Research which does a great job of overlaying historical market returns, multiples, to inflation and what forward returns have been from that matrix. 

 

Basically the items I took from it were :

1) Inflation matters a hell of a lot more to forward nominal returns than I ever appreciated (and not in a good way) and 

2) There are times to be passive (when stocks on the whole are cheap) and times to be active (when stocks on the whole are expensive)

 

I read it back in the ~2015 era and have been of the view that risk/stocks need to be actively managed since given that the U.S. was expensive on a relative basis to the rest of the world then and even more so (and on an absolute basis) today.  As a result, I regularly trade around a core position selling rips and buying dips, sell covered calls to generate extra return while maintaining sell discipline, manage position limits and reduce positions from their maximums, committing to buys/sells at prices long before they're hit using GTC limit orders, etc.

 

If the market was at significantly cheaper levels, I would probably just index and deleverage myself from the effort. Like many of my foreign holdings that I don't actively trade, don't sell options on, don't hedge, etc. But they're cheap. The U.S. market is mostly not.  

 

 

4 hours ago, Blake Hampton said:

And you're still pushing Bitcoin and MicroStrategy. The world has lost its mind.

 

Even as I a devout believer in deep value strategies and use assets/NAV and low P/Es as my primary guides own Bitcoin. Its a different animal than any stock - and probably a more important development than any company has made in our lifetimes. 

 

Just as the cost of energy touches just about every industry and facet of life, the price of money touches everything and impacts everything. And when your money is based on unsound principles, it creates perverse incentives and results in a ton of wasted/unproductive work implemented for its production/distribution/maintenance of which sound money would only require a fraction of. 

[TwoCitiesCapital]

2 minutes ago, Luke said:

I think we are at a point in time where markets will never have crashes as they did in previous decades, especially not the US markets. There is way too much money involved; stocks became essential infrastructure via pensions, and livelihoods never have been as dependent on them as before. The politicians have massive incentives to keep stocks up, just look at trump who is willing to interfere with the FED to pump markets, or pump even crypto. Seeing what trump pulled off the last year and him being in office for the next 4 with that team should scare every bear. Managements do more buybacks than previously, the index has such a strong earnings growth based on really high quality...i think waiting for a crash or shorting any of these companies is an exercise in futility. I have followed this thread for 3 years now and any bearish comments have been plain wrong and right now i am fully convinced that they will continue to be wrong.

 

If you had said because of auto-401k contributions, I probably would have bought this. But you didn't so I remain skeptical. 

 

We don't have to go back more than 15 years to the largest recession/stock drawdown/economic chaos from the Great Depression. That was still THIS generation - in the age of internet and 401ks and IRAs and pensions and etc. It happened then - it can happen again.

 

Especially once the view of society tips to inflation being a bigger threat than equity drawdowns and deficit spending is hamstrung...even in a pullback. Perhaps we're already there? The local top in bonds this year was right before the Fed started cutting rates and they've been bleeding ever since. Perhaps lower rates is no LONGER a good thing and perhaps neither are multitrilion deficits required to bail us out of whatever the next crisis is. 

[Blake Hampton]

28 minutes ago, Luke said:

I think we are at a point in time where markets will never have crashes as they did in previous decades, especially not the US markets. There is way too much money involved; stocks became essential infrastructure via pensions, and livelihoods never have been as dependent on them as before. The politicians have massive incentives to keep stocks up, just look at trump who is willing to interfere with the FED to pump markets, or pump even crypto. Seeing what trump pulled off the last year and him being in office for the next 4 with that team should scare every bear. Managements do more buybacks than previously, the index has such a strong earnings growth based on really high quality...i think waiting for a crash or shorting any of these companies is an exercise in futility. I have followed this thread for 3 years now and any bearish comments have been plain wrong and right now i am fully convinced that they will continue to be wrong.

Nothing is more important to the U.S. then the sanctity of the dollar, and interfering with FED independence is not an option.

 

My PFP is Volcker for Christ's sake.

 

 

Edit: Though I don't like it, you unfortunately do have a point.

 

Edited January 9 by Blake Hampton

[frommi]

Funny thing is that a lot of people think that value investing doesn't work anymore or that the lessons from Grahams book are outdated, yet my automated NCAV system has produced 50% annual returns since the covid crash in 2020.

[Gregmal]

1 hour ago, frommi said:

Funny thing is that a lot of people think that value investing doesn't work anymore or that the lessons from Grahams book are outdated, yet my automated NCAV system has produced 50% annual returns since the covid crash in 2020.

Being in the market works. Hoarding cash and lecturing everyone about how dumb they are for being in the market is a sure fire way to a long and unhappy career as a W2. 

[Parsad]

17 hours ago, frommi said:

Sometimes i think that every generation has to relearn the same lessons again, because young investors are not able to learn from their parents/grandparents because they think they know better. His son is probably in for a rude awakening. (as is most of this board)

 

+1!  Cheers!

[Viking]

11 hours ago, james22 said:

 

The most difficult thing for a young investor to accept is that their intelligence and education, no matter how demonstrable (test scores, grades) and analytically rigorous (field of study, school ranking), gives them very little advantage.

When i was getting started (back in my late 20’s), I did not think i was particularly intelligent/smart when it came to investing. I did a finance degree is school (joint major business/economics and minor in political science) and learned about stuff like the bank act (nothing about investing) so my formal education did not help at all (but it also did not teach me any bad habits). 
 

But I did like money/investing… a lot. And I wanted to do well. And I was action oriented (and a risk taker). So that drove me to try. 
 

And i was terrible. My first big investment ($5,000) was Bre-X and it promptly went to zero. Ended up being one of my best investments ever. Because it taught me quickly that i knew nothing about investing. It also taught me one of the most valuable lessons right when I was getting started - the difference between speculating and investing. 

But I was lucky. I hate (really hate) to lose money. And i realized i needed to learn how to invest. Enter Warren Buffett, Peter Lynch and Burton Malkiel. And after many hours and years of hard work and the rest is history. 
 

But my first three years managing my own money had negative returns (I have tracked my returns for each year going back 30 years). Year 4 was +35%… that was how long it took me to start to figure investing out (a framework that fit my intellect and how I was wired). 

Edited January 9 by Viking

[Parsad]

10 hours ago, Jaygo said:

Thanks for that.

 

Blake you may be too smart for your own good. 

 

I fell in love with the stock market long before I had any money, I won a stock picking challenge in  high school and after that it was on full blast. I graduated in 2005 and worked construction finally making money. In 2007 I found a gloriously rich client who advised the markets would keep going for a long time. He helped me turn my 50k I had saved into an investment loan of 100K it went up and up for a few months, I thought I was brilliant, all that studying the markets paid off, then it started to fall. My 100k was down to 40 after 12 months and I was devastated. I sold half for a loss and worked to pay off the debt. Now my 50k was basically -5k.

 

I just knew the market would keep going down right through 2009 and 2010 and 2011 and 2012 and on and on. I studied harder, I read and read but the market didn't do what it was supposed to do. Europe in 2012 was burning, Greece was toast and the great depression was coming. The market just "climbed a wall of worry" that was the tag line then and "Green Shoots"

 

Well by 2014 I gave up and bought some BRK, it slowly went and up and for the first time in my life I saw what owning a real company could do. I focused on work and not the markets. I stopped predicting the end of the world and started understanding what all the numbers really mean. Hint! They dont mean shit, the numbers are fake, the money is fake, the real thing is production and trade. 

 

Blake I hope you can focus on the productive parts of the global economy and not just on the numbers getting bigger. That's what counts. You are on the right track by recognising the world is messed up, but you kind of have to figure out how to play within the chaos rather than avoid it all together. 

 

Caution is always a good thing but please understand that the numbers will go up forever, by the time you are old the numbers will be far bigger. I would suggest reading about the purchasing power of gold, oil and other timeless items and then get a baseline for the money from there.  Check out the gold to suit ratio. It remains unchanged since the days of Shakespeare. I guess my point is that big numbers should not be the determining factor and they do not necessarily lead to a collapse.

 

I'm running long here but one example is Canadian housing. Many say we are in bubble that should burst any day but according to the gold housing ratio we basically right around the mark. 

 

Gold 1950 34$ USD per oz

Toronto House price average  1950 $ 19,000.00 CAD really hard to find but this is close

 

Gold 2025 $2675 USD per oz or 79 times the 1950 average price

Toronto house price average 2024 $ 1,282,000.00 or 68 times the 1950 price

 

 

 

 

 

Blake this post by Jaygo is mostly correct.  But it is based on what markets do over long periods of time.  Sometimes very long periods of time...such as after 1929.  

 

The general idea by Jaygo...expect business to prosper over the long-term and stay invested in the market is correct.  But like everything, even the stock market is influenced by its own form of gravity and stocks do not go up in a straight line.

 

You cannot just pay any price for stocks and expect to outperform the general market.  If you don't want to compete with the general market...buy an ETF.

 

Having accessible funds to allocate to the market on a regular basis...be it annually or as you find ideas or after a significant correction...that helps.

 

And lastly, avoiding permanent loss is the foundation you should build your wealth on.  If something doesn't make sense or you cannot justify its valuation...move on.  Find 3 foot hurdles rather than 8 foot hurdles.  

 

I would also not discount your intelligence, but suggest that regardless of what markets do, the above is timeless and works.  

 

Cheers!

[james22]

6 hours ago, Gregmal said:

Being in the market works. Hoarding cash and lecturing everyone about how dumb they are for being in the market is a sure fire way to a long and unhappy career as a W2. 

 

Young kids should zoom out. Look at the last 30 years.

 

How'd the market do? Despite inflation, deflation, bubbles, recessions, deficits, riots, wars, changing administrations, hurricanes, etc., it went up.

 

So? Be fully invested. Your one great advantage over more knowledgeable and experienced investor is that volatility means nothing to you.

 

 

[thowed]

10 hours ago, Luke said:

I think we are at a point in time where markets will never have crashes as they did in previous decades, especially not the US markets. There is way too much money involved; stocks became essential infrastructure via pensions, and livelihoods never have been as dependent on them as before. The politicians have massive incentives to keep stocks up, just look at trump who is willing to interfere with the FED to pump markets, or pump even crypto. Seeing what trump pulled off the last year and him being in office for the next 4 with that team should scare every bear. Managements do more buybacks than previously, the index has such a strong earnings growth based on really high quality...i think waiting for a crash or shorting any of these companies is an exercise in futility. I have followed this thread for 3 years now and any bearish comments have been plain wrong and right now i am fully convinced that they will continue to be wrong.

 

Top!

 

Seriously though, I think the point is that nobody knows.  There could well be crashes.  But you can't predict them.  And maybe there won't be.  I think all you can do is invest according to your personal risk tolerance.

[thowed]

If I was to re-design the CFA course, I'd put much greater emphasis on Behavioural Investing & the psychology of crowds.

 

What I've learned is that it's easy to start off young and smart, knowing about valuations etc. but after a while you learn that, as Keynes put it so succinctly, the markets can remain irrational longer than you can remain liquid.  And you have to be able to invest around that fact.

[73 Reds]

10 hours ago, Luke said:

I think we are at a point in time where markets will never have crashes as they did in previous decades, especially not the US markets. There is way too much money involved; stocks became essential infrastructure via pensions, and livelihoods never have been as dependent on them as before. The politicians have massive incentives to keep stocks up, just look at trump who is willing to interfere with the FED to pump markets, or pump even crypto. Seeing what trump pulled off the last year and him being in office for the next 4 with that team should scare every bear. Managements do more buybacks than previously, the index has such a strong earnings growth based on really high quality...i think waiting for a crash or shorting any of these companies is an exercise in futility. I have followed this thread for 3 years now and any bearish comments have been plain wrong and right now i am fully convinced that they will continue to be wrong.

There will always be "crashes" of one sort or another because there will always continue to be unexpected events that influence consensus behavior.  That said it is silly to try to plan for such events, precisely because they are unexpected and their timing is unknown.  Best strategy is to take advantage of any such events rather than be afraid of them.  Buffett speaks often about this issue citing Depressions, World Wars and other huge disruptions including politics that did not destroy capitalism or our economy.  Likewise there will always be frenzies of one form or another.  I have yet to hear of any frenzy that ended well.

[Blake Hampton]

6 hours ago, Parsad said:

 

Blake this post by Jaygo is mostly correct.  But it is based on what markets do over long periods of time.  Sometimes very long periods of time...such as after 1929.  

 

The general idea by Jaygo...expect business to prosper over the long-term and stay invested in the market is correct.  But like everything, even the stock market is influenced by its own form of gravity and stocks do not go up in a straight line.

 

You cannot just pay any price for stocks and expect to outperform the general market.  If you don't want to compete with the general market...buy an ETF.

 

Having accessible funds to allocate to the market on a regular basis...be it annually or as you find ideas or after a significant correction...that helps.

 

And lastly, avoiding permanent loss is the foundation you should build your wealth on.  If something doesn't make sense or you cannot justify its valuation...move on.  Find 3 foot hurdles rather than 8 foot hurdles.  

 

I would also not discount your intelligence, but suggest that regardless of what markets do, the above is timeless and works.  

 

Cheers!

Thanks for the post. I don’t believe that all stocks are overvalued. However, I firmly believe the general market is extremely overvalued.

 

I find it interesting because people don’t have investing options in a 401(k). They simply get the choice between large caps, bonds, or cash, sometimes international equities, but that’s normally it. This dynamic, where people are almost forced into buying the market seems incredibly dangerous. This is especially true considering how it’s recently performed.

 

I’m curious on what your thoughts are.

[73 Reds]

7 minutes ago, Blake Hampton said:

Thanks for the post. I don’t believe that all stocks are overvalued. However, I firmly believe the general market is extremely overvalued.

 

I find it interesting because people don’t have investing options in a 401(k). They simply get the choice between large caps, bonds, or cash, sometimes international equities, but that’s normally it. This dynamic, where people are almost forced into buying the market seems incredibly dangerous. This is especially true considering how it’s recently performed.

 

I’m curious on what your thoughts are.

I'm not Parsad but a 401 plan is also a dollar cost average plan.  In such case when you are investing for times that are often well into the future, today's prices are immaterial to long term results.