Have We Hit The Top?

[Blake Hampton]

17 minutes ago, Castanza said:

 

What does this even mean? What exactly are you expecting to happen? 

 

 

 

You are extrapolating nominal returns for a situation that we have never before experienced.

[TwoCitiesCapital]

14 hours ago, Blake Hampton said:

Quotes

 

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

- Benjamin Graham, Security Analysis

 

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

- Warren Buffett, 2000 Chairman's Letter

 

"In the first ten years after the war - the decade ending in 1955 - the Dow Jones industrials had an average annual return on year-end equity of 12.8 percent. In the second decade, the figure was 10.1 percent. In the third decade it was 10.9 percent. Data for a larger universe, the FORTUNE 500 (whose history goes back only to the mid-1950's), indicate somewhat similar results: 11.2 percent in the decade ending in 1965, 11.8 percent in the decade through 1975. The figures for a few exceptional years have been substantially higher (the high for the 500 was 14.1 percent in 1974) or lower (9.5 percent in 1958 and 1970), but over the years, and in the aggregate, the return on book value tends to keep coming back to a level around 12 percent. It shows no signs of exceeding that level significantly in inflationary years (or in years of stable prices, for that matter)."

- Warren Buffett, How Inflation Swindles the Equity Investor

 

^ This article still has a ton of applicability today, and it remains one of the best ever written on investment.

 

The Market

 

- TTM S&P 500 ROE: 17.2%

- 24-year average S&P 500 ROE: 13.3%

- Current S&P 500 P/B: 5.2x

 

- TTM average S&P 500 tax rate: 18.2%

- 30-year average S&P 500 tax rate: 30.3%

 

- Increased interest expense as companies refinance debt issued during ZIRP

- (ASU) 2016-1 requiring companies to record unrealized capital gains as income

 

If you were to adjust the Shiller P/E using historically average interest and corporate tax expenses, the number would be sitting at an all-time high by a wide margin. We are currently experiencing the most expensive stock market in history, more expensive than at the peak of the tech bubble.

 

 

The problem is when interest rates were zero, everyone used 0% rates as an argument for why multiples should be elevated (double counting IMO). 

 

Now that rates aren't 0%, they've forgotten all of that and multiples are elevated because the US is exceptional and the only country with high quality companies (or Daddy Trump is going to do 1000% better than he did his first 4-year term). 

 

In neither environment was I comfortable with the multiples nor satisfied with the explanations provided - but Shiller P/E HAS been elevated basically my entire adult life so who is to say it won't stay that way for a few more years?

 

People will always find an excuse to justify elevated prices because their portfolio values, net worth, and/or happiness is dependent on 'number go up'. And to some extent - they're not wrong. Optimists get rewarded in the market far more regularly than pessimists. 

 

For me? I'm very heavily interested intermediate fixed income for someone my age. I own a few conviction names, a small % that I trade around, a hefty slug of Bitcoin, and ~50% intermediate agency mortgages and treasuries.

 

Some people are happy to pay 35-40x for stagnant earnings at Apple. I am much happier getting 4-6% YTMs that are basics guaranteed and can use the income/gains from that position to pick off names that become attractive when they're attractive. 

 

 

Edited Wednesday at 06:56 PM by TwoCitiesCapital

[Castanza]

Just now, Blake Hampton said:

situation that we have never before experienced.

 

go on....

[Gregmal]

Yea what is it that we havent experienced before? 5% rates? 7% mortgages? Tax cuts? Inflation is nowhere to be found despite people trying to sell you a story due to a slight uptrend in treasuries during a low liquidity holiday window. The recession has been obsessively called and then "pushed back" 6-12 months now every 6-12 months since covid happened. And before then it was a depression about to occur. Things are pretty freaking boring and unspectacular right now. 

[Blake Hampton]

8 minutes ago, Castanza said:

go on....

Record high market valuations for basically every single asset class, record fiscal deficits and debt levels, a moron as our president-elect and more waiting in congress, a ton of money in the system from past QE.

 

1 minute ago, Gregmal said:

Yea what is it that we havent experienced before? 5% rates? 7% mortgages? Tax cuts? Inflation is nowhere to be found despite people trying to sell you a story due to a slight uptrend in treasuries during a low liquidity holiday window. The recession has been obsessively called and then "pushed back" 6-12 months now every 6-12 months since covid happened. And before then it was a depression about to occur. Things are pretty freaking boring and unspectacular right now. 

Just because things are boring now means nothing.

[gfp]

1 minute ago, Blake Hampton said:

Record high market valuations for basically every single asset class, record fiscal deficits and debt levels, a moron as our president-elect and more waiting in congress, a ton of money in the system from past QE.

 

Just because things are boring now means nothing.

 

 

There will always be a record debt level.  Every year.  We call those liabilities "money."  QE doesn't do anything but create excess bank reserves that aren't useful in the real economy and don't circulate.  The coupon securities the government takes form the private sector when they "do QE" are more useful to the private sector - they can be pledged as collateral, transformed into anything, etc.   When you think about excess "money" in the system it is not QE, it is deficit spending and sometimes a boom in bank lending (not currently).  Deficit spending and growth in bank lending is the only way new federal money gets into our system.  International money can be created by non-US banks in huge amounts.  There are a lot of moving parts.  QE is not a major factor in any of it.

[Eldad]

2 minutes ago, Blake Hampton said:

Record high market valuations for basically every single asset class, record fiscal deficits and debt levels, a moron as our president-elect and more waiting in congress, a ton of money in the system from past QE.

 

Just because things are boring now means nothing.

I hear you. Warren Buffett I think hears you, so you are in good company. 

 

Just in general people are not thoughtful at all anymore and everyone has lost their minds to a certain extent.
 

If present society was a spoiled child, it would desperately need to be grounded for a couple of months and assigned to hard labor for its own future good. 

 

I don’t know when or why it will happen but it’s coming and it actually needs to happen very badly. 
 

At same time I can’t really bring myself to raise more than about 10% cash. 

[Jaygo]

1 hour ago, Blake Hampton said:

You guys are absolutely right when you say I don’t have a handle on this—it feels impossible to. I’ve spent the last couple of years really digging into this stuff, and every time I think I’ve figured something out, I quickly realize I’m wrong.

 

We don’t know what’s going to happen.

 

That said, I do think it’s possible to understand the different ways it could play out and position yourself for each scenario. The only thing I’m sure of is that none of this is good, and whatever bad comes from it will hurt a lot of people. I don’t plan to be one of them.

Blake how old are you, where do you live, your situation. I am curious if you dont mind my being nosey. The question is based on my own experience in the gfc fresh from school. I had a huge blow up on leverage and frankly was a very bleak individual for a few years. I just want to see if our paths are similar

[Blake Hampton]

14 minutes ago, Jaygo said:

Blake how old are you, where do you live, your situation. I am curious if you dont mind my being nosey. The question is based on my own experience in the gfc fresh from school. I had a huge blow up on leverage and frankly was a very bleak individual for a few years. I just want to see if our paths are similar

I’m 22 and I currently live in Oklahoma. I’m a part-time federal employee that’s also going to school for a Bachelors in Computer Science.

 

I grew up with my grandparents in a nice middle-class home and neighborhood. I went to a good elementary school, but went to some pretty ghetto middle schools and high schools.

Additionally, I’d say that I’ve done pretty well with money so far, but I’ve learned some hard lessons too. I’ve also experienced childhood struggles but I’m sure not as bad as some others. It’s good to see the bad sometimes, it keeps you grounded.

 

Edited Wednesday at 07:39 PM by Blake Hampton

[Castanza]

11 minutes ago, Blake Hampton said:

Record high market valuations for basically every single asset class, record fiscal deficits and debt levels, a moron as our president-elect and more waiting in congress, a ton of money in the system from past QE.

 

Just because things are boring now means nothing.

 

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. There is no positioning that will protect you from the asteroid event you seem to be afraid of. The line of thinking you're stuck in will be more detrimental to your long term market returns than any future market correction you are likely to experience in your lifetime. You either believe in general continued progress of humanity within your lifetime or you don't. 

[Blake Hampton]

1 minute 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. There is no positioning that will protect you from the asteroid event you seem to be afraid of. The line of thinking you're stuck in will be more detrimental to your long term market returns than any future market correction you are likely to experience in your lifetime. You either believe in general continued progress of humanity within your lifetime or you don't. 

I believe in progress. But I also believe you can always form excuses to justify crazy situations.

[Blake Hampton]

18 minutes ago, Jaygo said:

Blake how old are you, where do you live, your situation. I am curious if you dont mind my being nosey. The question is based on my own experience in the gfc fresh from school. I had a huge blow up on leverage and frankly was a very bleak individual for a few years. I just want to see if our paths are similar

I'm sorry you had to experience that by the way. I think the GFC was disproportionately harder on younger people such as yourself. Probably made it worse that older people didn't and still don't understand.

 

Edited Wednesday at 07:42 PM by Blake Hampton

[Value_Added]

Pretty good memo from Howard Marks put out yesterday. More of the same old stuff but there are good points made about current macro…There are alot of indicators that say the market is very expensive but there are also a lot of indicators that say we’re not really in huge bubble territory yet.

 

Aside from the memo…I think there is a lot of value in the market right now away from the tech and fads.  These companies will not be immune from huge drawdowns but boy it’s tough stay in a large cash position with them sitting there looking all cheap and such.  
 

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

[73 Reds]

25 minutes ago, Blake Hampton said:

I’m 22 and I currently live in Oklahoma. I’m a part-time federal employee that’s also going to school for a Bachelors in Computer Science.

 

I grew up with my grandparents in a nice middle-class home and neighborhood. I went to a good elementary school, but went to some pretty ghetto middle schools and high schools.

Additionally, I’d say that I’ve done pretty well with money so far, but I’ve learned some hard lessons too. I’ve also experienced childhood struggles but I’m sure not as bad as some others. It’s good to see the bad sometimes, it keeps you grounded.

 

Blake, you're young and lucky.  I'm old and lucky.  Wanna trade places?  I was lucky to have discovered Berkshire Hathaway when interest rates were at all time highs and the US economy was in the dumps - circa 1980.  Took me a while to get comfortable with it too.  Not long thereafter I discovered MO.  Two entirely different companies, both hugely successful for shareholders.  I sold MO on moral grounds (couldn't trust management after the MSA) but the lesson is that there is always something to buy in any economic environment.   As an aside I stopped caring at all about macro issues and instead simply buy and hold stocks (pieces of businesses) I believe will prosper no matter what. 

[Blake Hampton]

24 minutes ago, Value_Added said:

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

"There’s usually a grain of truth that underlies every mania and bubble. It just gets taken too far."

[Jaygo]

46 minutes ago, Blake Hampton said:

I’m 22 and I currently live in Oklahoma. I’m a part-time federal employee that’s also going to school for a Bachelors in Computer Science.

 

I grew up with my grandparents in a nice middle-class home and neighborhood. I went to a good elementary school, but went to some pretty ghetto middle schools and high schools.

Additionally, I’d say that I’ve done pretty well with money so far, but I’ve learned some hard lessons too. I’ve also experienced childhood struggles but I’m sure not as bad as some others. It’s good to see the bad sometimes, it keeps you grounded.

 

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

 

 

 

 

[cubsfan]

2 hours ago, Blake Hampton said:

It took the S&P 500 13 years to fully recover from the Dot-com bubble, even amid the FED lowering rates to 0% and conducting large amounts of QE.

 

I vehemently doubt we will be so lucky in the future.

 

 

I think we have all been there before - where the market looks expensive and scary - and the future looks clouded with obvious macro traps. It's rarely clear sailing.

 

But as a small investor @Blake Hampton - all you have to do is shift through opportunities and find a handful of good ones. Maybe 4/5/6 - and you can do incredibly well while others try and call the market. 

[james22]

12 minutes ago, Jaygo said:

Blake you may be too smart for your own good. 

 

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.

[cubsfan]

13 minutes 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.

 

That would absolutely be the John Hussman story. Brilliant, well written and terrifying conclusions while others ignore him and make a fortune.

[Gregmal]

1 minute ago, cubsfan said:

 

That would absolutely be the John Hussman story. Brilliant, well written and terrifying conclusions while others ignore him and make a fortune.

Yup. Whenever I hear these long macro diatribes I immediately think one of two things…naive, or selling a newsletter lol. 

[james22]

11 minutes ago, cubsfan said:

That would absolutely be the John Hussman story. Brilliant, well written and terrifying conclusions while others ignore him and make a fortune.

 

But absolute catnip to the intelligent investor.

 

[Castanza]

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. 

[Blake Hampton]

Thanks for the great post @Jaygo

[james22]

2 hours ago, Blake Hampton said:

I’m 22

 

My career in Corporate Planning was longer than you've been alive.

 

We built Long-Range Forecasts for one of the largest companies in the world.

 

How often? Every year.

 

Why? "Events, dear boy, events."

[Blake Hampton]

Just now, james22 said:

 

My career in Corporate Planning was longer than you've been alive.

 

We built Long-Range Forecasts for one of the largest companies in the world.

 

How often? Every year.

 

Why? "Events, dear boy, events."

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