Have We Hit The Top?

[Luke]

The extreme opposite would be a world where the entire global wealth is funneled through Wall Street, US multinationals concentrating even more and owning the whole global market, investment is coordinated with government and results in some sort of privately planned economy with a few rich feudal lords that live outside the normal world on some islands while the rest of the population stagnates and works for them while providing 0 competition to the hugely concentrated market and having no opportunity to ever get out of where they are. The movie Elysium sort of captures such a system. 

[Luke]

And I really enjoyed Bloomstran projected performance of the SP 500 Index in latest letter: 

 

The past (margins up, multiple up (even higher today):

 

 

And the future: (Moderate bull case) This is a realistic expected return without egregious assumptions and neither very bearish assumptions for the SP 500.

 

 

 

 

 

At close to 6% treasuries those returns are shit, obviously. 

Edited September 14, 2023 by Luca

[Luke]

Considering SP 500 PE is now at 25.61, a 4% earnings yield, multiple compression back to 19,2 would take of 2% of the projected 5.9%, so 3,9% annualized return. My Bank account gives me 3% on EUR right now haha!

[Luke]

Taking that into account, Berkshire, Fairfax, Exor, BN, LVMH etc you name it, are all much better buys than the Index

[TwoCitiesCapital]

1 hour ago, Luca said:

And I really enjoyed Bloomstran projected performance of the SP 500 Index in latest letter: 

 

The past (margins up, multiple up (even higher today):

 

 

And the future: (Moderate bull case) This is a realistic expected return without egregious assumptions and neither very bearish assumptions for the SP 500.

 

 

 

 

 

At close to 6% treasuries those returns are shit, obviously. 

 

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. 

[UK]

31 minutes ago, TwoCitiesCapital said:

 

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. 

 

It is funny, because, perhaps not without different biases involved, I actually thought exact opposite after seeing this (btw really nice analysis/tables), meaning who on earth would buy 10 year bonds at 4.3, if even SNP could still deliver 6 per cent (I think it is quite reasonable or even on the optimistic side) over the next 10 years? Maybe if you good at trading them, but for the buy and hold and with much better options than SNP? 

[Spekulatius]

50 minutes ago, UK said:

 

It is funny, because, perhaps not without different biases involved, I actually thought exact opposite after seeing this (btw really nice analysis/tables), meaning who on earth would buy 10 year bonds at 4.3, if even SNP could still deliver 6 per cent (I think it is quite reasonable or even on the optimistic side) over the next 10 years? Maybe if you good at trading them, but for the buy and hold and with much better options than SNP? 

I think the competition to equities isn't treasuries, but Investment grade debt - take BBB debt for example, which still has way lower risk than equites. BBB debt yields 6.08% and I think it will outperform equities but at much lower risk.

https://ycharts.com/indicators/us_corporate_bbb_effective_yield#:~:text=US Corporate BBB Effective Yield is at 6.08%%2C compared to,long term average of 5.25%.

Edited September 14, 2023 by Spekulatius

[ValueArb]

ARM went out today and is trading at $60, 100 times earnings and 24 times sales for a shrinking business. The bull market is still strong!

[UK]

24 minutes ago, Spekulatius said:

I think the competition to equities isn't treasuries, but Investment grade debt - take BBB debt for example, which still has way lower risk than equites. BBB debt yields 6.08% and I think it will outperform equities but at much lower risk.

https://ycharts.com/indicators/us_corporate_bbb_effective_yield#:~:text=US Corporate BBB Effective Yield is at 6.08%%2C compared to,long term average of 5.25%.

 

Yes, you are right, I just thought about treasuries, since Luca mentioned them in his original post. And yes, TwoCitiesCapital also refered to better alternatives.

 

Still, maybe because of the wrong biases, I just do not find anything below 8-10 per cent expected returs atractive, especialy if these returns are nominal, as with fixed income.

 

Kinda: https://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/

 

Edited September 14, 2023 by UK

[RichardGibbons]

7 hours ago, Luca said:

public housing, wealth tax for extreme net worth, higher capital gains and income tax for the very wealthy, 0% tax for average joe

 

Accidentally all things that China is doing right now and at the exact same point in time when china starts doing these things you start to see the US upping their own spending too because competition gets tougher

 

The problem is that this stuff doesn't actually do what you want it to because it assumes a static world.  The world isn't static, and in a non-static world capitalism wins (for everyone, not just the rich) because incentives matter.

 

Suppose that a country is getting 4% annual growth from a capitalist society, but the bottom 90% is only getting 40% of the output. If you put in your socialist changes and the bottom 90% now get 60%, but it costs you 2% of your growth, then in the year you do it, the bottom 90% have a 50% higher standard of living.

But in 17 years, they have the same standard of living. And in 30 years, the bottom 90% in the capitalist society have a 50% higher standard of living than those in the socialist system.

 

So you have to be careful not to break capitalist incentives, and studies show that higher capital gains taxes, wealth taxes, and high-income taxes do that.  

 

China is a pretty good example, because you saw the CCP destroy their country for socialism, adopt capitalism in the 1990s to dramatically boost their standard of living, and now you'll see them destroy their country once more by breaking capitalist incentives. The two Koreas are similar. Or, a less extreme example is the difference in Canadian and American economic paths.

 

I think the actual solution is massive inheritance taxes (like, 99% on amounts over $30M) combined with taxes and jail time on people attempting to subvert those inheritance taxes. Allow the brilliant risk-taking entrepreneurs to allocate capital and do their thing for their lifetime to improve everyone's standard of living. But nobody gets to be a billionaire except through their own efforts.

[WayWardCloud]

13 minutes ago, RichardGibbons said:

Allow the brilliant risk-taking entrepreneurs to allocate capital and do their thing for their lifetime to improve everyone's standard of living. But nobody gets to be a billionaire except through their own efforts.

 

Can you run for president please?

[Luke]

1 hour ago, UK said:

 

Yes, you are right, I just thought about treasuries, since Luca mentioned them in his original post. And yes, TwoCitiesCapital also refered to better alternatives.

 Yeah, Investment grade debt too. But then again, @Gregmal stressed it often enough, there are enough options where you get a 10% yield+ right now (FFH, Prosus, Exor, Nintendo etc) which one would much prefer over treasuries or investment grade debt etc. The Index itself is just overpriced and overbought. 

1 hour ago, UK said:

 

Still, maybe because of the wrong biases, I just do not find anything below 8-10 per cent expected returs atractive, especialy if these returns are nominal, as with fixed income.

 

Kinda: https://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/

 

+1

[ValueArb]

6 minutes ago, RichardGibbons said:

 

The problem is that this stuff doesn't actually do what you want it to because it assumes a static world.  The world isn't static, and in a non-static world capitalism wins (for everyone, not just the rich) because incentives matter.

 

Suppose that a country is getting 4% annual growth from a capitalist society, but the bottom 90% is only getting 40% of the output. If you put in your socialist changes and the bottom 90% now get 60%, but it costs you 2% of your growth, then in the year you do it, the bottom 90% have a 50% higher standard of living.

But in 17 years, they have the same standard of living. And in 30 years, the bottom 90% in the capitalist society have a 50% higher standard of living than those in the socialist system.

 

So you have to be careful not to break capitalist incentives, and studies show that higher capital gains taxes, wealth taxes, and high-income taxes do that.  

 

China is a pretty good example, because you saw the CCP destroy their country for socialism, adopt capitalism in the 1990s to dramatically boost their standard of living, and now you'll see them destroy their country once more by breaking capitalist incentives. The two Koreas are similar. Or, a less extreme example is the difference in Canadian and American economic paths.

 

I think the actual solution is massive inheritance taxes (like, 99% on amounts over $30M) combined with taxes and jail time on people attempting to subvert those inheritance taxes. Allow the brilliant risk-taking entrepreneurs to allocate capital and do their thing for their lifetime to improve everyone's standard of living. But nobody gets to be a billionaire except through their own efforts.

 

One of my favorite free markets vs. communism stories is that of the Russian communist party. Tsar Aleksander had freed the serfs, to an extent, giving them their own small land tracts and allowing them to leave their lords domains if they wanted to for the first time. Russian agriculture output gradually improved (still far from a pure free market, serfs were required to make payments to buy their freedom/land, the plots were too small to be efficient and many were still collectively farmed). 

 

But in 1918 the Russian communists had control of much of what was left of Russia (after ceding mass amounts of land to Germany for peace) and were locked in a brutal civil war with the Whites to keep that control. Food was expensive and scarce for the army and the urban proletariat that made up the communists main political support.  So they mandated that all excess production from the serfs be handed over to feed the proletariat and army. They sent armed bands led by Commisars through out the farms to seize any excess grain and other foodstuffs. And they arrested anyone they arbitrarily decided was hoarding, shot anyone who resisted, sometimes with their families, and of course occasionally raping peasant women because they could. Sometimes when they found a farmer with just barely enough food to feed your family, sometimes they would still call you a hoarder and take it all as "excess". 

 

And you might ask, well how did the Whites lose the civil war when the communists turned the entire rural population against them? The Whites were WORSE, they conducted pretty much the same type of raiding, theft, murder and rape, and also confiscated the farmers lands as the Whites were led mostly by clueless Tsarist elitists and former royalty who were trying to restore their lands and properties without a care for anyone "beneath" them in social status.

 

So after the communists won, a couple years of bad weather created massive food shortages and famine that killed millions. They finally realized that the farm production was  fraction of what it was under the Tsars because farmers had been beaten down to learn to only produce the minimum to feed their own family and not to stockpile production against bad years because any excess would only get stolen. So they switched back to a free market and allowing farmers to sell excess, and voila, production recovered.

 

Then when things were getting much better, it became a bit embarrassing that the "communist" party was allowing so much capitalism to exist. The smartest and hardest working farmers were becoming wealthy, as well as traders, transporters and others involved in the entire system of selling farm production to the urban centers. They grew afraid that they were creating another elite class that would subvert their grip on power and lead to their replacement by a more mainstream political group. 

 

And despite the increasing production the Russian and Ukrainian farmers were far less productive than western farmers for two reasons. One was there were a lot of small farms that emerged from the serf system, and also they trailed substantially in mechanization.  This isn't surprising, these people had just emerged from a system that kept them uneducated, many couldn't even read, and their initial plots were tiny. It takes time for plots to be sold and combined into larger farms, and for farmers to produce enough to save enough to reinvest in mechanical harvesting equipment.  So one approach would be to encourage capital formation and farm sales/combinations so the market would improve naturally, potentially even rapidly, over time. 

 

But spoiler alert, Stalin didn't do that. He thought he could kill three birds with one stone, forcibly collectivize the farms to grow them to larger and more productive sizes, while wiping out the new bourgeoisie (which he called "kulaks") and the political threat they might present. And guess what, it didn't work. Instead it lead to another plunge in farm output, and an even greater famine which the Ukrainians remember as Holodomor and many regard as a genocide being that it killed 3M to 5M peasants. Stalin regarded it as a solution to a problem, since he hated and distrusted peasants.

 

So the communists in Russia learned the costs of socializing agriculture twice within a decade, and still ignored the lesson because real world results that conflict with strongly held political beliefs are commonly rejected by humans throughout history. 

[Luke]

43 minutes ago, RichardGibbons said:

 

The problem is that this stuff doesn't actually do what you want it to because it assumes a static world.  The world isn't static, and in a non-static world capitalism wins (for everyone, not just the rich) because incentives matter.

I said before that capitalism, if it works, is a win win for the capitalist and the worker, if the incentives are set up right as you said.

43 minutes ago, RichardGibbons said:

 

Suppose that a country is getting 4% annual growth from a capitalist society, but the bottom 90% is only getting 40% of the output. If you put in your socialist changes and the bottom 90% now get 60%, but it costs you 2% of your growth, then in the year you do it, the bottom 90% have a 50% higher standard of living.

43 minutes ago, RichardGibbons said:

But in 17 years, they have the same standard of living. And in 30 years, the bottom 90% in the capitalist society have a 50% higher standard of living than those in the socialist system.

Yes, but currently we have 0 growth for the majority. My suggested policies would move the needle so that we pick up the worker/consumer, increase in investment and more competition etc. 

43 minutes ago, RichardGibbons said:

 

So you have to be careful not to break capitalist incentives, and studies show that higher capital gains taxes, wealth taxes, and high-income taxes do that.  

This is straight from the OECD: 

 

https://www.oecd.org/social/Focus-Inequality-and-Growth-2014.pdf

 

"New OECD analysis suggests that income inequality has a negative and statistically significant impact on medium-term growth. Rising inequality by 3 Gini points, that is the average increase recorded in the OECD over the past two decades, would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5 per cent.

 

2010 had inequality not changed between 1985 and 2005 (The most recent inequality trends since then are not taken into account as they affect future growth patterns). These estimates are meant to be illustrative and should not be interpreted as the causal effect of the actual change in inequality in each country. They indicate, however, that the possible impact of inequality can be sizeable. Rising inequality is estimated to have knocked more than 4 percentage points off growth in half of the countries over two decades. On the other hand, greater equality prior to the crisis helped increase GDP per capita in a few countries, notably Spain."

 

Regarding redistribution:

 

"The most direct policy tool to reduce inequality is redistribution through taxes and benefits. The analysis shows that redistribution per se does not lower economic growth. Of course, this does not mean that all redistribution measures are equally good for growth. Redistribution policies that are poorly targeted and do not focus on the most effective tools can lead to a waste of resources and generate inefficiencies."

 

Policies that help to limit or reverse inequality may not only make societies less unfair, but also wealthier. It is not just poverty or the incomes of the lowest 10% of the population that inhibits growth. Instead, policymakers need to be concerned about how the bottom 40% fare more generally. This includes the vulnerable lower-middle classes who are at risk of failing to benefit from and contribute to the recovery and future growth. Anti-poverty programmes will not be enough. Not only cash transfers but also increasing access to public services, such as high-quality education, training and healthcare, constitute long-term social investment to create greater equality of opportunities in the long run. Policy also needs to confront the historical legacy of underinvestment by low income groups in formal education. Strategies to foster skills development must include improved jobrelated training and education for the lowskilled, over the whole working live.

 

43 minutes ago, RichardGibbons said:

 

China is a pretty good example, because you saw the CCP destroy their country for socialism, adopt capitalism in the 1990s to dramatically boost their standard of living, and now you'll see them destroy their country once more by breaking capitalist incentives. The two Koreas are similar. Or, a less extreme example is the difference in Canadian and American economic paths.

I dont think China is destroying capitalist incentives, just trying to level the playing field, destroy harmful companies (education sector), stop insane housing prices so wages dont go into absurd rents that do absolutely nothing for GDP growth etc, they have stressed "healty development" and regulation of "disorderly capital", quite close to what the OECD describes in that article IMO. 

43 minutes ago, RichardGibbons said:

I think the actual solution is massive inheritance taxes (like, 99% on amounts over $30M) combined with taxes and jail time on people attempting to subvert those inheritance taxes. Allow the brilliant risk-taking entrepreneurs to allocate capital and do their thing for their lifetime to improve everyone's standard of living. But nobody gets to be a billionaire except through their own efforts.

And yeah, something into this direction is necessary although i cant say how much is too far and how little, difficult but important questions, i think we tend to agree on the direction of this. 

 

Cheers guys!

Edited September 14, 2023 by Luca

[TwoCitiesCapital]

3 hours ago, UK said:

 

It is funny, because, perhaps not without different biases involved, I actually thought exact opposite after seeing this (btw really nice analysis/tables), meaning who on earth would buy 10 year bonds at 4.3, if even SNP could still deliver 6 per cent (I think it is quite reasonable or even on the optimistic side) over the next 10 years? Maybe if you good at trading them, but for the buy and hold and with much better options than SNP? 

 

 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? 

 

[Luke]

20 minutes ago, TwoCitiesCapital said:

 

 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. 

Yep, I doubt that too. Take 19x earnings in 2033 and current profit margins, average of 4.1% sales growth (10 year average).

 

Then the average 0.7% sharecount shrinkage that, as bloomstran put it nicely, completely ignores the big amount of profit that go away to shrink that sharecount, because management pays themselves nicely. Wouldnt even count that in. 

 

So 4.1% sales growth+1.8% dividend yield+20% multiple compression in the end: 4.12% returns next 10 years.

 

We need a 4th industrial revolution happening that turbo charges GDP growth (our businesses that trade at 10% earnings will benefit too aka. FFH, Exor etc) to make this exciting at all...

 

PASS

 

20 minutes ago, TwoCitiesCapital said:

 

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.

Average sharecount shrinkage last annum 0.7% per year. Profit margins and multiple expansion has been driving growth very nicely, many people i know think they will make 10%+ in perpetuity...:D

20 minutes ago, TwoCitiesCapital said:

 

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. 

Yeah and with inflation margins will shrink too, bloomstran: 

 

"Presume inflation cyclically runs hotter than the Fed’s 2% made-up target and averages 4%, allowing for 6% growth in dollar sales per year. If inflation runs warm, kiss peak margins goodbye. Assume companies are forced to refinance debt at higher interest rates, leading many to delever. I won’t even touch on the potential for higher corporate taxes. Lower margins leave less for share repurchases, so hold share count flat. 

20 minutes ago, TwoCitiesCapital said:

 

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? 

 

Yep, but why not just skip corporates, mortgages etc and buy things like FFH, Berkshire, Exor, Prosus, Nintendo etc. 

 

Bonds are cool but one can still find things that are attractive

Edited September 14, 2023 by Luca

[Luke]

And you can EASILY paint a grimmer picture than the average sales growth and stable profit margins and maybe even a 15x multiple on earnings 10 years down the road. So 298 EPS-->4470 for the SP 500 in 10 years. So 0 growth+1.8% yield. So we all should be really happy that we are able to find better value than the index. 

 

I have to think about 2022 BRK AGM when munger was asked about Berkshire vs the SP 500 and he said he would bet on berkshire. Id heavily agree even at todays valuation!

 

Edited September 14, 2023 by Luca

[Luke]

2 hours ago, UK said:

Still, maybe because of the wrong biases, I just do not find anything below 8-10 per cent expected returs atractive, especialy if these returns are nominal, as with fixed income.

Btw UK, with Prosus you are getting basically a 10% earnings yield per share on tencent and Co with the earnings yield being higher 38% in 3 years due to the buybacks. So we can have 0 growth for tencent but stable for the next 10 years and we will make more than 10% on earnings just doing nothing  In 3 years EPS yield will be at 14%  Think about it haha.

 

 

Edited September 14, 2023 by Luca

[TwoCitiesCapital]

26 minutes ago, Luca said:

Yep, I doubt that too. Take 19x earnings in 2033 and current profit margins, average of 4.1% sales growth (10 year average).

 

Then the average 0.7% sharecount shrinkage that, as bloomstran put it nicely, completely ignores the big amount of profit that go away to shrink that sharecount, because management pays themselves nicely. Wouldnt even count that in. 

 

So 4.1% sales growth+1.8% dividend yield+20% multiple compression in the end: 4.12% returns next 10 years.

 

We need a 4th industrial revolution happening that turbo charges GDP growth (our businesses that trade at 10% earnings will benefit too aka. FFH, Exor etc) to make this exciting at all...

 

PASS

 

Average sharecount shrinkage last annum 0.7% per year. Profit margins and multiple expansion has been driving growth very nicely, many people i know think they will make 10%+ in perpetuity...:D

Yeah and with inflation margins will shrink too, bloomstran: 

 

"Presume inflation cyclically runs hotter than the Fed’s 2% made-up target and averages 4%, allowing for 6% growth in dollar sales per year. If inflation runs warm, kiss peak margins goodbye. Assume companies are forced to refinance debt at higher interest rates, leading many to delever. I won’t even touch on the potential for higher corporate taxes. Lower margins leave less for share repurchases, so hold share count flat. 

Yep, but why not just skip corporates, mortgages etc and buy things like FFH, Berkshire, Exor, Prosus, Nintendo etc. 

 

Bonds are cool but one can still find things that are attractive

 

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. 

Edited September 14, 2023 by TwoCitiesCapital

[Luke]

6 minutes ago, TwoCitiesCapital said:

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. 

Fair enough.

6 minutes ago, TwoCitiesCapital said:

I am continuing to buy what is cheap. I buy dips, sell rips, and have been slowly allocating more and more of the profits to fixed income and slowly extending the duration of that fixed income. 

Understand, not sure if I could time the markets as well as that but to each their own.

[Gregmal]

Is the fact that stocks can be volatile really a reason to be afraid of them? 
 

2020 for instance? Two types of thought I guess…to some it was awful because stuff temporarily went down. To others it was beautiful because you had a generational opportunity to make a fortune. The takeaway regardless? Now 3 years later pretty much everything is substantially higher then before it happened and really, unless you had a 1.5 month liquidity need, it was a blip on the radar. 

[Red Lion]

2 hours ago, RichardGibbons said:

I think the actual solution is massive inheritance taxes (like, 99% on amounts over $30M) combined with taxes and jail time on people attempting to subvert those inheritance taxes. Allow the brilliant risk-taking entrepreneurs to allocate capital and do their thing for their lifetime to improve everyone's standard of living. But nobody gets to be a billionaire except through their own efforts.

 

How many of these such billionaires even exist? The Waltons, some middle eastern royalty, etc. It seems like a lot of the billionaires I can think of are self made anyway. 

 

Seems like it hardly makes sense passing a whole law that's wildly confiscatory in nature (99% inheritance tax) if it's only going to affect a few hundred people. And then of course, I wonder if those people will just renounce citizenship and move. 

[TwoCitiesCapital]

2 minutes ago, Luca said:

Fair enough.

Understand, not sure if I could time the markets as well as that but to each their own.

 

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. 

 

5 minutes ago, Gregmal said:

Is the fact that stocks can be volatile really a reason to be afraid of them? 
 

2020 for instance? Two types of thought I guess…to some it was awful because stuff temporarily went down. To others it was beautiful because you had a generational opportunity to make a fortune. 

 

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. 

[Gregmal]

So when you own a bond, how much do you get compensated if the investment is validated via an acquisition? 
 

How much do you get compensated for volatility? Just within the universe of companies I follow, with stocks, good market or bad, you generally get 5-10/20% fluctuations frequently, to where you could literally just trade around a core and generate that mid single digit return in a matter of weeks/months. Same with selling options for premium.
 

In general I feel like the underlying and maybe not soooo sooo obvious attraction people have to bonds is a feeling of security due to market to market because you don’t see the same fluctuations as with stocks. But that safety IMO is derived from perception, and perception may differ wildly from reality. For instance, after all the circus, it is stocks, and not bonds that have largely recovered from last years transition period. And this despite the fact there has been underlying assumptions the entire time that “stocks will do poorly”. 

[Dinar]

@RichardGibbons, what do you think the implications of a 99% inheritance tax will be?  I will bet that you will 

a) see tax collection decline

b) people move out of the country (like Eduardo Saverin did)

c) massive misallocation of resources and economic destruction.  (If I had a net worth of $200MM and could only leave $30MM to my kids, I would move out of the US.  If I was prevented from doing so, I would then buy $170MM worth of apartment buildings or a really scarce commodity and burn them down.  Most of the kids I know from high school would do same thing by the way.)  

 

By the way, I came to the US as a penniless immigrant, and 70% of the kids in my high school were penniless immigrants.  We all became doctors, lawyers, programmers, etc....  I have yet to meet someone in the US (excluding people who are very ill) who worked hard, saved and did not do well.

 

https://www.bloomberg.com/news/articles/2023-09-09/norway-wealth-tax-pushes-the-rich-to-move-to-switzerland?utm_medium=email&utm_source=newsletter&utm_term=230914&utm_campaign=wealth

Edited September 14, 2023 by Dinar