Gregmal Posted June 24, 2022 Posted June 24, 2022 16 minutes ago, AzCactus said: I guess we don't know right-there's only one reality. But markets don't go up forever-last year markets were up like 30%-was that actually warranted? My point is over the course of a general cycle-periodic pullbacks are healthy. In this specific cycle, there are several factors that are (somewhat) unique-inflation at a 30 year high, student loan debt at an all time high, a maxed out fed etc. Lastly here, I wouldn't categorize what I mentioned as fears other than the fear of a recession. It's a fact that inflation is at like a 40 year high, it's a fact that housing is unaffordable and it's a fact that student loan debt is hurting many consumers. If we look at the past call it 15 years there have been a couple of times (2008 and 2020) where the fed has intervened in a huge, huge way and we can't push the can down the road forever. Appreciate the healthy debate @Gregmal Haha yea all good. I think a lot of times simplifying elements of the equation is the easiest way to back into a framework that suites what you’re trying to do. The Fed is given a crazy amount of credit because people need explanations for everything when a lot of time you can get by without needing the explanations. Why did the FANGs plummet? You can probably list a million reasons, many of which I’ve detailed the past year or so. It’s probably a combination of things. But the easiest answer for most is “the Fed”. The Fed basically works as a helping hand when things get rough. The disgruntled savers or fund managers who got burned on their shorts bitch cuz they got it wrong, and trash the Fed, but ultimately the way I’ve always come out seeing it, is that they help when it’s rough out and when it’s not, they remove the training wheels. The economy being where it is, isn’t too bad, and has a lot of room to improve if things like commodities, which have always been pitched as supply and demand sensitive cyclicals…follow the basic premise of that and revert to more normal prices. Sure, the big corporations and elitists are pissed they have to pay workers more, but we need to stop believing this is a bad thing. Rates IMO aren’t a big deal in the 3-5% range. All in all, an investor shouldn’t be bothered or change their approach trying to time or avoid 15-20% corrections. But at the same time, historically, those type of corrections don’t occur for no reason. It’s almost always some knee jerk pricing in of folks getting scared of some big scary event. It’s become exacerbated by computer trading the past decade. Look at late 2011…perfect example. But I think if you back up, look at things with a 2-5 year horizon, much is these stupid headlines and fear inspired narrative don’t matter as much. The Fed is hardly out of “bullets” or whatever folks mean when they say that and Congress can always take action to improve situations that are clearly not working. These aren’t always immediate fixes, but over a mid duration time period almost always seem to work their way into the picture. Housing is the easiest example. How does it get solved? If commodity prices come down prices can get lowered(see LEN recent commentary) while companies keep their profits. If that doesn’t work you’ll likely see first time homebuyer programs reintroduced. If it doesn’t make housing more affordable, chances are your doing pretty well if you own a home yourself. Lot of different angles that work and eventually I think all of them happen to occur simply because in time, we almost always end up getting to where makes the most sense.
changegonnacome Posted June 24, 2022 Posted June 24, 2022 (edited) 50 minutes ago, Parsad said: What is whacked exactly...earnings off 2-3% or earnings off 10%+? We are talking so broadly here that it gets a little meaningless, so I'll speak about the indexes SPY/QQQ lets say.....but no not 10% next quarter but lets say 1-2% a QTR for the next 4 qtrs but I think really accelerating into early 2023 just given the dynamics I'm hearing around wage negotiations & ingrained inflation expectations driving those conversations. Labor not capital is in the driving seat right now in the US & labor is pressing its advantage effecting corp. margins into a weakening consumer, higher energy prices & an outrageously strong dollar depressing the value of overseas earnings (~40% of SPY revenue). It's a tough mix for US earnings while at the same treasury's & other less 'risky' US assets than equities are beginning to compete again for investors attention pulling people back in the risk curve & reducing multiples. As I've mentioned before I pick stocks........but you cant ignore the beta......sometimes it has your back, sometimes its a full force gail in the front....I think the US SPY/QQQ is in the later camp for the next 12 - 18 months and hence why I'm careful around picking my spots in US markets right now. It's tough going swimming against the current. I like swimming with the current. My whacked comment is a little too over the top.......I mean it in the context of P/E valuations having a magnifying effect just given the numerator & denominator interacting as they do.......modest changes in earnings reality (E) married to modest changes in expectations/optimism & alternatives to equities (P) are all thats required to move stock prices significantly and way more than you'd expect given we don't think in terms of you know a ratio where both top & bottom are moving together. I dont need to tell you this @Parsad but for others I just want to be clear on what I'm saying.....earnings arent going off a cliff but big moves in SPY/QQQ dont require that. Edited June 24, 2022 by changegonnacome
Thrifty3000 Posted June 24, 2022 Posted June 24, 2022 We're about six months into this decline. 2000 Tech Bubble: - It took TWO abysmal YEARS to slowly griiiiind down to a bottom. Then took about FIVE MORE years to revisit the tech bubble peak for about a split second. 2007 Housing Bubble: - It also took nearly TWO abysmal YEARS to slowly griiiind down to a bottom. Then took about FOUR MORE years to revisit and sustain the housing bubble peak. (During those bubbles the Fed had loads of fire power and readily jumped in to help.) 2021 Everything Bubble: (This time around the Fed has already accepted defeat on staving off recession. The Fed's out of ammo and believes its only option is to pick the economy's poison; either high inflation or high rates.) - After only six months, has the market fully baked in the implications? Or will it take TWO YEARS of declining purchasing power, bankruptcies and a sidelined Fed for Mr. Market to root his way to a bottom? It sure feels like we're still a bit ahead of our skis.
Thrifty3000 Posted June 24, 2022 Posted June 24, 2022 ^ with that said, I'm only about 10% cash right now. So, I'm not freaking out. Just enjoying the ride.
Gregmal Posted June 24, 2022 Posted June 24, 2022 (edited) Regardless of whether we are at the bottom or just a wee bit off the top, an investor who brings personal accountability to the table when selecting their investments should do well. It’s so hard for most to do because we are surrounded by bullshit and narrative/headline peddlers. Every day CNBC, Cramer, Seeking Alpha, etc have headlines about why things are moving. 95% of them are nonsense and either aren’t true or don’t matter if you have the right investing hat on. I’ve seen “here’s why ABC is down today” and looked at ABC and it finished up. I’ve seen analyst opinions from guys who can’t pick from a QSR menu let alone a stock. We are surrounded by WS clowns and fund managers who peddle ultra bombastic and unaccountable self serving doo doo. Ever notice how every fund manager is 300% responsible for their winners(even while underperforming the basic index?!?) but when they have losers there is always a million excuses about how someone else did something or an unsavory actor is the reason they got “screwed”. Yea hi Melvin! None of these clowns are ever at fault and thus need to peddle excuses and reasons and the media carries on this wagon too. So throw it out the window. If YOU buy or sell anything YOU are responsible for it and have to make sure YOU can live with the range of outcomes associated with it. If that’s kosher with you, then is it really that hard to invest? Edited June 24, 2022 by Gregmal
Spekulatius Posted June 24, 2022 Posted June 24, 2022 1 hour ago, Parsad said: Are earnings going to get whacked? What is whacked exactly...earnings off 2-3% or earnings off 10%+? From everything I'm seeing, earnings look to be flat or slightly down for the next 2 quarters...I bet you they are good after the Christmas quarter. Drop in consumption is being supported by an increase in the cost of goods sold...since jobs are plentiful, incomes are higher and consumers are still spending. If the average consumer buys 10% less ketchup, but the price is up 7-8%, what is the net hit to revenues? Certainly not a deep recession "whack", but probably a light recession hit. A lot of that is already priced into many stocks. I think this may be a prolonged up and down market...down 20-30%, then a rebound up 30-40%, then down again 15-30%, then up 20-30%...as things unwind, interest rates slowly rise...a new equilibrium has to be set each time, and it won't be a comfortable market like we saw between 2010-2019...it will be a stock picker market. Cheers! In your ketchup example, it depends on how input costs are doing. We have been seeing indications that Producer input costs have been rising faster than inflation. Producer input prices have been deflationary for a long time, but not recently - if producer input prices rise faster than inflation this means lower margins on aggregate: FWIW, I am seeing a lot of companies in manufacturing who have margin issues recently.
Viking Posted June 24, 2022 Posted June 24, 2022 (edited) I am starting to buy into the thesis that we get an earnings recession in the coming quarters and perhaps not an actual economic recession (although growth is slowing). Why? We have a labour shortage. Still. High inflation and a strong labour market = higher than expected interest rates. Maybe we actually see interest rates close to 4% across the curve in the coming months. We will see Earnings recession + flattish growth + high inflation + solid labour market Edited June 24, 2022 by Viking
Parsad Posted June 24, 2022 Author Posted June 24, 2022 4 hours ago, Spekulatius said: In your ketchup example, it depends on how input costs are doing. We have been seeing indications that Producer input costs have been rising faster than inflation. Producer input prices have been deflationary for a long time, but not recently - if producer input prices rise faster than inflation this means lower margins on aggregate: FWIW, I am seeing a lot of companies in manufacturing who have margin issues recently. I agree with you that margins will shrink slightly, quarter by quarter, as there is always a delay before manufacturers pass the added costs on to retailers, in turn consumers. But that may not impact overall earnings if revenues each quarter are nominally higher due to previous quarter hikes in prices. You have price hikes and product volume shrinkage...that should allow decreases in margins to be softer rather than a harder landing. Especially if interest rates start to have some effect and we start to get some equilibrium between rates, inflation and consumption. I agree with some of the other comments that this will drag out a couple of years...but there will be spurts of losses and rebounds along the way. Won't be a crash landing like 2008/2009 or the pandemic...more like 2000-2002...and you will probably have this continued separation between value and growth. Cheers!
crs223 Posted June 24, 2022 Posted June 24, 2022 22 hours ago, Parsad said: I'll do better...I'll give them all to you...in order: FFH, META, ATCO, GOOGL, AMZN, BAC, JEF, OSTK, GE Thank you for sharing. Why no BRK? Figured it would be in your top ten since you named the friggin website after it!
Guest Posted June 25, 2022 Posted June 25, 2022 21 hours ago, Parsad said: Well it would take three of my brains to make one Buffett brain...so I held 3 times as much cash! Cheers! haha I don't know about that! When was the last time you were below 20% cash though (besides covid drop)?
Parsad Posted June 25, 2022 Author Posted June 25, 2022 1 hour ago, crs223 said: Thank you for sharing. Why no BRK? Figured it would be in your top ten since you named the friggin website after it! I don't fall in love with any single stock, even if I named the website after it. I love BRK, but it just isn't cheap enough right now compared to other opportunities. I would say BRK is cheaper than AMZN, which I own, but I'm concerned about Buffett's age. I hope he lives as long as Methusaleh, but that would be wishful thinking. So it's also partly risk management presently. I need a bigger discount to protect against the age risk. Cheers!
meiroy Posted June 25, 2022 Posted June 25, 2022 4 hours ago, Viking said: I am starting to buy into the thesis that we get an earnings recession in the coming quarters and perhaps not an actual economic recession (although growth is slowing). Why? We have a labour shortage. Still. High inflation and a strong labour market = higher than expected interest rates. Maybe we actually see interest rates close to 4% across the curve in the coming months. We will see Earnings recession + flattish growth + high inflation + solid labour market Yeah, that's an interesting argument, that there's not going to be an actual recession because of current labor shortages. First, it should be clear that unemployment is a lagging indicator. Now, why is there labor shortage? One obvious reason is because of all that liquidity pumping for the past few years. Take that away + higher inflation + layoffs going on in waves and the shortage is resolved. I think it's extremely unlikely the Fed will manage a soft landing, even if my reasoning here is completely wrong.
Parsad Posted June 25, 2022 Author Posted June 25, 2022 26 minutes ago, stahleyp said: haha I don't know about that! When was the last time you were below 20% cash though (besides covid drop)? I've only been below 20% cash like 5 times...2000-2001 (Tech Bubble - Value Cheap), 2003/2004 (FFH Collapses From Shorts), 2009/2010 (After Financial Crisis), 2020 (Pandemic), and now again. I'm always early to buy and early to sell, but I get the periods of cheap stocks right almost all of the time! Sadly because I tend to sell early, I usually miss a year or two of upside returns, but then that is made up by the cash holdings which start early too and I don't get hit by the bear markets (other than the pandemic)...for example, I'm up this year 3-4%, while markets are down 19-28%...but as the bull market returns at some point, I'll probably sell a year early at least from the peak! C'est la vie! Cheers!
Longtermlens Posted June 25, 2022 Posted June 25, 2022 58 minutes ago, Parsad said: I don't fall in love with any single stock, even if I named the website after it. I love BRK, but it just isn't cheap enough right now compared to other opportunities. I would say BRK is cheaper than AMZN, which I own, but I'm concerned about Buffett's age. I hope he lives as long as Methusaleh, but that would be wishful thinking. So it's also partly risk management presently. I need a bigger discount to protect against the age risk. Cheers! It’s a good point re Buffetts age and the risk to Berkshire going forward. Anytime I find myself thinking about it I reread the essay from Munger - VIce Chairman’s Thoughts Past and Future. If anyone who owns Berkshire has not read it - highly recommend. The part below is what I often remind myself of. Gets me comfortable owning it long and strong. “The next to last task on my list was: Predict whether abnormally good results would continue at Berkshire if Buffett were soon to depart. The answer is yes. Berkshire has in place in its subsidiaries much business momentum grounded in much durable competitive advantage. Moreover, its railroad and utility subsidiaries now provide much desirable opportunity to invest large sums in new fixed assets. And many subsidiaries are now engaged in making wise “bolt-on” acquisitions. Provided that most of the Berkshire system remains in place, the combined momentum and opportunity now present is so great that Berkshire would almost surely remain a better-than-normal company for a very long time even if (1) Buffett left tomorrow, (2) his successors were persons of only moderate ability, and (3) Berkshire never again purchased a large business. But, under this Buffett-soon-leaves assumption, his successors would not be “of only moderate ability.” For instance, Ajit Jain and Greg Abel are proven performers who would probably be under-described as “world-class.” “World-leading” would be the description I would choose. In some important ways, each is a better business executive than Buffett. And I believe neither Jain nor Abel would (1) leave Berkshire, no matter what someone else offered or (2) desire much change in the Berkshire system.”
Parsad Posted June 25, 2022 Author Posted June 25, 2022 24 minutes ago, Longtermlens said: It’s a good point re Buffetts age and the risk to Berkshire going forward. Anytime I find myself thinking about it I reread the essay from Munger - VIce Chairman’s Thoughts Past and Future. If anyone who owns Berkshire has not read it - highly recommend. The part below is what I often remind myself of. Gets me comfortable owning it long and strong. “The next to last task on my list was: Predict whether abnormally good results would continue at Berkshire if Buffett were soon to depart. The answer is yes. Berkshire has in place in its subsidiaries much business momentum grounded in much durable competitive advantage. Moreover, its railroad and utility subsidiaries now provide much desirable opportunity to invest large sums in new fixed assets. And many subsidiaries are now engaged in making wise “bolt-on” acquisitions. Provided that most of the Berkshire system remains in place, the combined momentum and opportunity now present is so great that Berkshire would almost surely remain a better-than-normal company for a very long time even if (1) Buffett left tomorrow, (2) his successors were persons of only moderate ability, and (3) Berkshire never again purchased a large business. But, under this Buffett-soon-leaves assumption, his successors would not be “of only moderate ability.” For instance, Ajit Jain and Greg Abel are proven performers who would probably be under-described as “world-class.” “World-leading” would be the description I would choose. In some important ways, each is a better business executive than Buffett. And I believe neither Jain nor Abel would (1) leave Berkshire, no matter what someone else offered or (2) desire much change in the Berkshire system.” Ajit is far fitter than I am, and every time I've met him over the last 20 years, he seems like he hasn't aged. But he is 70 now. Abel is relatively young at 60...but he's Canadian like myself and probably eats a lot of back bacon and maple syrup! It should be noted that Berkshire will continue to do well, with or without Buffett & Munger, but because of it's sheer size, it will never be the Berkshire of old that grew at 20% annualized. You will probably do marginally better than the S&P500 long-term. Once Ajit is gone too, that advantage will diminish further, probably on par with the S&P500 at best. The most valuable thing to take away from Berkshire is not Berkshire stock, but the teachings of Buffett & Munger around Berkshire. That will do more for you in life than Berkshire stock now at this point. Cheers!
Gregmal Posted June 25, 2022 Posted June 25, 2022 Yea am I the only one who thinks Berkshire will actually do better once the new guys fully take the reigns?
Longtermlens Posted June 25, 2022 Posted June 25, 2022 (edited) 8 minutes ago, Parsad said: Ajit is far fitter than I am, and every time I've met him over the last 20 years, he seems like he hasn't aged. But he is 70 now. Abel is relatively young at 60...but he's Canadian like myself and probably eats a lot of back bacon and maple syrup! It should be noted that Berkshire will continue to do well, with or without Buffett & Munger, but because of it's sheer size, it will never be the Berkshire of old that grew at 20% annualized. You will probably do marginally better than the S&P500 long-term. Once Ajit is gone too, that advantage will diminish further, probably on par with the S&P500 at best. The most valuable thing to take away from Berkshire is not Berkshire stock, but the teachings of Buffett & Munger around Berkshire. That will do more for you in life than Berkshire stock now at this point. Cheers! Yes - I do largely agree with you. For me I treat Berkshire as relatively low risk with chances of marginally beating the index going forward. I expect 7-10% type returns out of it. Buybacks at “cheap prices” help that cause of course. Re-reading some of the Berkshire analysis from the bloomstran letters. Looking at his 10 year return expectations from a normalized earnings power = $48 billion. - your looking at 10% - 20% type returns over a long time horizon. (depending if you think the equity trades for 13x or 20x earnings and whether the roe is 8% or 10%). * and of course how much stock is bought back vs price Edited June 25, 2022 by Longtermlens
Longtermlens Posted June 25, 2022 Posted June 25, 2022 4 minutes ago, Gregmal said: Yea am I the only one who thinks Berkshire will actually do better once the new guys fully take the reigns? Apparently Munger agrees with you some ”World-leading” would be the description I would choose. In some important ways, each is a better business executive than Buffett.”
Thrifty3000 Posted June 25, 2022 Posted June 25, 2022 Serious question. Is Greg Abel legit? And, if so, why do you believe he is? I can’t name anything outstanding he has done. Do we know for sure he isn’t just a “company guy” that has ridden the coattails of D Sokol - and the Midamerican management team Sokol put in place?
Parsad Posted June 25, 2022 Author Posted June 25, 2022 1 hour ago, Thrifty3000 said: Serious question. Is Greg Abel legit? And, if so, why do you believe he is? I can’t name anything outstanding he has done. Do we know for sure he isn’t just a “company guy” that has ridden the coattails of D Sokol - and the Midamerican management team Sokol put in place? Legitimate question! The one area that no one can replace Buffett is risk management...maybe only Ajit is as good. How many people can see that 1 in a million risk, that somehow over time becomes 1 in 50? To be prepared for that! To write contracts that avoid that! To buy businesses that survive that! Only time will tell. Cheers!
throw123 Posted June 25, 2022 Posted June 25, 2022 4 hours ago, Gregmal said: Yea am I the only one who thinks Berkshire will actually do better once the new guys fully take the reigns? i tend to think so as well. I also envisage a lot more buy backs so dont see it as a bad thing for the stock to languish once Charlie and Buffett step down
scorpioncapital Posted June 25, 2022 Posted June 25, 2022 You know I used to look at stock charts from a few decades back and I saw periods where the stocks literally flatlined...for years if not decades. It was uncanny. I wonder if something like this can happen again. If you look at these charts its like flat for 20 years and then everything shoots up.
gfp Posted June 25, 2022 Posted June 25, 2022 11 hours ago, Thrifty3000 said: Serious question. Is Greg Abel legit? And, if so, why do you believe he is? I can’t name anything outstanding he has done. Do we know for sure he isn’t just a “company guy” that has ridden the coattails of D Sokol - and the Midamerican management team Sokol put in place? I think he is "legit." This FT article with quote from Sokol and several inside stories about Greg is helpful if you haven't read it. Warren Buffett’s heir apparent comes out of the shadows | Financial Times.pdf
crs223 Posted June 25, 2022 Posted June 25, 2022 (edited) 4 hours ago, scorpioncapital said: You know I used to look at stock charts from a few decades back and I saw periods where the stocks literally flatlined...for years if not decades. It was uncanny. I wonder if something like this can happen again. If you look at these charts its like flat for 20 years and then everything shoots up. I cannot find a proper resolution of this chart from 2004, but it shows the something similar. It was trying to show that those long stretches without growth are to bring the P/E ratio back down. Edited June 25, 2022 by crs223
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