Is The Bottom Almost Here?

[Gregmal]

Also don’t forget the irony of folks whining about 20x earnings but then ooh lala-ing about 5% fixed income lol. At least the earnings tend to be dynamic and grow over extended periods of time. If you really believe in the inflation thing, the last thing you want back in future years is todays dollars. What a market we currently have.

[Gregmal]

5 minutes ago, changegonnacome said:

data.....a shit homebuilder/company is one that can only make money at 2019/2020/2021 house prices & FF at 0%........without looking i suspect there are a few of these around.

Cough KB Homes and Hovnanian might be worth looking at.

Edited February 7, 2023 by Gregmal

[changegonnacome]

3 minutes ago, Gregmal said:

Also don’t forget the irony of folks whining about 20x earnings but then ooh lala-ing about 5% fixed income lol. At least the earnings tend to be dynamic and grow over extended periods of time. If you really believe in the inflation thing, the last thing you want back in future years is todays dollars. What a market we currently have.

 

Yeah i agree - the hint is in the name.....FIXED and thats the best case scenario.....long duration folks found out mark to market you can get absolutely killed in FI just like stocks  ..........what I quibble with and we've chatted about this before is folks underwriting from 2020/21 what IMO are/were peak margins.......on what were IMO peak unit volumes for some groups that became COVID beneficiaries........and then going and paying a 20-25xx multiple on that.....Apple kind of, but there are worst than them where your toast forever............Apple is probably a sufficiently great company that you can be dumb and pay 30 times 2021 earnings and get an OK return if you hold it long enough.......such that Apple's greatness & time bails you out.........but lets be clear Apple's earning per share in Q4 2022 were down ~20% in real terms over Q4 2021.....some folks did indeed pay 30 times 2021 EPS at $180 levels......I of course could be wrong but I think those that paid $180 a share for Apple will have to hold it for a long time from here to see a descent TSR and also respecting that Apple is only like ~15% of its ATH's....on relative basis you've done better than most........but on an absolute basis not so much.

[changegonnacome]

22 minutes ago, Gregmal said:

Cough KB Homes and Hovnanian might be worth looking at.

 

Cheers!

[thepupil]

22 minutes ago, Gregmal said:

Also don’t forget the irony of folks whining about 20x earnings but then ooh lala-ing about 5% fixed income lol. At least the earnings tend to be dynamic and grow over extended periods of time. If you really believe in the inflation thing, the last thing you want back in future years is todays dollars. What a market we currently have.

 

they are very different. a 10 yr bond at 5% yield ($100 with 5% coupon) loses 8% in price if the required return goes up by 1% and will make 5 points of coupon, so in a 12 month period loses 3% on a total return basis. A 1 or 2 or 5 year bonds (or floating rate) has even less risk of nominal loss. CLO AAA right now has no duration and lost like 3% in MArch 2020 and in Summer 2022.

 

A mediocre company at 20x EPS growing 6% / yr and using all its cash to do so loses 20% if required rate of return goes up by 1%. 

 

stocks are far longer duration investments and subject to much greater changes in value upon multiple changes. 

 

it's intellectually consistent to prefer bonds to stocks in a rising rate/high inflation,decreasing valuation environment. bonds have generally greater degrees of coupon to reinvest and are lower in duration. they also get paid first. so if you're worried about margins, preferring bonds also makes sense. 

 

I don't think it's ironic at all. of course over LONGER term time horizons, stocks will kick bonds ass in most cases over most but not all long term (defined as 10+ years) time horizons.. We all have different time horizons. if you told me inflation was going to be 8% over the next five years and everything else will be the same, I'd increase my allocation to bonds/cash versus stocks/RE. 

 

 

[Gregmal]

1 minute ago, thepupil said:

 

they are very different. a 10 yr bond at 5% yield ($100 with 5% coupon) loses 8% in price if the required return goes up by 1% and will make 5 points of coupon, so in a 12 month period loses 3% on a total return basis. A 1 or 2 or 5 year bonds (or floating rate) has even less risk of nominal loss. CLO AAA right now has no duration and lost like 3% in MArch 2020 and in Summer 2022.

 

A mediocre company at 20x EPS growing 6% / yr and using all its cash to do so loses 20% if required rate of return goes up by 1%. 

 

stocks are far longer duration investments and subject to much greater changes in value upon multiple changes. 

 

it's intellectually consistent to prefer bonds to stocks in a rising rate/high inflation,decreasing valuation environment. bonds have generally greater degrees of coupon to reinvest and are lower in duration. they also get paid first. so if you're worried about margins, preferring bonds also makes sense. 

 

I don't think it's ironic at all. of course over LONGER term time horizons, stocks will kick bonds ass in most cases over most but not all long term (defined as 10+ years) time horizons.. We all have different time horizons. if you told me inflation was going to be 8% over the next five years and everything else will be the same, I'd increase my allocation to bonds/cash versus stocks/RE. 

 

 

What do you think of MBS type stuff? 

[Intelligent_Investor]

14 minutes ago, thepupil said:

 

they are very different. a 10 yr bond at 5% yield ($100 with 5% coupon) loses 8% in price if the required return goes up by 1% and will make 5 points of coupon, so in a 12 month period loses 3% on a total return basis. A 1 or 2 or 5 year bonds (or floating rate) has even less risk of nominal loss. CLO AAA right now has no duration and lost like 3% in MArch 2020 and in Summer 2022.

 

A mediocre company at 20x EPS growing 6% / yr and using all its cash to do so loses 20% if required rate of return goes up by 1%. 

 

stocks are far longer duration investments and subject to much greater changes in value upon multiple changes. 

 

it's intellectually consistent to prefer bonds to stocks in a rising rate/high inflation,decreasing valuation environment. bonds have generally greater degrees of coupon to reinvest and are lower in duration. they also get paid first. so if you're worried about margins, preferring bonds also makes sense. 

 

I don't think it's ironic at all. of course over LONGER term time horizons, stocks will kick bonds ass in most cases over most but not all long term (defined as 10+ years) time horizons.. We all have different time horizons. if you told me inflation was going to be 8% over the next five years and everything else will be the same, I'd increase my allocation to bonds/cash versus stocks/RE. 

 

 

This is true if you are worried about market price, but not if you are a value investor worried about the intrinsic value. The stock with a 5% earnings yield growing at 6% will throw off more cash than the bond will, even if the market price is more sensitive, and thus will have a higher intrinsic value than a 5% fixed coupon bond, even if the bond is less volatile in market price. 

[thepupil]

31 minutes ago, Gregmal said:

What do you think of MBS type stuff? 

 

 

I like MBS. government guaranteed like 5% yields. look at the YTW of 4.4%. That means if everyone out there never died/moved/divorced/refi'd etc. they'd be like 20 yr securities yielding 4.4%. it will obviously be higher than that and shorter duration. also look at WA price of $90. so now when people die/move/divorce/default/etc, you make $10 / $90 when that happens.

 

i am a buyer of the bond index which yields 4.5% and it yields more than treasuries in part because of its big slug of MBS. 

 

 

 

[thepupil]

17 minutes ago, Intelligent_Investor said:

This is true if you are worried about market price, but not if you are a value investor worried about the intrinsic value. The stock with a 5% earnings yield growing at 6% will throw off more cash than the bond will, even if the market price is more sensitive, and thus will have a higher intrinsic value than a 5% fixed coupon bond, even if the bond is less volatile in market price. 

 

of course, to be clear I'm 80% risk assets. I'm just saying it's consistent that if you think stocks need to be at lower multiples to own bonds at similar yields to earnings yields of stocks. 

[dealraker]

Very likely because I've seen so many cycles from 20% interest rates down to basically zero, inflation from way up in the double digits to whatever it was when lower, I'm far-far-far away from the fears that seem to be geared toward "folks" that just don't know enough.  I personally think for most investors, including those thinking they are smart and thus able to maneuvre around thus escaping the downs, that the biggest risk is not being a participant.

 

Again, I know endless wealthy people - to some degree I was incredibly lucky to have lost my parents early and thus forced to get out and about and I had endless connections from both family in political and business positions and ownership.  For me I summarize it this way:

 

People who are in business and who avoid crappy endeavors, trendy/silly things...people diversified (to some degree) who stay owners of business?  They have ALL the money.

 

People who sell, people who go to cash or skirt in and out of endeavors, and especially older people who go to cash, tax free bonds, or whatever they do to distance themselves from operating businesses?  Their family money simply goes away...and NOT slowly.  Inflation and spending send it flying away to others.

 

And it really doesn't get much more complex than that--- given a lot of time.  And most of you here have a lot of time left.  The more direct your connection is to successful businesses the more money you will have over time.

 

My biggest fear is the big boys take away all the good businesses while little people chant "I won" by selling out (at what they thought was great life altering price).  

 

 

Edited February 8, 2023 by dealraker

[Gregmal]

7 minutes ago, dealraker said:

My biggest fear is the big boys take away all the good businesses while little people chant "I won" by selling out (at what they thought was great life altering price).  

 

This is quite possibly the most life altering perspective one can have, and it requires a great deal of internalizing the investment process. When I started out and had little money, every fluctuation was a big deal. Over time you can’t help but notice how many, most, almost all….of the well timed sales look foolish if given enough time.  The long game is just as simple as Buffett has shown it to be…accumulating. Not churning, flipping, etc. 

[StevieV]

11 minutes ago, dealraker said:

People who are in business and who avoid crappy endeavors, trendy/silly things...people diversified (to some degree) who stay owners of business?  They have ALL the money.

 

Can you elaborate?  Interested in what businesses, how started, anything else of note?

 

[TwoCitiesCapital]

2 hours ago, Intelligent_Investor said:

This is true if you are worried about market price, but not if you are a value investor worried about the intrinsic value. The stock with a 5% earnings yield growing at 6% will throw off more cash than the bond will, even if the market price is more sensitive, and thus will have a higher intrinsic value than a 5% fixed coupon bond, even if the bond is less volatile in market price. 

 

See, but that's the problem. Those companies AREN'T growing at the moment. 

 

Earnings are down 5% YoY across the S&P 500 companies. The big tech darlings that could do no wrong with secular growth tailwinda? Also contracting.

 

And this is only the beginning IMO seeing as it takes MONTHS for Fed actions to flow through the economy and corporate margins are a historically reverting series. 

 

Yes, if you have a 30-year time frame, those companies will likely catch back up and exceed bonds. But over the next 3-5 years? I think short- term bonds will come out ahead as measured from the peak at the end of 2021. Now that intermediate bonds have corrected and provide some value, I'll take them outperforming equities over the next 3-4 years. 

 

Cash and short-term bonds are some of the BEST inflation hedges because they have the least duration. That's exactly why these asset classes outperformed in 2022 on a nominal basis. Oil/Gold/TIPS can work on persistent and long-term inflation, but in the short term it's cash and short bonds. 

 

That inflationary correction/repricing may not be entirely over, but you can probably start wading out on the risk spectrum now. But wading out on the risk spectrum means buying agency mortgages, short duration corporates, and intermediate treasuries. 4-7% returns without taking equity risk or too much duration. 

 

Inflation hasn't YET been slayed, economic indicators are screaming fragility, and equities have rarely been attractive in environments of contracting PMIs/Leading indicators/corporate earnings.  Sure, there are pockets of attractiveness in equities. I own Fairfax. I own commodity producers. I own EM and etc. 

 

But cheap has gotten cheaper in basically every pull back I've ever witnessed. Fairfax going up last year is one of the few individual exceptions I can think of. But they also cratered in 2020 despite sitting on tons of cash and an opportunity rich environment so there's no guarantees that continues. 

 

Having dry, liquid powder in an environment characterized by such fragility is rarely a bad thing. Especially if you aren't sacrificing returns by sitting in 0% return products. 

 

 

 

Edited February 7, 2023 by TwoCitiesCapital

[dealraker]

2 hours ago, StevieV said:

 

Can you elaborate?  Interested in what businesses, how started, anything else of note?

 

StevieV I was referring to either privately owned, I am a part owner of a builders suppy and a millwork business, or public as I own about 250 stocks- although I'm 80 percent weighted in just two stocks.  There is no difference as to staying connected/attached to the things that create wealth in capitalism.

 

That said, I do absolutely know for certain that Walter Schloss types and right here Parsad can be successful buying/selling shares of stock.  This model is an easier win in tax free accounts of course.  I'm just not programmed or capable to do it and as of yet in my life I personally know no one who has gotten wealthy this way...and I know a LOT of wealthy people.

 

 

Edited February 7, 2023 by dealraker

[Spekulatius]

It depends on the business. Almost all small  business are crappy ones where basically the owner just owns a job. My dad was one of them- he passed away last year and basically died broke.

 

Many of his fellow entrepreneurs or land owners went to work for other people over time, as their own business failed. The local economy has a lot to do with it, if you are in a demographically challenged area for example.  Survivorship bias is huge with small business, much more do than with mid cap or large cap stocks,

[StevieV]

9 minutes ago, Spekulatius said:

It depends on the business. Almost all small  business are crappy ones where basically the owner just owns a job. My dad was one of them- he passed away last year and basically died broke.

 

Many of his fellow entrepreneurs or land owners went to work for other people over time, as their own business failed. The local economy has a lot to do with it, if you are in a demographically challenged area for example.  Survivorship bias is huge with small business, much more do than with mid cap or large cap stocks,

 

What does the board recommend for young folks then?

[Gregmal]

25 minutes ago, StevieV said:

 

What does the board recommend for young folks then?

Work hard and do whatever makes you the most obscene amount of money until you have somewhat of a base….then get aspirational and make lifestyle choices. 

[Spekulatius]

9 minutes ago, Gregmal said:

Work hard and do whatever makes you the most obscene amount of money until you have somewhat of a base….then get aspirational and make lifestyle choices. 

Yes, and work smart. If something does not pan out, switch careers and/or move elsewhere and try again.

[thepupil]

This discussion bring up the idea of time horizon. In truth, I don’t know my time horizon. 7-10 years ago, I’d have told you it was 5 decades, but then I plowed a large portion of my accessible net worth into a down payment on a house a few year a ago . So that money was thought of as 50 year money but was actually 5 year money. Maybe I should have invested more conservatively (though that would have been a worse result). Right now if I knew I wanted to work 3 more decades, I’d know my time horizon was super long. If I want to work 5 more years or 3 and start something entrepreneurial, my time horizon is not nearly as long. I think once one reaches a certain level of wealth / income from other sources, one doesn’t really care about drawdowns or volatility, but before then, volatility matters. Before you have “f you” money, before you know what path you’ll take, if there’s a chance you want to access your money for whatever reason before “many years from now”, you care about drawdowns and your time horizon is probably not as long as you think. 
 

I don’t have super strong or well

formed views here but I don’t think it’s as simple as “young = long time horizon” 

 

also when you’re young and have little money, new money is huge percentage of portfolio. Once you have a little scratch, you can’t as easily correct mistakes / invest into drawdowns with new money. $100k/year of savings is more meaningful to a $100k portfolio vs a $1mm or $2mm, so I think drawdown sensitivity increases as you get wealthier, then decreases again if you have so much that you can live well at very low withdrawal rate.

Edited February 8, 2023 by thepupil

[Jaygo]

1 hour ago, StevieV said:

 

What does the board recommend for young folks then?

 

Stevie find something that you are good at, enjoy somewhat and the market readily pays for. I see too many bright people go into mostly intellectual and useless things. Go learn something we all need and there is a shortage of and read some books if your into philosophy or history.

 

I do ok in my business and there are tax benefits but when I see the tik toks of silicon valley gigs and they make the same money i do or more it makes me feel like a fool for going down the road I did.

 

I generally bust my ass, have a relatively dangerous job and work a lot of nights plus a couple hundred k in capital expended. If i knew how to code i could do as well or better plus get a massage after work, id take the switch but I dont code however i'm good with my hands and ok with my mind so i went the route of small business and have built a bit of a nest egg.

 

Without knowing you I dont think spouting advice is appropriate or fair to you other than the top sentence. 

 

 

 

 

 

 

[Jaygo]

5 hours ago, dealraker said:

People who are in business and who avoid crappy endeavors, trendy/silly things...people diversified (to some degree) who stay owners of business?  They have ALL the money.

 

People who sell, people who go to cash or skirt in and out of endeavors, and especially older people who go to cash, tax free bonds, or whatever they do to distance themselves from operating businesses?  They family money simply goes away...and NOT slowly.  Inflation and spending send it flying away to others.

 

And it really doesn't get much more complex than that--- given a lot of time.  And most of you here have a lot of time left.  The more direct your connection is to successful businesses the more money you will have over time.

These three paragraphs need to be printed out and recited over and over as gospel.

 

I suffer from the need to do something and I understand that I am suffering for it financially. Aside from some huge percentage gainers on very small stakes (Thank you shopify, cell therapeutics and spartan energy)  my best investment was the original 120 shares of brk.b somewhere around 105. Its the only thing ive never traded out of so the only investment on my statement that shows any real success. 

 

"the more direct your connection is to a successful business the more money you will have over time" Dealraker

 

This is so simple that most  people will overthink it and not benefit from the wisdom. thanks Dealraker 

 

 

 

 

[Dinar]

1 hour ago, thepupil said:

This discussion bring up the idea of time horizon. In truth, I don’t know my time horizon. 7-10 years ago, I’d have told you it was 5 decades, but then I plowed a large portion of my accessible net worth into a down payment on a house a few year a ago . So that money was thought of as 50 year money but was actually 5 year money. Maybe I should have invested more conservatively (though that would have been a worse result). Right now if I knew I wanted to work 3 more decades, I’d know my time horizon was super long. If I want to work 5 more years or 3 and start something entrepreneurial, my time horizon is not nearly as long. I think once one reaches a certain level of wealth / income from other sources, one doesn’t really care about drawdowns or volatility, but before then, volatility matters. Before you have “f you” money, before you know what path you’ll take, if there’s a chance you want to access your money for whatever reason before “many years from now”, you care about drawdowns and your time horizon is probably not as long as you think. 
 

I don’t have super strong or well

formed views here but I don’t think it’s as simple as “young = long time horizon” 

 

also when you’re young and have little money, new money is huge percentage of portfolio. Once you have a little scratch, you can’t as easily correct mistakes / invest into drawdowns with new money. $100k/year of savings is more meaningful to a $100k portfolio vs a $1mm or $2mm, so I think drawdown sensitivity increases as you get wealthier, then decreases again if you have so much that you can live well at very low withdrawal rate.

I thought I had F you money, but then I got married....

[nwoodman]

56 minutes ago, Jaygo said:

 my best investment was the original 120 shares of brk.b somewhere around 105. Its the only thing ive never traded out of so the only investment on my statement that shows any real success. 

 

If you understand why this worked - valuation? quality of the company? timeframe? then you are well on your way.  Not saying Berkshire is the (only) answer, but it provides an excellent basis for handicapping business prospects, recognising the beauty of long-term compounding and management integrity.  10 years or so to formulate a sensible framework is perfectly acceptable if you then use it for another 30-40 years, it will work out well.   

 

I understand the desire to jump around but you need to resist the urge to pay taxes.  I sometimes wonder if the lure of the trade in the  "tax-free account"  is like the call of the sirens for patience. One of the advantages you have as a small retail investor is timeframe i.e. patience. 

 

@dealraker is spot on and I wish someone had said that to me in my early 20's, very nicely put.

Edited February 8, 2023 by nwoodman

[Masterofnone]

Dealraker has been consistent in his message. He was around 25 years ago on the very first active stock message board-Yahoo. He pointed out that Berkshire fit the bill as a company worth partnering with. You don't need too many good ideas with this framework and as Buffett has often said, if you have a new idea you should always ask "is it better than the other ideas you have acted upon?" I first bought Berkshire at what was a terrible entry point in 1998. Took five years for the stock to catch back up to the very dear price I first paid- but even those ill-timed shares have done just fine over time. If you partner with the right people, time is really all you need.

 

And when you really get to know your partners, you can just confidently add when folks will sell more to you cheap. After that first purchase with lots of reading and help from folks like Dealraker, I learned better when to add and just rode that single pony (largely) right on into retirement.

[Viking]

10 hours ago, dealraker said:

Very likely because I've seen so many cycles from 20% interest rates down to basically zero, inflation from way up in the double digits to whatever it was when lower, I'm far-far-far away from the fears that seem to be geared toward "folks" that just don't know enough.  I personally think for most investors, including those thinking they are smart and thus able to maneuvre around thus escaping the downs, that the biggest risk is not being a participant.

 

Again, I know endless wealthy people - to some degree I was incredibly lucky to have lost my parents early and thus forced to get out and about and I had endless connections from both family in political and business positions and ownership.  For me I summarize it this way:

 

People who are in business and who avoid crappy endeavors, trendy/silly things...people diversified (to some degree) who stay owners of business?  They have ALL the money.

 

People who sell, people who go to cash or skirt in and out of endeavors, and especially older people who go to cash, tax free bonds, or whatever they do to distance themselves from operating businesses?  They family money simply goes away...and NOT slowly.  Inflation and spending send it flying away to others.

 

And it really doesn't get much more complex than that--- given a lot of time.  And most of you here have a lot of time left.  The more direct your connection is to successful businesses the more money you will have over time.

 

My biggest fear is the big boys take away all the good businesses while little people chant "I won" by selling out (at what they thought was great life altering price).  

@dealraker i love the comments… please keep them coming. Great wisdom. As i get older i am starting to question if Buffett’s and Lynch’s wisdom - that an average person can learn to successfully invest on their own - is actually realistic/possible (for most people). I just see so few people who are actually able to figure it out over time. Worse, i know a fair number of people who have tried and failed… some miserably. None of my family members have been able to figure it out. Why not? I am wondering if the vast majority of people simply do not have the required emotional make-up to be successful self-directed investors. So few people get rich the way Warren Buffett did (financial markets) - perhaps its not as easy as it looks.

—————

By ‘successfully invest’ i mean they are able to achieve results (over decades) that are better than the relevant market benchmark. 

Edited February 8, 2023 by Viking