Economics

[blakehampton]

I have a question for some of you more experienced investors.

 

Does the current economic situation particularly stand out to you, or is a mass feeling of uncertainty simply inevitable when it comes to markets?

 

The main points that stick out to me are the wide variance in interest rates (in a short period of time I might add) alongside the high prices of seemingly every asset class. I'm a relatively new investor, having only been doing this for about three years now, so I'm curious as to what you all think.

[Viking]

@blakehampton If you haven’t, I would read Chapter 8 of the Intelligent Investor.

“Does the current economic situation particularly stand out to you, or is a mass feeling of uncertainty simply inevitable when it comes to markets?”
 

Volatility is your friend. Especially if you are young. I think people in their 40’s are young (in investing years). If you are young you should pray for armageddon. Falling stock markets are a gift. The bigger the decline the better. You buy more with the same amount of dollars. When you are really old, that is when you want strong equity markets. 
 

Of course you are not going to be able to time the bottom. My point is, on big declines, find money (bring forward contributions - borrow short term from family etc). Buffett suggests you should buy stocks like you buy groceries - lower prices are better.
 

Training your brain is one of the keys to successful investing. Watch CNBC less. Read @dealraker posts about buy and hold. 
 

http://csinvesting.org/wp-content/uploads/2012/07/mr-market-by-ben-graham_final.pdf

[no_free_lunch]

43 minutes ago, blakehampton said:

I have a question for some of you more experienced investors.

 

Does the current economic situation particularly stand out to you, or is a mass feeling of uncertainty simply inevitable when it comes to markets?

 

The main points that stick out to me are the wide variance in interest rates (in a short period of time I might add) alongside the high prices of seemingly every asset class. I'm a relatively new investor, having only been doing this for about three years now, so I'm curious as to what you all think.

The current sitiation does not stand out to me.  It has been confusing and uncertain from day one.   There were maybe a few times during crashes where I saw sufficient margin of safety that I wasn't stressed but otherwise I've never known what would happen next and it always feels I'm paying top dollar. 

 

With interest rates reverting the current period feels actually a lot saner than the past decade.  At least there's a bond alternative. 

 

Edited September 18, 2023 by no_free_lunch

[dwy000]

1 hour ago, blakehampton said:

I have a question for some of you more experienced investors.

 

Does the current economic situation particularly stand out to you, or is a mass feeling of uncertainty simply inevitable when it comes to markets?

 

The main points that stick out to me are the wide variance in interest rates (in a short period of time I might add) alongside the high prices of seemingly every asset class. I'm a relatively new investor, having only been doing this for about three years now, so I'm curious as to what you all think.

Take a deep breath - this is normal.  I can't remember a time when various indicators weren't out of whack or pointing to problems.  The minute you feel certainty and lack of worry is the time to be very, very afraid.   If things are going great you worry about the inevitable downturn.  If things are going poorly you worry it will continue indefinitely.  There's always a doomsayer predicting (very rationally) that it's all going to crash down and the next depression is almost upon us.  There's a reason Buffett and Munger and most legendary investors ignore what the markets and economy are doing and focus on individual companies.  

[Cigarbutt]

Here's a summarized version with slightly modified text from Mr. Buffett's partnership letter released towards the end of 1969.

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For the first time in my investment lifetime. I now believe there is little choice for the average investor between professionally managed money in stocks and passive investment in bonds. If correct. this view has important implications. Let me briefly (and in somewhat oversimplified form) set out the situation as I see it...vs taxation vs expectations...

Purely passive investment in tax-free bonds will now bring about 6-1/2%. This yield can be achieved with excellent quality and locked up for just about any period for which the investor wishes to contract...

The ten year expectation for corporate stocks as a group is probably not better than 9% overall. say 3% dividends and 6% gain in value. I would doubt that Gross National Product grows more than 6% per annum - I don't believe corporate profits are likely to grow significantly as a percentage of GNP - and if earnings multipliers don't change (and with these assumptions and present interest rates they shouldn't) the aggregate valuation of American corporate enterprise should not grow at a long-term compounded rate above 6% per annum. This typical experience in stocks might produce (for the taxpayer described earlier) 1-3/4% after tax from dividends and 4-3/4% after tax from capital gain, for a total after-tax return of about 6-1/2%. The pre-tax mix between dividends and capital gains might be more like 4% and 5%, giving a slightly lower aftertax result. This is not far from historical experience and overall, I believe future tax rules on capital gains are likely to be stiffer than in the past.

Finally, probably half the money invested in stocks over the next decade will be professionally managed. Thus, by definition virtually, the total investor experience with professionally managed money will be average results (or 6-1/2% after tax if my assumptions above are correct). My judgment would be that less than 10% of professionally managed money (which might imply an average of $40 billion just for this superior segment) handled consistently for the decade would average 2 points per annum over group expectancy. So-called "aggressively run" money is unlikely to do significantly better than the general run of professionally managed money...

The rather startling conclusion is that under today's historically unusual conditions, passive investment in tax-free bonds is likely to be fully the equivalent of expectations from professionally managed money in stocks, and only modestly inferior to extremely well-managed equity money.

A word about inflation - it has very little to do with the above calculation except that it enters into the 6% assumed growth rate in GNP and contributes to the causes producing 6-1/2% on tax-free bonds. If stocks should produce 8% after tax and bonds 4%, stocks are better to own than bonds, regardless of whether prices go up, down or sidewise. The converse is true if bonds produce 6-1/2% after tax. and stocks 6%. The simple truth, of course, is that the best expectable after-tax rate of return makes the most sense - given a rising, declining or stable dollar. All of the above should be viewed with all the suspicion properly accorded to assessments of the future. It does seem to me to be the most realistic evaluation of what is always an uncertain future - I present it with no great feeling regarding its approximate accuracy, but only so you will know what I think at this time.

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Here's a photo of the BRK insurance subs' balance sheet (1971) showing the investment allocation:

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Of course, in the decade following 1969, the future revealed itself in a relatively unexpected way and Mr. Buffett adjusted the allocation accordingly, at a time when bonds became an institutional favorite.

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As of now, the Aaa Corporate Bond Yield is at 4.95% and Treasury yields look like this:

As for expected general stock index return for the next 10 years or so, who knows but it's reasonable to suggest that a reasonable investor may be facing some alternatives and then is there still room for the prudent investor ("prudent" in the sense of the prudent investor rule)?

As for the aggressive investor, the markets need to reflect a wide variety of perspectives including optimistic ones and that's great again.

Given a certain perspective about prospective returns, it's possible that the future will be different than the past but an optimistic stance requires, to some degree, to think like Pangloss:

"It is demonstrable that things cannot be otherwise than as they are; for all being created for an end, all is necessarily for the best end."

[Spekulatius]

The economic situation is always confusing. What we have right now does not strike me as unusual. I think what is unusual are the higher interest rate, but only if you don’t look back further than 20 years.

[ValueArb]

If you are considering an investment that almost certainly requires you predict future interest ratesm or oil prices or any similar macro price movement, I have six words for you.

 

Index funds and dollar cost averaging.

[mcliu]

I think Economics is difficult to predict like the weather. That's why it's better to be conservative and carry an umbrella if it looks like it'll rain.