Brooklyn Investor latest

[Libs]

https://brklyninvestor.com/2024/11/06/cash/

[73 Reds]

11 minutes ago, Libs said:

https://brklyninvestor.com/2024/11/06/cash/

I think folks read way more into Berkshire's cash holdings than necessary.  If/when Buffett has something better to invest in, does anyone doubt that he will?  Otherwise, it is pretty clear that all potential acquisitions are currently priced too high.  

[dwy000]

50 minutes ago, 73 Reds said:

I think folks read way more into Berkshire's cash holdings than necessary.  If/when Buffett has something better to invest in, does anyone doubt that he will?  Otherwise, it is pretty clear that all potential acquisitions are currently priced too high.  

Exactly. His point that Apple was so successful an investment that it threw off everything else is very accurate.  So lightening up on it gets headlines as well as creates a cash pile that draws more headlines.  Not sure we should read more into it than he's reaping gains from one of his most successful investments ever. 

[thowed]

Bill @wabuffo did something similar recently & referenced brklyn, but I can't remember where - Twitter?  Don't know if that prompted this?!

[John Hjorth]

1 hour ago, 73 Reds said:

I think folks read way more into Berkshire's cash holdings than necessary.  If/when Buffett has something better to invest in, does anyone doubt that he will?  Otherwise, it is pretty clear that all potential acquisitions are currently priced too high.  

 

Yes, @73 Reds,

 

Start doing the following :

 

1.  Deduct from the 'cash' USD 40 billion as liquidity reserve for the whole insurance group never to get in any kind of trouble,

2. Not all the 'cash' is actually cash, it's a combination of cash and T-Bills, the T-Bills actually generating 'something' by now, where 'something' > 'nothing' 'earlier',

3. One could argue, that of the 'cash', a part of it, according to latest float information from Berkshire stated to USD 174 billion EOP 2024Q3, is financed by float,

 

and, if one is still whining about the Berkshire cash,

 

4. The Berkshire cash is what provides you staying power in this non-zero-sum game, if financial armageddon resurfaces on our planet, or if you make serious mistakes with - for you - serious money - in other investments.

 

- - - o 0 o - - -

 

That's actually not that bad, at all.

[VersaillesinNY]

https://brklyninvestor.com/2025/02/11/broken-markets/

[MungerWunger]

1 hour ago, VersaillesinNY said:

https://brklyninvestor.com/2025/02/11/broken-markets/

thanks for sharing!

[dwy000]

10 minutes ago, MungerWunger said:

thanks for sharing!

I wonder if the reference to the friend who got rich by never, ever selling is about Dealraker. 

[DooDiligence]

“You can’t complain that the market is broken just because you don’t agree with it.”

“Maybe this whole indexing thing is a self-reinforcing cycle of the sort Soros talks about. The more active managers underperform, the more investors rush into index funds, and the more investors rush into index funds, the higher the index goes, and the more active investors underperform.”

 

“Of course, this can’t go on forever, but like any big cycle, it is very hard to call the turn. It may take a big bear market to wash out all the passive investors first, and maybe when investing is no longer viewed as the right thing to do, the next cycle will start with active managers outperforming the indices (like Buffett in the 50s). Maybe putting on a pair trade like this is a good hedge against ‘broken’ markets!”

 

Hmmm…

 

[Eldad]

Fed Model. 10 year is 4.609% right now. 21.7 PE. Add in an equity premium and let’s call it 20. S&P current PE of 30.26. 50% overvalued.

 

Most of the stuff on there looks like he is writing a summary of the thoughts of this board over the last year. 

[dealraker]

10 hours ago, DooDiligence said:

“You can’t complain that the market is broken just because you don’t agree with it.”

“Maybe this whole indexing thing is a self-reinforcing cycle of the sort Soros talks about. The more active managers underperform, the more investors rush into index funds, and the more investors rush into index funds, the higher the index goes, and the more active investors underperform.”

 

“Of course, this can’t go on forever, but like any big cycle, it is very hard to call the turn. It may take a big bear market to wash out all the passive investors first, and maybe when investing is no longer viewed as the right thing to do, the next cycle will start with active managers outperforming the indices (like Buffett in the 50s). Maybe putting on a pair trade like this is a good hedge against ‘broken’ markets!”

 

Hmmm…

 

I often think that when the cycle of US exceptionalism, read rising stock prices, ends that ex-US indexing is going to give some very predictable relative outperformance.  Maybe not a great return straight out, but relative a "you'll have twice the money" with the swap.  

[DooDiligence]

30 minutes ago, dealraker said:

I often think that when the cycle of US exceptionalism, read rising stock prices, ends that ex-US indexing is going to give some very predictable relative outperformance.  Maybe not a great return straight out, but relative a "you'll have twice the money" with the swap.  

I’m pretty concentrated right now (in for the long haul). Debt free with plenty of cash to live. I’m ok sitting on my hands, and would put the rest of my investable cash into VOO on a big pull back, and call it a day.

[73 Reds]

15 hours ago, VersaillesinNY said:

https://brklyninvestor.com/2025/02/11/broken-markets/

The incessant focus on whether stocks are expensive is meaningless to anyone who simply makes periodic contributions to an index fund like VOO, i.e., most folks with a 401k.  Does the amount of time spent evaluating every minute change or nuance to valuations have any bearing on returns?  Broad based equity indices never go to -0- and eventually (always) make new highs.  I've never understood why high schools don't teach kids a mandatory tutorial on compounding.  They'd quickly realize that once they start earning a living, contributing $XXX/paycheck into an index fund like SPY over the course of a working lifetime will generate $X millions when they retire, without a single worry whether stocks are cheap or expensive at any given time.  

[Castanza]

1 hour ago, 73 Reds said:

The incessant focus on whether stocks are expensive is meaningless to anyone who simply makes periodic contributions to an index fund like VOO, i.e., most folks with a 401k.  Does the amount of time spent evaluating every minute change or nuance to valuations have any bearing on returns?  Broad based equity indices never go to -0- and eventually (always) make new highs.  I've never understood why high schools don't teach kids a mandatory tutorial on compounding.  They'd quickly realize that once they start earning a living, contributing $XXX/paycheck into an index fund like SPY over the course of a working lifetime will generate $X millions when they retire, without a single worry whether stocks are cheap or expensive at any given time.  

 

Exactly, there is no point discussing valuations of Index funds if you aren't going to discuss how they are pitched to the ones making contributions. 

 

All people know...."I contribute X to my 401k and my employer matches X amount." The conversation pretty much stops there for 99% of people. Most people probably don't even check their allocation and just roll with whatever Target date fund they get put in.  

[rogermunibond]

Flows before pros.

[villainx]

2 hours ago, DooDiligence said:

on a big pull back

 

What would you say is big?  Or how much down?

 

 

[DooDiligence]

9 hours ago, villainx said:

 

What would you say is big?  Or how much down?

 

 

IDK, maybe when CoBFers start crowing about how value is back in vogue? Probably ought to just start DCAing in now.

[Spekulatius]

9 hours ago, villainx said:

 

What would you say is big?  Or how much down?

 

 

I think you get a ~ 20% pullback every 2-3 years if past history is any guide.

[TwoCitiesCapital]

11 minutes ago, Spekulatius said:

I think you get a ~ 20% pullback every 2-3 years if past history is any guide.

 

So we're right on schedule for another

[Spekulatius]

On 2/13/2025 at 9:19 AM, 73 Reds said:

The incessant focus on whether stocks are expensive is meaningless to anyone who simply makes periodic contributions to an index fund like VOO, i.e., most folks with a 401k.  Does the amount of time spent evaluating every minute change or nuance to valuations have any bearing on returns?  Broad based equity indices never go to -0- and eventually (always) make new highs.  I've never understood why high schools don't teach kids a mandatory tutorial on compounding.  They'd quickly realize that once they start earning a living, contributing $XXX/paycheck into an index fund like SPY over the course of a working lifetime will generate $X millions when they retire, without a single worry whether stocks are cheap or expensive at any given time.  

It is very relevant if you are closer to retirement though , which is also the time when most people actually have a lot of

money invested.

[73 Reds]

8 minutes ago, Spekulatius said:

It is very relevant if you are closer to retirement though , which is also the time when most people actually have a lot of

money invested.

Sure, then you reallocate in order to account for your own needs.  But, like many retired folks if you don't plan on dying soon after retirement, reallocation need not be anything too drastic.

Edited Friday at 02:49 PM by 73 Reds
word

[Spekulatius]

1 minute ago, 73 Reds said:

Sure, then you reallocate in order to account for your own needs.  But, like many retired folks if you don't plan on dying soon after retirement, reallocation need not be anything too drastic.

My simple take is that you need enough cash to survive a bear market without drawing down equities. About 2-3 years of expenses in cash or cash equivalents ( high grade bonds/ treasuries) should do it.

[73 Reds]

Just now, Spekulatius said:

My simple take is that you need enough cash to survive a bear market without drawing down equities. About 2-3 years of expenses in cash or cash equivalents ( high grade bonds/ treasuries) should do it.

Yeah, I agree with that and not only for retirees.  Younger folks should also maintain cash reserves (not necessarily that much) so they don't feel the need to sell otherwise solid equities at the wrong time.

[thepupil]

 

On 2/13/2025 at 9:19 AM, 73 Reds said:

The incessant focus on whether stocks are expensive is meaningless to anyone who simply makes periodic contributions to an index fund like VOO, i.e., most folks with a 401k.  Does the amount of time spent evaluating every minute change or nuance to valuations have any bearing on returns?  Broad based equity indices never go to -0- and eventually (always) make new highs.  I've never understood why high schools don't teach kids a mandatory tutorial on compounding.  They'd quickly realize that once they start earning a living, contributing $XXX/paycheck into an index fund like SPY over the course of a working lifetime will generate $X millions when they retire, without a single worry whether stocks are cheap or expensive at any given time.  

 

I think the answer to this is "probably". Valuations very much probably have an impact on long term returns based on history. But the long term is truly a long time. 10-20+ years. and until very recently equities offered very substantial premiums to risk free alternatives. In a tax free account, I think TIPs are starting to get a little more competitive but still not there. the long term case for stocks remains, but feels less strong given valuations.

 

I don't know what anyone should really do with that though. young people should buy risk assets, mostly, and old people should acknowledge SORR / mark to market / volatility and maybe not be 100% US equities unless they ahve a like 2-3% WR....beyond those truisms, doesn't feel like anyone should do anything differently w/ high valuations versus low versus medium. I for one thought do find it harder to index w/ US index at these levels...but I own enough US stocks/risk assets to be fine with or without the 401k portion of my NW (where I must pick some kind of index) in US stocks. it's in EM / bonds right now. my wife's is in a target fund which owns the whole world / mostly equities. 

 

 small sample size. this only uses 1985 - 2024 but would suggest a strong relationship. 

 

 

 

this uses 1926 - 2017 and finds that valuations potentially do matter and have a degree of predictive power, but there is wide variance and predictions should not be single-point, but rather directional. 

 

https://www.kitces.com/blog/us-equity-valuations-investment-cape-10-diversification-stocks-sp-500/

 

Quote

For example:

• When the CAPE 10 was below 9.6, 10-year-forward real returns averaged 9.8%, well above the historical average of 7.4%. The best 10-year-forward real return was 17.2%. The worst 10-year-forward real return was still a pretty good 4.2%. The range between the best and worst outcomes was a 13.0-percentage-point difference in real returns.
• When the CAPE 10 was between 16.1 and 17.8 (about its long-term average of 16.9), the 10-year-forward real return averaged 5.4%. The best and worst 10-year-forward real returns were 14.6% and -3.8%, respectively. The range between the best and worst outcomes was an 18.4 percentage point difference in real returns.
• When the CAPE 10 was above 26.4, the real return over the following 10 years averaged just 0.9% – only half a percentage point above the long-term real return on the risk-free benchmark, 1-month Treasury bills. The best 10-year-forward real return was 5.8%, and the worst 10-year-forward real return was -6.1%. The range between the best and worst outcomes was a difference of 11.9 percentage points in real returns.

As tests of robustness, Shiller and Jivraj also found that the CAPE 10 had explanatory power for both sector and individual stock returns.

What can we learn from the preceding data? First, starting valuations clearly matter, and they matter a lot. Higher starting values mean that not only are future expected returns lower, but the best outcomes are lower and the worst outcomes are worse. The reverse is true as well – lower starting values mean that not only are future expected returns higher, but the best outcomes are higher and the worst outcomes are less poor.

However, it's also extremely important to understand that a wide dispersion of potential outcomes, for which we must prepare when developing an investment plan, still exists – high (low) starting valuations don't necessarily result in poor (good) outcomes. In other words, investors should not think of a forecast as a single-point estimate, but only as the mean of a wide potential dispersion of returns. The main reason for the wide dispersion is that risk premiums vary over time (if they were not, there would be no risk in investing!). It is the time-varying risk premium, what John Bogle called the "speculative return" that leads to the wide dispersion in outcomes.

The fact that a wide dispersion of returns occurs around the mean forecast is why a Monte Carlo simulation is a valuable planning tool. While the input includes an estimated return, it also recognizes the risks of that mean forecast not being achieved – which is why volatility is another input. Because most simulators allow you to examine thousands of alternative universes, they enable you to test the durability of your plan – you can see the odds of success (such as not running out of money or leaving an estate of a certain size) across various asset allocations and spending rates.

The time-varying risk premium is also why an investment plan should include a plan B, a contingency plan that lists the actions to take if financial assets were to drop below a predetermined level. Actions might include remaining in (or returning to) the workforce, reducing current spending, reducing the financial goal, selling a home, and/or moving to a location with a lower cost of living.

The bottom line is that even though the predictive power of CAPE 10 used to estimate real returns of the S&P 500 has a good deal of variability, it is a valuable tool to build plans. However, advisors must not make the mistake of overestimating the forecasting power of the CAPE 10 metric and treating that forecast as what will happen. Instead, it should be used to help determine the need to take risks and then, with the understanding that risk premiums are time-varying and a wide dispersion of potential outcomes is likely, to help build a plan B.

Another mistake investors make when criticizing the use of the CAPE 10 is that it doesn't work as a timing tool. You would think Jeremy Grantham, the chief investment strategist of GMO, would have learned that, as he has been predicting a severe bear market as far back as 2013.

 

 

Edited Friday at 03:03 PM by thepupil

[73 Reds]

3 minutes ago, thepupil said:

 

 

I think the answer to this is "probably". Valuations very much probably have an impact on long term returns based on history. But the long term is truly a long time. 10-20+ years. and until very recently equities offered very substantial premiums to risk free alternatives. In a tax free account, I think TIPs are starting to get a little more competitive but still not there. the long term case for stocks remains, but feels less strong given valuations.

 

I don't know what anyone should really do with that though. young people should buy risk assets, mostly, and old people should acknowledge SORR / mark to market / volatility and maybe not be 100% US equities unless they ahve a like 2-3% WR....beyond those truisms, doesn't feel like anyone should do anything differently w/ high valuations versus low versus medium. I for one thought do find it harder to index w/ US index at these levels...but I own enough US stocks/risk assets to be fine with or without the 401k portion of my NW (where I must pick some kind of index) in US stocks. it's in EM / bonds right now. my wife's is in a target fund which owns the whole world / mostly equities. 

 

 small sample size. this only uses 1985 - 2024 but would suggest a strong relationship. 

 

 

 

this uses 1926 - 2017 and finds that valuations potentially do matter and have a degree of predictive power, but there is wide variance and predictions should not be single-point, but rather directional. 

 

https://www.kitces.com/blog/us-equity-valuations-investment-cape-10-diversification-stocks-sp-500/

 

 

 

The example of the unluckiest investor who DCA'd the exact same amount each year into SPY/VOO at the exact yearly high price always comes to mind.  This "unlucky" investor still did better than most.