Are we in a bubble?

[NnnnotSoSmart]

3 minutes ago, thepupil said:

Funny part is he wrote that in 1998..

Correct. Original paper was 1995.

 

 

[Parsad]

2 hours ago, Intelligent_Investor said:

The problem with PE is that it cannot accurately value something with compounding growth. It is basic math meant to value something with zero growth and a bondlike payout

 

Well the other side is also, what if AI increases margins at many companies.  If AI improves Costco or Walmart's operating margins through more efficient distribution, inventory management, reduced staffing, better site selection, etc...than can wider P/E's be justifiable when you recalculate intrinsic value.  That's part of the reason why Google and Amazon continue to have high P/E's because their businesses continue to evolve and become more efficient.  But what if AI can do that for the broad S&P500 or more?  Cheers!

[Parsad]

1 hour ago, Gregmal said:

All the above. Market is not static. Tailwinds vs headwinds. Growth opportunities. Track record of management. Potential competition. I'd probably buy something with a proven track record, clean balance sheet, that has multi/year macro tailwinds, high margins, embedded growth opportunities, and capable operators without spending more than a few minutes on the PE. 

 

But yes, there is no "formula" which is what the above seems to be implying in terms of what it's asking. 

 

Unfortunately, the risk free rate acts as gravity for market valuations.  There is no escaping it.  We may be able to justify higher valuations for long periods of time due to low interest rates, increasing operating margins from efficiencies including technology, but ultimately the risk free rate and the growth rate of any business, will pull it back to reality over time.  We just don't know when that will happen and what will be the trigger.  Cheers!

[Milu]

2 hours ago, 73 Reds said:

At the risk of getting thrown of this board, numbers are the very last thing I look at when it comes to equity investing.  Dominance, widespread need of a company's products and services, long runway, optionality and quality of management are always what I look for first.  Most often a stock has to literally jump off the page and hit me before I take any interest at all.  Numbers (ratios, etc.) are indeed very accurate in the past, usually accurate in the present but highly inaccurate as projections into the future, particularly more than a few quarters or years out.  If your investment time horizon is short, today's reported numbers and estimates mean much more because you are merely renting a stock.  Otherwise, if you're looking for a business partner, today's numbers and estimates have little to do with long term success. 

Very well said.

[Spekulatius]

1 hour ago, NnnnotSoSmart said:

Was reminded of Jeremy Siegel's  1998 "The Nifty-Fifty Revisited" paper (copy attached) where he challenged the market consensus view that the premier growth stocks of the early 1970s had been driven to completely unwarranted, bubble-induced valuations. Tracking the performance of these 50 institutional favorites from their December 1972 market peak through August 1998 (26+ years), Siegel suggested that a diversified portfolio of these stocks actually matched or slightly exceeded the long-term returns of the broader S&P 500. Ultimately, he concluded that while investors must avoid overpaying for individual "bad apples" (hard to do), a premium valuation (such as a 40+ P/E ratio) is structurally justified for a rare breed of elite, dominant companies capable of sustaining double-digit earnings growth over multiple decades.

 

Note that in Siegel's table below, a number of the tech names of the day (IBM, Xerox, Kodak, Burroughs, Polaroid, etc) had some of the worst performances after the 1972 peak, whereas consumer product and pharmaceutical stocks reside at the top of the list. 

 

Is this time different?  Probably.  

 

P.S. There's a high probability I'll be dead in 27 years. I can't afford to wait that long!

 

.

 

577058914-valuing-growth-stocks-revisiting-the-nifty-fifty.pdf 54.54 kB · 0 downloads

A ton of those have fallen off the cliff after 1998 x like all the pharmaceuticals for example.

[Gregmal]

30 minutes ago, Parsad said:

We just don't know when that will happen and what will be the trigger. 

Sure, but how do we qualify that? And even after we do, do we care? I recall a lot of gloating in aforementioned 2022, and even some rather emphatic chants of SPY 3000 as far as price targets went; certainty about how overvalued things were through 2023 and into ‘24; so I guess it helps to reframe this? If “pulling it back to reality” means 3/6/12, even 24 months of a buying opportunity, should we even care? And if that sort of shorter term hiccup isn’t what we are talking about, are we then channeling Blake and predicting something that arguably doesn’t even happen every decade+?

[Mephistopheles]

Even Buffett sold Costco way too early and bought such little, despite his best bud pumping it from the rooftops! 

[Parsad]

5 hours ago, Gregmal said:

Sure, but how do we qualify that? And even after we do, do we care? I recall a lot of gloating in aforementioned 2022, and even some rather emphatic chants of SPY 3000 as far as price targets went; certainty about how overvalued things were through 2023 and into ‘24; so I guess it helps to reframe this? If “pulling it back to reality” means 3/6/12, even 24 months of a buying opportunity, should we even care? And if that sort of shorter term hiccup isn’t what we are talking about, are we then channeling Blake and predicting something that arguably doesn’t even happen every decade+?

 

Yes.  That's why people should ignore the market and just buy stuff when they think it is cheap, and sell when they think it is expensive and they have a cheaper/better idea. 

 

Blake's idea of cheap is a once in a lifetime pricing of the stock market...if that!  Either he's going to be incredibly right one day, or spend most of his life missing out on opportunities.  But that seems to be the threshold he's beholden to and nothing is going to change that.

 

Cheers!

[Paarslaars]

Well it's not just Blake is it? Buffet seems to be making the same mistake... sitting on >200B in cash for 10 years, now up to 400B. 

[Castanza]

14 hours ago, Parsad said:

 

You have far more money in private equity, hedge funds, ETF's, underground, BTC, etc...Market Cap to GDP gives you some comparative, but it is no longer equal.

 

Also, part of the problem with fiber optics was that too much was spent developing network cables and very little was lit for the better part of the next decade.  There is an enormous shortage for high level chips and components...it's the opposite of the internet actually...demand is exceeding supply and is being used immediately.  Rare earth minerals are being restricted...chips, magnets, etc can't be made fast enough.  

 

Capex back then also didn't include huge amounts being spent on energy infrastructure and data centers that are needed to support AI computing.  The difference is building a highway, and now building the cars, fuel stations, garages, warehouses, parts manufacturers and traffic light system to run the whole thing.  Capex is naturally going to be higher.  Cheers! 

 

Exactly, the supply demand situation is completely different currently than what we saw in the dotcom bubble. We didn't have the the end point users to support the telecom buildout. Today we have a shortage of chips and compute demand with a constantly developing use case. People love to distill bubbles down to simple things and draw parallels; but at the end of the day you can't forecast the "pop". The trigger will likely be whatever event or sentiment change that causes the hyperscale's halt buildout. But even still this might not be the "system reset" everyone is hoping for. I wager we see a few small pullbacks (10-20% short duration) as compute demand outpaces and under paces supply. Meanwhile entire market segments continue to be tossed to the wayside (where I'm shopping). 

 

Volatility is a value investors "Open for Business" sign. 

[coffeecaninvestor]

6 hours ago, Paarslaars said:

Well it's not just Blake is it? Buffet seems to be making the same mistake... sitting on >200B in cash for 10 years, now up to 400B. 

But as a % of assets that’s what 30%. it’s usually in the 10-15%range . The size of the dollar figure is huge, but I just think they are mostly always invested. 
 
if shit gets crazy like it typically does in a bubble and we go up double digits per year for the next 2-3+ years (or longer) and have a 40-50% drop mostly in the bubble stocks and your not mostly invested I think you end up in a much worse place by trying to time it and stay out of the market. 

Edited May 20 by coffeecaninvestor

[LC]

7 hours ago, Paarslaars said:

Well it's not just Blake is it? Buffet seems to be making the same mistake... sitting on >200B in cash for 10 years, now up to 400B. 

 

Yeah it's a good point - the only caveats being (1) Buffett is 90+ and Blake is younger ; and (2) Berkshire has a size constraint wheras Blake (and most of us) can move the needle with anything except perhaps microcaps.

 

No excuses, though. Buffett really should have figured a way to put that money to work IMO. 

[73 Reds]

7 hours ago, Paarslaars said:

Well it's not just Blake is it? Buffet seems to be making the same mistake... sitting on >200B in cash for 10 years, now up to 400B. 

All depends on your perspective.  Buffet's stated investment objective for the last decade has been preservation of capital for existing shareholders.  His goal has been to modestly outperform the S&P 500.  The only "mistake" may be not initiating a regular divided to attract new buyers, while he recognizes that most existing shareholders don't want one.  

[SharperDingaan]

If the 'opposite' of a bubble is a crater  ..... look to the energy thread.

 

Does anyone really believe that both tankers and freighters are going to be freely clearing the SOH within the next 6 weeks. If everything works out, hail the hero's as oil sells off .... and help yourself to the o/g small caps and utilities. 

 

SD

[ajlomb1011]

https://www.investors.com/news/technology/cerebras-stock-possible-index-inclusion/
 

When indexes stop caring about rules that are in place for a reason that should be a signal as to what kind of market we’re currently in. 

[Spooky]

2 hours ago, ajlomb1011 said:

https://www.investors.com/news/technology/cerebras-stock-possible-index-inclusion/
 

When indexes stop caring about rules that are in place for a reason that should be a signal as to what kind of market we’re currently in. 

 

Yea, this stuff is troubling to me. Also some reports they want to bend the rules to allow the SpaceX / Anthropic IPOs into the S&P 500.

[Paarslaars]

3 hours ago, 73 Reds said:

All depends on your perspective.  Buffet's stated investment objective for the last decade has been preservation of capital for existing shareholders.  His goal has been to modestly outperform the S&P 500.  The only "mistake" may be not initiating a regular divided to attract new buyers, while he recognizes that most existing shareholders don't want one.  

Well he is underperforming the S&P over the past 20 years... not to bash the goat or anything.

Edited May 20 by Paarslaars

[73 Reds]

3 minutes ago, Paarslaars said:

Well he is underperforming the S&P over the past 20 years... not to bash the goat or anything.

Haven't looked but can't be by much and when you factor in taxes (dividends from SPY) BRK may still be ahead.

[Spekulatius]

13 hours ago, Parsad said:

 

Yes.  That's why people should ignore the market and just buy stuff when they think it is cheap, and sell when they think it is expensive and they have a cheaper/better idea. 

 

Blake's idea of cheap is a once in a lifetime pricing of the stock market...if that!  Either he's going to be incredibly right one day, or spend most of his life missing out on opportunities.  But that seems to be the threshold he's beholden to and nothing is going to change that.

 

Cheers!

You only need a single stock to be cheap, or a about 10 if you diversify a bit. There are ten thousands of stocks and about 20 countries that are easily accessible via IBKR. There are hundreds of stocks now trading at decade low valuations, many discussed here 

 

You just need to do some work and then the stomach to live with the volatility. The last part is the hard one.

 

Most people should avoid betting on Macro and just be Macro aware and not fall in some trap here betting ln certain Macro outcomes. Most of us have no edge here.

Edited May 20 by Spekulatius

[Red Lion]

21 hours ago, Parsad said:

 

Well the other side is also, what if AI increases margins at many companies.  If AI improves Costco or Walmart's operating margins through more efficient distribution, inventory management, reduced staffing, better site selection, etc...than can wider P/E's be justifiable when you recalculate intrinsic value.  That's part of the reason why Google and Amazon continue to have high P/E's because their businesses continue to evolve and become more efficient.  But what if AI can do that for the broad S&P500 or more?  Cheers!

 

On this subject I just read an opinion piece somewhere (maybe WSJ or Bloomberg?) which was saying small caps and emerging markets may be the best way to play the AI wave as there is the most room for margin expansion, and these tools are being made available to everyone (not just Fortune 500 companies). 

 

I found it to be an interesting thesis, this article was suggesting indexes rather than actual companies, but I'm sure there may be lots of smaller less efficient companies that can really improve their productivity and margins with AI tools. 

[Parsad]

13 hours ago, Paarslaars said:

Well it's not just Blake is it? Buffet seems to be making the same mistake... sitting on >200B in cash for 10 years, now up to 400B. 

 

There may be a once in a lifetime buyback opportunity when Buffett eventually passes.  There may even be significant undervaluation for years because investors are grimly waiting or expecting it at some point...the Buffett discount as it is termed!  The cash is there so that if that happens, Abel can buy back stock.  Buffett is the extreme pragmatist!  

 

He also doesn't want to allocate huge sums of money for Abel as he's stated.  It should be up to Abel to decide now how investments are made.  

 

Cheers!

[Parsad]

2 hours ago, Paarslaars said:

Well he is underperforming the S&P over the past 20 years... not to bash the goat or anything.

 

So was Prem, until he creamed the hell out of it, caught up and screamed past!  Smart people don't go stupid overnight.  It's usually a combination of decisions. 

 

Fortunately, Prem and Buffett usually work their way through before making too many bad combinations...in Buffett's case, forget combination, a single mistake is rare.  Cheers!

[Parsad]

No dot-com company was making money like this:

 

https://finance.yahoo.com/markets/stocks/articles/nvidia-announces-financial-results-first-202000544.html

 

There may be a bubble, but it's a ways away from popping!  Cheers!

[Blake Hampton]

It is quite amazing. But I also think that the current situation could change quickly under certain circumstances.

[Spekulatius]

39 minutes ago, Parsad said:

No dot-com company was making money like this:

 

https://finance.yahoo.com/markets/stocks/articles/nvidia-announces-financial-results-first-202000544.html

 

There may be a bubble, but it's a ways away from popping!  Cheers!

Cisco did. Revenue was up ~50% YoY, 75% gross margins (similar to NVDA). The numbers weren’t that clean because of amortization but the profit margins weren’t hat different. Broadcom also was around back then and no slouch.

 

The dot comes of today  are probably the hyperscalers (= Global Crossing) and AI companies but I also think we will get an Amazon out of it just like in 2000. Probably with a 90% drawdown in between too….

Edited May 20 by Spekulatius