Thanks for the essay. You make a lot of good points with data to back it up. The thing I most loved is the analogy about the food truck. It is so easy to disconnect buying stocks from buying all/part-interest in an actual business. Most people would never buy something with a 3% yield + modest growth when the risk free rate is close to 5%.
I think the market over the past 15-years has been distorted by artificially low interest rates, government support, and creative "financing." It could last forever. And the markets may have permanently changed. But I am not convinced. As someone who traded through the dot-com bust and side-stepped the financial crisis in '07/08, red flags are everywhere today. And a lot of people who have enjoyed success in markets in the past say 5-10 years really haven't been tested yet (Covid being a one-off that recovered quickly).
I remember both in '99 and then in '07 people who had very little experience with markets were telling me about how much money they were making in markets, watching CNBC all-day, and hanging on the Fed's statements. It seems even worse now. Many of them were using borrowed money to invest and thought it was a one-way ticket to wealth. I am a contrarian by nature, so I took the other side of that bet. Maybe I was lucky. But the economic fundamentals did not justify being exposed to markets then. The same rings true today.
Investing successfully today, from current market levels, requires a lot to go right. In my view, the probabilities are lower for the status quo to continue than for a reset. Timing is very hard as you say. But the warning signs are flashing. And many forget that Wall Street analysts, financial commentators, and the media are incentivized to keep the game going--look up Chuck Prince's famous quote in '07 about dancing while the music was playing.
A very long-winded way of saying thank you for putting such a timely and thoughtful note out to your subs. I think if some are having trouble wrapping their head around your thesis, a few things could help.
1. To really think about your food truck analogy.
2. To read and digest the writings of the investors you cite.
3. Look at the relationship to insider sales/buys and run it over time.
4. Ask if you are in the majority or the minority with your current investment thesis. Always being a contrarian obviously doesn't work, but one of Buffett's most insightful maxims is that you cannot buy with the crowd and expect to do well.
I was going to initially make a small counter argument that one could explain today’s higher earnings multiple based on the fact that the investors believe that earnings this time around will be more persistent, meaning, you are happy to pay 20x knowing that earnings yield will stay the same (we are seeing the inverse of that with memory stocks right now, where some mistakenly point ant P/E multiples and scream how cheap the stocks are, without realizing it’s the market showing that these earnings are not persistent).
But then, I remembered that over the last 2-3 quarters most of the net earnings was actually driven by mark-to-market of private investments held by hyperscalers in startups, while free cash flow and op. Margins were under pressure thanks to the increased spend.
So yeah, not looking bright. And I agree that bonds offer attractive alternative right now for those who would usually just buy the index. Because at the end of the day, even if the index trades sideways for a decade, it doesn’t mean that all of the underlying stocks traded the same way. Of course, in a crash scenario everything will fall.
To your first point I do agree businesses are better than they were 100 years ago and probably deserve higher ratio but I think the higher PE ratio probably are more of a result of much lower bond yields. But I did try to account for this even assuming high PE ratios the market is still constrained by revenue growth.
Well done. Loved the food truck example. I just retired and funny part is that I've been pretty hardcharging up until about December and then less so since getting on Substack. I switched over to treasuries back in Mar to wait for the drop. Now I'm glad I'm treasuries for all the reasons that are happening realtime and you point out. Really feels like we're going to at least 6% and maybe 7%. S&P 2000? Man that would be a mess. It's hard to imagine and I did 2000 and 2008 in the market just like I am now on the sideline watching nervously. 5% on the sideline.
Thanks for the feedback on the food truck. It’s my first time using it I’ve always used a lemonade stand in the past but this seemed a little more real and understandable. Appreciate that.
I wasn’t investing in 99 or 2008 so I didn’t get to feel the optimism personally. However in books I’ve read some of the comments are identical especially to 2000.
Thanks for the essay. You make a lot of good points with data to back it up. The thing I most loved is the analogy about the food truck. It is so easy to disconnect buying stocks from buying all/part-interest in an actual business. Most people would never buy something with a 3% yield + modest growth when the risk free rate is close to 5%.
I think the market over the past 15-years has been distorted by artificially low interest rates, government support, and creative "financing." It could last forever. And the markets may have permanently changed. But I am not convinced. As someone who traded through the dot-com bust and side-stepped the financial crisis in '07/08, red flags are everywhere today. And a lot of people who have enjoyed success in markets in the past say 5-10 years really haven't been tested yet (Covid being a one-off that recovered quickly).
I remember both in '99 and then in '07 people who had very little experience with markets were telling me about how much money they were making in markets, watching CNBC all-day, and hanging on the Fed's statements. It seems even worse now. Many of them were using borrowed money to invest and thought it was a one-way ticket to wealth. I am a contrarian by nature, so I took the other side of that bet. Maybe I was lucky. But the economic fundamentals did not justify being exposed to markets then. The same rings true today.
Investing successfully today, from current market levels, requires a lot to go right. In my view, the probabilities are lower for the status quo to continue than for a reset. Timing is very hard as you say. But the warning signs are flashing. And many forget that Wall Street analysts, financial commentators, and the media are incentivized to keep the game going--look up Chuck Prince's famous quote in '07 about dancing while the music was playing.
A very long-winded way of saying thank you for putting such a timely and thoughtful note out to your subs. I think if some are having trouble wrapping their head around your thesis, a few things could help.
1. To really think about your food truck analogy.
2. To read and digest the writings of the investors you cite.
3. Look at the relationship to insider sales/buys and run it over time.
4. Ask if you are in the majority or the minority with your current investment thesis. Always being a contrarian obviously doesn't work, but one of Buffett's most insightful maxims is that you cannot buy with the crowd and expect to do well.
Thanks again.
Very well written article, thank you.
I was going to initially make a small counter argument that one could explain today’s higher earnings multiple based on the fact that the investors believe that earnings this time around will be more persistent, meaning, you are happy to pay 20x knowing that earnings yield will stay the same (we are seeing the inverse of that with memory stocks right now, where some mistakenly point ant P/E multiples and scream how cheap the stocks are, without realizing it’s the market showing that these earnings are not persistent).
But then, I remembered that over the last 2-3 quarters most of the net earnings was actually driven by mark-to-market of private investments held by hyperscalers in startups, while free cash flow and op. Margins were under pressure thanks to the increased spend.
So yeah, not looking bright. And I agree that bonds offer attractive alternative right now for those who would usually just buy the index. Because at the end of the day, even if the index trades sideways for a decade, it doesn’t mean that all of the underlying stocks traded the same way. Of course, in a crash scenario everything will fall.
To your first point I do agree businesses are better than they were 100 years ago and probably deserve higher ratio but I think the higher PE ratio probably are more of a result of much lower bond yields. But I did try to account for this even assuming high PE ratios the market is still constrained by revenue growth.
Thank you!!
Well done. Loved the food truck example. I just retired and funny part is that I've been pretty hardcharging up until about December and then less so since getting on Substack. I switched over to treasuries back in Mar to wait for the drop. Now I'm glad I'm treasuries for all the reasons that are happening realtime and you point out. Really feels like we're going to at least 6% and maybe 7%. S&P 2000? Man that would be a mess. It's hard to imagine and I did 2000 and 2008 in the market just like I am now on the sideline watching nervously. 5% on the sideline.
Love the comment thank you!!
Thanks for the feedback on the food truck. It’s my first time using it I’ve always used a lemonade stand in the past but this seemed a little more real and understandable. Appreciate that.
I wasn’t investing in 99 or 2008 so I didn’t get to feel the optimism personally. However in books I’ve read some of the comments are identical especially to 2000.
Again thanks!!