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No. of Recommendations: 9
Jeremy Grantham:

"Today in the U.S. we are in the fourth superbubble of the last hundred years.Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle. The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time."

https://www.gmo.com/americas/research-library/let-the-wild-r...

Is he fibbing, or is this time the real thing?
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No. of Recommendations: 6
Cathie Wood agrees, sort of:

Cathie Wood believes that if a market bubble is growing, it is being created within value stocks and not growth names.
"In our view, the real bubble could be building in such so-called "value" stocks with much higher valuations in the context of a five-year investment time horizon as opposed to last year," Cathie Wood wrote in ARK's latest quarterly report.

Wood added: "Meanwhile, the valuations of many innovation related stocks have been cut in half."

https://seekingalpha.com/news/3789355-cathie-wood-in-our-vie...
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No. of Recommendations: 0
The "GMO Explaining P/E Model" chart in the Appendix is interesting...if true.

Jives with other's thinking: stocks got cheap in 2009, fairly valued in 2020, expensive now.
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No. of Recommendations: 14
I don't really follow Grantham at all, but his name came up on some forum not long ago (perhaps here?) and someone quickly linked to a dozen+ articles that he has proclaimed the same exact thing almost every year over the past 13-14 years.

I suppose one of these years he will be right, and will be on every TV station being hailed as Nostradamus
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No. of Recommendations: 28
Cathie Wood believes that if a market bubble is growing, it is being created within value stocks and not growth names.
"In our view, the real bubble could be building in such so-called "value" stocks with much higher valuations in the context of a five-year investment time horizon as opposed to last year,"


So, value stocks outperform modestly for the first year in 10, and all the sudden they are in a bubble? Give me a break. She's just talking her book. Stocks at reasonable price/earnings or other appropriate valuation metrics are abundant, some with growth prospects, they're discussed on this board all the time. No bubble in value stocks that I can see.


Wood added: "Meanwhile, the valuations of many innovation related stocks have been cut in half."

A business with no earnings trading for 100 x sales gets cut to 50 x sales could still be ridiculously overvalued, anchoring on past share price is not a useful approach to valuation.
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No. of Recommendations: 15
Right or wrong, I have to agree with he and Munger on this topic:

Grantham:"Cryptocurrencies leave me increasingly feeling like the boy watching the naked emperor passing in procession. So many significant people and institutions are admiring his incredible coat, which is so technically complicated and superior that normal people simply can’t comprehend it and must take it on trust. I would not. In such situations I have learned to prefer avoidance to trust."
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No. of Recommendations: 0
Don`t you think it seems more likely this time than it did the last time? And isn`t this time more like the time before the last time?
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No. of Recommendations: 12
Is he fibbing, or is this time the real thing?

Oh, it's certainly the real thing this time...in certain corners of the markets.
Insanity doesn't have to hit everybody in the village for the village to be deemed a crazy place.

Normally most securities in the market trade within the broad range of normality, with occasional pockets of insanity for the flavour of the day.
These days it sometimes seems more like the reverse.

Jim
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No. of Recommendations: 21
Normally most securities in the market trade within the broad range of normality, with occasional pockets of insanity for the flavour of the day.
These days it sometimes seems more like the reverse.


A random peek into that:

Value Line covers 1700 stocks every week, and has done so for decades.
Since 1997, on a typical day, an average of 50 of those are trading at more than 10 times last-four-quarters sales, under 3% of them.
As of January 3 the figure was 176 stocks, over 3 standard deviations above the average proportion.
Heck, 47 of them are trading at over 20 times sales.
It seems that an unusually large number of stocks is being seen with boundless optimism.

Berkshire is trading at about 1.91 times recent sales, in case anybody is wondering.
It's not a meaningful metric for any one firm, but it's a token attempt to stay on topic.

Jim
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No. of Recommendations: 0
Just wondered if there`s any data of how ADR`s perform in bear markets vs domestic listed firms. Eg if BABA has an 8 to 1 ratio and the HK listing is holding up nicely does it bolster the US share price?
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No. of Recommendations: 15
Cathie Wood gave the single worst intvw I've ever heard on Invest Like the Best a few years back. She refused to name one investing mistake or error she had ever made. Her analysis was so facile it was laughable.

I shorted ARKK last March and have been enjoying it ever since.
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No. of Recommendations: 0
"Oh, it's certainly the real thing this time...in certain corners of the markets."

I agree. Take the NASDAQ, for example. It's down 12.5% from its November high, and still trading at 37x earnings. How low do you think it will go before it recovers to its November high? 15% below the November high? 50% below the high. I'd guess closer to 50% than 15%. We'll see.
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No. of Recommendations: 4
Grantham tends to be basically "right" but without too much effort or accuracy related to time. Therefore the market goes far further in whatever direction and the valuations get more extreme all while he is chanting (whatever he's chanting).
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No. of Recommendations: 26
As of today, the U.S. has seen three great asset bubbles in 25 years, far more than normal. I believe this is far from being a run of bad luck, rather this is a direct outcome of the post-Volcker regime of dovish Fed bosses. It is a good time to ask why on Earth the Fed would not only have allowed these events but should have actually encouraged and facilitated them.

If I had copied and pasted every part of this article I wanted to I would have needed to post the whole thing. But, the above is the $64,000 question. For you youngsters here, you may need to look up this reference.

It appears that there was insufficient damage done by the previous housing and stock bubbles. What did we miss? the Fed asked. "Bonds," they shouted through their hallowed halls. Bonds! Add those this time!

I have been warning of this disorder for years; so long that I am tired of hearing myself say it. But, just because someone is wrong in the present moment – though there is evidence that even now that may not be true – it doesn’t mean that the thesis itself is not accurate. It involves timing, and timing is a bitch.

If I wanted to put on my conspiracy hat, I could say that the Fed and its masters in the political class have been kicking the can down the road. “Peace and prosperity in our time,” they chant. “I will have made mine and be out of office, political or enterprise, before it all falls apart.” Is this why?

Or, I could say it is all of the elites. Those with power, privilege and prestige have many more opportunities than the bottom 99% to profit from this insanity. They encouraged a Fed policy that would allow them to use their wide range schemes for the creating and protecting of wealth; unconcerned about the eventual damage that will be done to the much less fortunate. Is that what is happening? I think so.

Whatever the case, how could you put an innocuous explanation to the intentional manipulation of asset prices over the last 20 or so years? How does Mr. and Mrs. John Doe protect themselves? Their mortgages will be underwater and their saved wealth in stocks and bonds will be decimated. Do the people who created this mayhem for their own personal gain care about them? Apparently not.

When this all ends, as it will, we will have accomplished a hugh transfer of wealth from the small and medium to the rich and powerful. If the value of the stock in your company’s IPO falls from $2 billion to $500 million, you are still more than OK. If your already barely sufficient retirement savings fall in half or more, you are not OK.

Future history will not be kind to the architects of this looming catastrophe.
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No. of Recommendations: 2
Another data point: Looking at the market in tech jobs, salaries have easily increased 100-300% from five years ago. It's really bananas out there. Big tech and well funded startups are throwing tons of cash/equity at tech folks because there is so much demand for them. Feels exuberant to me.

A few other signs that worry me:

* Ridiculous valuations of tech stocks, both public and private (There are more than 900 tech startups that are worth more than $1B now; in 2015 there were 80 [1])
* My wife (who is not in tech) asked me about what Bitcoin and NFTs were, which tells me things must be close to peak hype
* Meme stocks and the related irrational (nonsensical) things going on in the market

No idea what's going to happen but things are so crazy now, there is no way it's going to last forever. I'm sitting on a decent amount of cash and am employed at a steady company who should not be too affected by a downturn in some of the above trends. Mostly just twiddling my thumbs and nibbling at things that look cheap.


[1] https://www.nytimes.com/2022/01/19/technology/tech-startup-f...
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No. of Recommendations: 4
There are more than 900 tech startups that are worth more than $1B now...

For certain values of "worth"...

Jim
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No. of Recommendations: 7
I haven’t been following this thread too closely but I recall vividly and rather worryingly Grantham said last summer something along the lines:

First there will be a collapse of the low quality names. He used the term confidence termites.

Then the confidence termites will spread to the quality assets.

It looks like the first act has absolutely started. I see Netflix is down in a big way today. Is this the beginning of the second act that takes out the quality companies as well. We will see. But it’s looks to me Grantham’s prediction is shaping up nicely.

I have always been an anxious type and my instinct is to sell a little to have more cash. However, I’m 90% Berkshire and will probably ride this out. I have found over the years that when I start selling I eventually sell everything. And that is usually not a great idea. I’m kind of preparing myself for a 50% drawdown in Berkshire. But am taking solace in the possibility that I will not be spending any of my Berkshire for at least 10 or 20 years. Plus as I read through Adam Meads Complete Financial History of Berkshire Hathaway, it is so clear that Berkshire rarely makes major capital allocation moves and that they are almost always during periods when there are no bids for great assets.
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No. of Recommendations: 2
Elias, why will people's mortgages be underwater when they've borrowed at incredibly low rates and housing prices have gone way up? I don't understand your comment.

If your already barely sufficient retirement savings fall in half or more, you are not OK.

A diversified retirement portfolio should never fall by half. If it does, that's your fault and no one else's.
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No. of Recommendations: 14
A diversified retirement portfolio should never fall by half. If it does, that's your fault and no one else's.

I'm not so sure about that. Price volatility isn't risk.
If you are early in retirement, you want and perhaps truly need a positive real return.
Failure to meet the minimum return is a real risk, whereas a transient fall in prices isn't.

Anyone wanting or needing a positive real return owns zero bonds, as there is almost nothing with a positive real yield.
Especially if there are fees.

There is no reason for a gigantic cash pile.

What does that leave for most people?
Equities fall in price by half pretty regularly, but they're what you'd want to be the bulk of the portfolio.
So, from that point of view, I wouldn't say anyone was doing anything wrong being exposed to a 50% drop.
I'd be wondering more about the people who foolishly traded returns they need for steadiness they don't.
Sales done over a very long period will inevitably get very average valuation multiples.

The only exception I can thing of is that the pension pot is much to small, and going to run out soon, long before you'll likely croak.
In that situation, a big drawdown is a big issue.
You'd probably want a barbell portfolio: tons of cash, an a small allocation to "lottery ticket" investments that just might pay off in multiples.

If you're nearer the end of your retirement, it's a different story.

Jim
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No. of Recommendations: 0
Whatever the case, how could you put an innocuous explanation to the intentional manipulation of asset prices over the last 20 or so years?

Well, recessions hurt, and economists think they can make them hurt less.

I'm *very slowly* reading Alan Greenspan's The Age of Turbulence. Essentially, economists, and fed economists especially believe they can use the tools they have to control the economy for the benefit of society. They recognize that markets can get too inflated, but inflated markets also show an increase in labor participation by people in lower rungs of society, so it's hard to argue that they let this occur to benefit the rich at the expense of the poor.

A recent example of markets getting too inflated was the real estate run up leading to 2007. But a lot of the policies that inflated the bubble helped middle and low income Americans build wealth they otherwise could not have. At the time, I'm sure it looked like a reasonable tradeoff.
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No. of Recommendations: 0
If you are early in retirement, you want and perhaps truly need a positive real return.
Failure to meet the minimum return is a real risk, whereas a transient fall in prices isn't.


What do you think of a couple year's expenses in cash to be spent only if your otherwise all-equity portfolio falls 20% or more?

As the Cash Bucket described here: https://earlyretirementnow.com/2018/05/23/the-ultimate-guide...

Thanks, Jim.
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No. of Recommendations: 2
"It [the Nasdaq] is down 12.5% from its November high, and still trading at 37x earnings."

My question is not what to do with QQQ or QQQE. I definitely wouldn't buy those right now. They will fall farther imo. My question is what to do with an individual stock like INTC. By both my estimate and Morningstar's estimate INTC is 20% undervalued. What would be the best strategy if I wanted to buy INTC? Buy now? Average in? Wait for the NASDAQ to bottom? Other?
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No. of Recommendations: 25
Elias, why will people's mortgages be underwater when they've borrowed at incredibly low rates and housing prices have gone way up? I don't understand your comment.

If I remember correctly, in 2005 -2007 the accepted belief was that housing prices never fell. That was shortly proven wrong, and, in part because of falling housing prices, in 2009 the financial markets stopped functioning at one point. Banks were merged, investment firms were merged, AIG lost something like $100 billion in one year and nearly failed. If we have a bubble again, housing is overpriced, in at least some cases. The value of some houses will fall below their mortgage amount. The housing purchase prices went way up before their market value went way down.

A diversified retirement portfolio should never fall by half. If it does, that's your fault and no one else's.

OK, what are you going to diversify into today? There has been more than one time in my lifetime when the stock market averages fell by 50%. Are you going to diversify into bonds? With interest rates at all-time lows, bond prices are at all-time highs. If you want to scare yourself, look at how much a 30 year, 3% bond would get marked down with a 100, 200 or 300 basis point increase in rates.

For the seasoned investor, volatility can be a friend. For the vast majority of people who can barely distinguish a stock from a bond, they go by what they are told, understanding it or not. Does society have any obligation to protect its citizens’ financial affairs? When I talk to my friends and relatives I can see they have only a very shallow understanding of investing, even in their 401-ks that they count on for retirement income. I don’t know what to tell them because I can’t tell them enough to impart the knowledge they need to properly financially protect themselves. The subject is too difficult. Is it their fault for not being financially savvy enough to navigate today’s market?

For the vast majority of people, a rather stable market environment where they can periodically invest new funds, earn some return, and then have a dignified retirement is optimal. They buy what they can, which is mostly stocks and bonds. They believe that they are doing the right thing, unaware that the Fed is manipulating assets prices so high that regardless of what they do, they are set up for a big fail when the bubble bursts.

There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?

IMHO there is no place to hide but cash, but most feel that they need to be invested and won’t take that option.
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No. of Recommendations: 0
<<There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?
>>

There is another possibility: the value of US dollar comparing to other currencies especially the Chinese will drop significantly, resulting in rising import price and inflation.
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No. of Recommendations: 12
The cyclical nature of things is important to consider and I think Grantham to some degree (for years I read his stuff but now I don't because it is redundant to my own thinking) is going to plug a lot of stuff into his valuation model. When I'm thinking cyclical some things come to mind:

Saul's board: Not sure how many reading and investing understand how dramatically cyclical and secular hyper growth stock investing is. Not only do people chase and run in groups, they also most often choose to chase different things after those that formerly were chased fell from grace. There's just so many Amazon's and such, those that sustain from one euporic chase to the next (before eventually now being chased any longer).

For reference: In the mid 1990's my investment club bought EMC, the data storage stock. We bought for a split adjusted $1.50 and put $20,000 into it. The stock ran to $105...nobody wanted to sell! Along the way all the members of the club (25 of us) except me bought EMC stock personally. In the end we, the club, sold EMC for $7 making a solid 15% annual return. All 24 other members of the club? They ALL lost money on EMC because they bought at a later time than the club. EMC the business? It just marched along fine, growth slowly fell from 50%, to 35%, to 25%, to 10%...and so forth. Dell bought out the stock eventually.

EMC, once it fell? Never was it chased again! The club voted down one members recommendation to put "all our money into it" when it fell to $35. Thank goodness rational thought prevailed!

Homes/contractors/home builders/Lowes/Home Depot: I have owend Lowes since it came public, it was from my area and we all knew about Lowes. I've been selling Lowes and even sold down to the price it sells for today. In 2015 you could buy it all day long for $60. We used to say here, "When the contractors are all buying new trucks it is time to get out." Well, the contractors here not only have been buying new trucks every year since 2014 (about when housing here began to sustain in a really solid manner) ....they now routinely buy $75,000 Ford trucks with features made for space travel (kidding of course). Lowes doesn't look expensive on a PE basis; Lowes IS expensive.
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No. of Recommendations: 3
Re property.

In the UK we have help to buy.

Government backed deposits for first time buyers.

Buyer provides 5%, Gov 20% with a 75% mortgage and they're borrowing upto 5 x joint incomes buying overinflated new builds upto £600k cap (c$800k),the housebuilders are all signed up.

In London the cap has been increased to 40% backed by the Government.

https://en.m.wikipedia.org/wiki/Help_to_Buy

This was their answer to an already inflated housing market to help FTB's. Lunacy IMO.

Lessons learnt from the Finaicial Crisis, non it seems?
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No. of Recommendations: 0
OK, what are you going to diversify into today?

Small Value, Emerging Markets, Energy.
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No. of Recommendations: 1
The UK situation was a disgrace. You can look at the house price chart and see when it started - prices move significantly up from thereon in. Any chancellor of the exchequer worth their salt should have resigned rather than agree to it.
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No. of Recommendations: 1
The British are obsessed by their house prices.... television is full of property related refurb and investment programmes. A put under prices is a vote winner, it's also a good money spinner (taxation)..... until the music stops playing that is....

The private house builders are cautious, the Plc's are still aggressively buying land and overpaying. They carry on and will Issue shares at the bottom to shore themselves up, management awarding share options for the recovery and the cycle repeats....
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No. of Recommendations: 1
“The British are obsessed by their house prices.... television is full of property related refurb and investment programmes.”

Same in the USA. HGTV seems to be the go to channel in my house.
We do frequently watch a UK based show. Property hunters thing.
“Escape to the Country” my kid tells me.
Makes us want to buy a holiday cottage there, but the prices, yikes!
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No. of Recommendations: 2
My neighbor, who works for Teledyne, and I enjoyed a conversation about 2 months ago with the contractor who rebuilt my neighbors pier. This contractor has been around a long time as he began doing pier work just out of college and has stuck with it since. He loves to chat!

He says, "Right now? I am 2 years behind...seriously I am taking jobs with 2 years out scheduling!" That comment was interesting enough but he followed with this: "The more stupid, the more insanely expensive the project? Well, you can bet that THAT is the theme today over and over again." He went on by saying, "I am adding on to my house because the bigger and more outrageous you make something right now the more it will sell for a stupidly high price!" The he finished with, "My wife and I want to downsize, we have the lake lot and my home will be on the market within a month and it will sell immeditately."

His house did sell at a price above his listing price...for cash.

At the end of the above conversation we all discussed together that most of those on his list for 2 years out will decide to delay once the blistering bubble mentality is extinguished.
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No. of Recommendations: 10
Are you going to diversify into bonds? With interest rates at all-time lows, bond prices are at all-time highs.

Of course I own bonds in my retirement portfolio. And, no, IR are not close to all-time lows. But they could keep rising, yes.

If you want to scare yourself, look at how much a 30 year, 3% bond would get marked down

I started working in fixed income in 1994, so I'm well aware of how duration works. But why are you insisting a retirement portfolio would have to be only in the longest-duration bonds in the FI portion?

Is it their fault for not being financially savvy enough to navigate today’s market?

Diversification is the only free lunch the market offers, that is not hard to understand. If most of your friends put it all in the S+P, then they get that risk, and as you pointed out the market just dropped 50% from 2007-09, so it's not like no one remembers that.

There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both.

This is simply not correct. And I feel you have said the same things before, but I look at where the markets are now compared to 2007 and they are nicely higher.

'If you invested $100 in the S&P 500 at the beginning of 2007, you would have about $453.83 at the beginning of 2022, assuming you reinvested all dividends. This is a return on investment of 353.83%, or 10.61% per year.'


IMHO there is no place to hide but cash, but most feel that they need to be invested and won’t take that option.

And coming full circle, holding no cash and all stocks is what may allow your portfolio to drop 50%, which is then on the person making that decision AND NO ONE ELSE.

But if you truly are a long-term investor, stocks will recover as they did after 1987 and 2000-02 and 2007-09, and 1982, and 1973-4, et al.
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No. of Recommendations: 0
There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both.

Tom Lee would disagree: https://www.youtube.com/watch?v=VJBt17yBSss

When people say things are different, 20 percent of the time they are right. John Templeton
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No. of Recommendations: 2
Bloomberg interview with Jeremy Grantham yesterday:

He's still crying wolf.

https://www.youtube.com/watch?v=JlEGU2ypr1Q

Remember that Charlie was also saying recently that the market is nutz:

Munger didn’t mince words when he said earlier this month that he considers today’s stock market environment “even crazier than the dot-com era.”

"I just can't stand participating in these insane booms,” Munger said at the Sohn Hearts & Minds Investment Leaders Conference. “There's no great company that can't be turned into a bad investment just by raising the price."


https://www.yahoo.com/now/charlie-munger-market-even-crazier...
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No. of Recommendations: 0
Bloomberg interview with Jeremy Grantham yesterday

Grantham says 2500 is on trend for S&P500, down about 50% from the peak.
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No. of Recommendations: 0
"He's still crying wolf."

It's not crying wolf if it's true. Or maybe you didn't mean to suggest that it wasn't true. The NASDAQ is down 17.5% from its high. At what point do we say that we're in a bear market? 3-sigma is a big overvaluation.

There are a number of other interesting topics in the interview besides the overvaluation of the US stock market, too, such as the decline in fertility and sperm count in the US, and the lower upward mobility in the US versus the UK, just the opposite of the way it was of years ago.
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No. of Recommendations: 1
"It's not crying wolf if it's true. Or maybe you didn't mean to suggest that it wasn't true.

He may be right, it's just that the wolf (or is it bear) hasn't shown up at our door steps yet.

I think Grantham makes a pretty good case that valuations are stretched.

It's not just Grantham. Recall our own Charlie Munger last month expressing concerns about valuations:

(Bloomberg) -- Berkshire Hathaway Inc.’s Charlie Munger told a conference Friday that markets are wildly overvalued in places and that the current environment is “even crazier” than the dotcom boom of the late 1990s that subsequently led to a bust.

https://www.bloombergquint.com/markets/berkshire-s-munger-sa...

I'm 90% invested, 50% in Berkshire, 40% in BABA and only 10% in cash. Wondering if I should sell some BRK to raise my cash level.
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No. of Recommendations: 2
"I'm 90% invested, 50% in Berkshire, 40% in BABA and only 10% in cash. Wondering if I should sell some BRK to raise my cash level."

Selling is never an easy decision, especially if one has to pay capital gains tax. Eight days ago I sold INTC, which was in an IRA. I liked the company and the price, but I was concerned about it becoming collateral damage in a NASDAQ selloff. My investment horizon is pretty short. INTC is down 12% since I sold, so I guess it worked out, but that doesn't mean that my logic was correct. I haven't sold BRKB, which is in a taxable account. We can never be sure if we're making the right decision. We just have to do our best. Good luck to you.
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No. of Recommendations: 1
You guys may want to consider Munger and Grantham's portfolio actions as well as what they state.
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No. of Recommendations: 21
Bloomberg interview with Jeremy Grantham yesterday:
He's still crying wolf.
https://www.youtube.com/watch?v=JlEGU2ypr1Q


An interesting snip from that:
"I think the peak of crazy behaviour is behind us. I think we're now in the buy-the-dip mode,
which the super bubbles specialize in. You don't have two years of buying frenzy dying overnight, typically"


Consistent with that, I just read that small US retail accounts were net buyers of both US equities and equity ETFs every trading day so far this year.
And all but two of those days were at higher dollar rates of buying than the 2021 average.

I've always liked this graph.
I'm sure much of it is dangerous oversimplification, but it's easy to see bits of truth in it.
https://en.wikipedia.org/wiki/Jean-Paul_Rodrigue#/media/File...
In effect, the comment above suggests that the retail hordes are getting lined up for the bull trap.

Jim
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No. of Recommendations: 29
Bloomberg interview with Jeremy Grantham yesterday:
He's still crying wolf.
https://www.youtube.com/watch?v=JlEGU2ypr1Q


Another minor note---
He suggests that he thinks the on-trend normal level of the S&P 500 would be about 2500 today.
On the notion that the smoothed real earnings yield is the best metric for the broad market,
and using my own set of figures and smoothing method (a bit smoother than Shiller's E10),
that suggests that he expects the current normal valuation level to equal the average multiple observed since about January 1983.

Though I do buy his line of reasoning, I'm a bit dubious of that particular figure.
Personally, I think the modern economy really is "different this time".
Not that different, but different enough not to expect the normal of 50 years ago to be fully relevant.
For one thing, historically the great majority of earnings were constrained by access to capital,
but that is no longer a good characterization of the global economy.
This changes the broad profile of the cost of capital: slightly lower demand for capital would general mean slightly lower yields on all kinds of securities.
Lacking any better idea, I expect future "normal" to be something like a move back to the average since a start date somewhere in the 1990s.
That's about the most optimistic/bullish view, anyway, so the bear market implications are perhaps the mildest that remain rational.

Using the average trend earnings yield observed since 1990 would suggest "normal" around 2975 for the S&P 500.
Using the average trend earnings yield observed since 1995 would suggest "normal" around 3194.
Using the average trend earnings yield observed since 2000 would suggest "normal" around 3102.
So, rock and roll, I think maybe his 2500 is a bit dour and 3000 might be a more reasonable expectation of normality these days.
He expects a drop of about -42%, I expect a drop more like -31%. From these heights it doesn't seem like such a big difference.

But of course, my relative bullishness--only a 30% drop!--is not that much comfort.
That's the figure I kind of expect as a future average.
If that were so, presumably stocks will be cheaper than that "normal" level about half the time, sometimes quite a bit.

Jim
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So in broad terms you'd expect BRK to do a little better, perhaps 25% worse case, so that's a 230 per b floor 22/23. 230-250 would be a good entry point.
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So in broad terms you'd expect BRK to do a little better, perhaps 25% worse case, so that's a 230 per b floor 22/23. 230-250 would be a good entry point.

I don't really have any numerical idea of what Berkshire's price might do in a market drop, particularly since I don't know when or how lasting the next bear market will be.
Nor how deep, though those numbers above at least give a blurry image of what might be sensible to expect.
My gut feel is that Berkshire will drop with the market on any short term drop, but at some time during the fall it will mostly stabilize.
But that's just a general sense, not any kind of prediction.
The "drop right in line with the market" part seems very likely, for the first part of any drop.

The only firm expectations that I really bank on are pretty normal real value growth rates and pretty normal future valuation multiples for Berkshire shares.
And somewhat better performance over the next full cycle than the broad market.

I hope for a really low price bottom for BRK, as I always enjoy double-loading the truck at a great valuation level.
Sign me up for a boatload at peak-to-date book per share.

Jim
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For comp I just looked at the drop in 2020. The S&P dropped 30% BRK 25% before the rebound.
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I'll add my 2 cents. I would not surprise me one bit if investors fleeing the market would choose something to chase temporarily. Energy? Berkshire? In a market sell-off of course it isn't going to sustain but these things do happen.

Life is great if you can stand it. Remember if you sell out you'll one day need to get back in. And when you get back in, given most here (but not all div 20!) are value investors and we tend to get back in way too early!

HA!
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Great Finaancial Crisis 2008-09 BRK 50% S&P 52% identical basically.
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And in terms of timescales.

It took 5 yrs in the GFC for BRK to get back to the previous peak 08-13 and 11 months in 2020.

Decline took 1 year top to bottom in the GFC and 1 month in 2020.

I'd expect a situation more like the GFC this time rather than 2020 given what Grantham says.
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In both the 2008-2009 and 2020 crashes, Berkshire dropped to near book value. Depending on the severity of the next bear, that *may* be the bottom for Berkshire.

Yes, book value is less meaningful than it used to be due to the share buybacks and the carrying cost of assets (which are not marked to market in the calculation of book value), both of which reduce book value, compared to intrinsic value. However, if the lowering impact of these factors roughly equals the overvaluation of stocks such as Apple, then these factors may cancel out and book value would still be meaningful. Jim's data confirm that to be the case.
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"It took 5 yrs in the GFC for BRK to get back to the previous peak 08-13 and 11 months in 2020.

Decline took 1 year top to bottom in the GFC and 1 month in 2020.

I'd expect a situation more like the GFC this time rather than 2020 given what Grantham says."

That's correct but BRK was overvalued going in to the GFC (if I recall correctly, Jim sold shares in late 2007 as the price to book was around 1.8). In contrast, it was slightly undervalued going in to the 2020 crash. That may partly explain the time it took to get back to the previous peak in the two cases.

This time, BRK is not meaningfully overvalued, which may reduce the time for it to get back to the earlier peak, compared to during the GFC.
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It took 5 yrs in the GFC for BRK to get back to the previous peak 08-13 and 11 months in 2020...

That's a good number, but it is a little dependent on what valuations were like before the plunge.
The price did spike in the early days of the crisis 2007, for example, trading briefly over 1.9 times book.
If a spike sets the high you're waiting to hit again, a longer wait will be likely.

A alternative metric might be "how long did it stay below a reasonable valuation multiple?"
In the modern era, 1.4 times "peak to date" book per share has been about par for the course.
If that's your test, it stayed "too cheap" for 2.1 years.

If you figured 1.45 constituted the end of the "too cheap" stretch, it was a bear of 3.28 years.

If you needed to see 1.5 to consider it a decent multiple, the dark ages lasted a full 6 years.
(The second longest stretch ever waiting for the 1.5 hurdle ended just this month, at 3.24 years).

Jim
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book value is less meaningful than it used to be due to the share buybacks and the carrying cost of
assets (which are not marked to market in the calculation of book value), both of which reduce book value,
compared to intrinsic value. However, if the lowering impact of these factors roughly equals the overvaluation
of stocks such as Apple, then these factors may cancel out and book value would still be meaningful.


Another factor is how long it has been since a big acquisition.
Money spent internally on capex generally has an intrinsic value worth a multiple >1 of the cash spent.
That's why the average company is worth a significant positive multiple of book.
Money spent on shares of a company (public or private) are worth about what was paid for the first while.
That's why funds aren't worth more than book (NAV).

Jim
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I would say that the selloff is not just imminent; it's begun. The S&P 500 is 9% below its peak; the NASDAQ is 16% below its peak; the Russell 2000 is 21% below its peak.

It sounds like most people on this board plan to ride BRK and the market down if they fall significantly, and then ride them back up. That's not a bad approach, depending on one's investment timeframe. Averaging down is also not a bad approach. Few people here, it appears, have significantly reduced their asset allocation to equities, and that's OK, too. Timing the market is difficult, and paying capital gains tax is costly. Grantham, in his personal account, has rotated into less overvalued segments of the market, specifically emerging market value stocks, and he has shorted the NASDAQ and the Russell 2000. GMO's approach has been to remain fully invested, but to "overlay a long-short portfolio" equal to about 30% of the base portfolio. They say that their research has show this to reduce the drawdown. All of these approaches are reasonable, but some will have better 5-year returns than others. What do you think the best approach is?
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FYI: I sold some BRK and purchased some AMZN and DIS (just a small amount however).

tecmo
...
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book value is less meaningful than it used to be due to the share buybacks and the carrying cost of
assets (which are not marked to market in the calculation of book value), both of which reduce book value,
compared to intrinsic value. However, if the lowering impact of these factors roughly equals the overvaluation
of stocks such as Apple, then these factors may cancel out and book value would still be meaningful.
=====
Another factor is how long it has been since a big acquisition.



Ok, and another big factor is that Berkshire is itself a big holders of securities, and these would presumably fall during a sell-off, while Berkshire's official book value (published every 3 months) remains the same.

Berkshire's operating company side should not suffer much in a general sell-off - it's already at fair value, maybe about 2x book.

Berkshire's stock holdings, however, constitute almost half the value of Berkshire, and presumably are worth about their market value, or slightly less, given the future capital gains taxes owed on these. Almost half of Berkshire's value is in this collection of stocks, half of this being Apple but the other half is arguably overvalued too. If the stock holdings sold off by 40%, but this had not yet been updated in a quarterly report, Berkshire's share price might go to very low multiples of the most recently published book value, even if the multiples (1 and 2) on these two parts of the company had not changed.

If someone is following Berkshire and looking for a good price to buy back in, I think it makes a lot of sense to separate out these two components. Mr Market may be schizophrenic, but he's not stupid.

dtb
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The amazing thing to me is how rigidly investment managers of foundations, target funds and the like have stuck to their strategic asset allocations during the stock and bond bubbles, earning nothing in bonds and risking significant loss in US equities. One foundation that I talked to said that the Uniform Prudent Investment Act (UPIA) required them to use the asset allocation that they were using. This is somewhat true. The UPIA does require that managers use Modern Portfolio Theory to allocate assets, but it does not require them to use silly assumptions about the near term returns of those asset classes. Bonds and US equities face poor, near term returns. All asset allocations need not be based on 30 year forecasts.
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"He [Grantham] suggests that he thinks the on-trend normal level of the S&P 500 would be about 2500 today."

There are many ways to to calculate the trend. The basic approach is to plot (log-log) the S&P index against something upon which it logically depends, such as revenues or earnings (not time). I tried plotting it against GDP. As in Jim's analysis, the trendline as of 12/21 depends on the start date of the plot. If I start the plot in 1929, the trendline as of 12/21 is 1,915. If I start the plot in 1945, the trendline as of 12/21 is 2,186. If I start the plot in 1985, the trendline as of 12/21 is 3,413. It's good to include in the plot a number of periods when the S&P was clearly undervalued, such as 1981, and clearly overvalued, such as 1999.
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He [Grantham] suggests that he thinks the on-trend normal level of the S&P 500 would be about 2500 today.

I have seen research where they are talking about SP500 23 earnings pegged at $250. Economy is still doing good, it can take a hit after rate increase, etc, but now doing good. If it continues and we actually have $250, are you expecting sp500 will trade at 2500 level?

The chances of wide eyed bull succeeding is far higher than a strong bear. I can understand being cautious but not that negative.
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I have seen research where they are talking about SP500 23 earnings pegged at $250.
Economy is still doing good, it can take a hit after rate increase, etc, but now doing good.
If it continues and we actually have $250, are you expecting sp500 will trade at 2500 level?
The chances of wide eyed bull succeeding is far higher than a strong bear. I can understand being cautious but not that negative.


Earnings are cyclical.
The 2023 earnings could be high or low, but the 2023 cyclically adjusted earnings will be pretty predictably between the two.

Extrapolating GDP and estimating public market profits as a likely percentage of GDP makes a lot of sense. GDP growth is pretty predictable over fairly long timeframes.
A simpler method is just to extrapolate the real net earnings of the index over time, which is pretty close to the same thing.
Then it depends what sort of time frame you consider. Bullish optimists take shorter time frames because the tax cuts make a nice steep slope to the trend line.

The trend line of real S&P 500 earnings (and cap weight predecessors) using any start date 2010-2014
or anything 1999-2005 gives a pretty cheery figure in the $141-146 range in today's money for calendar 2023.
Any start date for the trend prior to that gives a lower extrapolated figure for 2023.
For example, a trend line starting 1995 would extrapolate to 2023 earnings of about $135 in today's money.

So, sure, $250 is entirely possible for that particular year, but it would be about 75% above trend, give or take.
Most of the value of any equity is far in the future, so no single year matters much.

Jim
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I have seen research where they are talking about SP500 23 earnings pegged at $250.
Economy is still doing good, it can take a hit after rate increase, etc, but now doing good.
If it continues and we actually have $250, are you expecting sp500 will trade at 2500 level?
...
The trend line of real S&P 500 earnings (and cap weight predecessors) using any start date 2010-2014
or anything 1999-2005 gives a pretty cheery figure in the $141-146 range in today's money for calendar 2023.


PS
Let's say the 2023 S&P cyclically adjusted earnings come in at the midpoint of that extrapolation in today's dollars, $143.50.
In that case, Mr Grantham's target of S&P 2500 would be 17.4 times cyclically adjusted earnings.
My very rough expectation of something more like 3000 would be 20.9 times cyclically adjusted earnings.
Those don't sound like crazily pessimistic figures.

Jim
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Earnings are cyclical

There are many folks argue the board is not a perma-bear... here is your prime example. :)

The cape wearing, mean revisionists have predicted the world is going to go back to buggy whips because if you take 300 years of industrial age... :)

Sometimes things change and such change don't mean revert, or you can rewind the clock. So I consider cyclically adjusted earnings only for cyclical industries like commodities. Not everything is going to mean revert, if it does, I would like my age and hair to mean revert.

Now, with my ranting on mean-reversion out of the way, I don't know what is going to happen on 2023, whether Fed will actually do as many rate hikes as market is expecting, whether Fed will follow through on their words in doing QT, i.e., they are really going to shrink FED balance sheet, whether US congress now got comfortable with uncontrolled money printing will be weaned away, etc. Many of these have positive and negative effects on economy. The $250 spy earnings assumes 8% earnings increase in 2022, which may be more attainable with supply chain easing and cap-ex cycle starting, will 2023 see 10% earnings growth, which is baked in to that assumption, I don't know.

What I do know is, future is unknown, unpredictable, there are variety of outcomes possible and in most of those scenarios SP500 earnings is going to be far higher than pandemic low of $140. What that is going to be? IDK, but I dearly hope it is far better than 2020 economy.

https://www.yardeni.com/pub/yriearningsforecast.pdf
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The cape wearing, mean revisionists have predicted the world is going to go back to buggy whips because if you take 300 years of industrial age... :)

Sometimes things change and such change don't mean revert, or you can rewind the clock. So I consider cyclically adjusted earnings only for cyclical industries like commodities. Not everything is going to mean revert, if it does, I would like my age and hair to mean revert.


More strawman arguments. Many on the board have argued that profitability (margins) might be permanently elevated; but the argument that they will continue to rise "forever" if of course impossible. There have been lots of discussions trying to explain the elevated margins - some of the explanations even make sense!

tecmo
...
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Earnings are cyclical
...
There are many folks argue the board is not a perma-bear... here is your prime example. :)


So, you're saying...earnings aren't cyclical?
I dare say, a few hundred million business people and stock investors will be very startled to learn this.

What I do know is, future is unknown, unpredictable, there are variety of outcomes possible and
in most of those scenarios SP500 earnings is going to be far higher than pandemic low of $140.


FWIW, the pandemic low (rolling four quarters) was $94.13, not $140.
So the figure of S&P 500 earnings in the low $140s in 2023 suggested by extrapolating the real earnings trend would be 52% up from the pandemic lows, not equal to the lows.

I have no idea whether S&P 500 earnings will be $250 in 2023.
But if they manage that, it sure will be a lollapalooza of a result. (achieving the wildly improbable?)
$250 S&P 500 earnings in 2023 would correspond to total US corporate earnings being just over 16% of GDP.
(Using the fairly reasonable approximation that S&P 500 earnings growth is about the same as total US corporate earnings growth in this stretch)
That's up about 37% from the current figures which represent the all time high in the Fed database back to the 1940s.
Have a look at what corporate profits at 16% of GDP looks like in context https://fred.stlouisfed.org/graph/?g=cSh
Let's just say that 16% wouldn't be my central expectation.

Jim
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So, you're saying...earnings aren't cyclical?

You are arguing against something that I didn't say. Why?

Economy goes through cycles is something everyone understands. But even your cyclical lows can and are higher than past cycle lows'.

At the moment, economy is doing fine and 101 econ says inflation results in economic growth, or GDP growth. What we are suffering is high inflation, thus higher GDP. Predicting cyclically low earnings is not aligned.

I linked the numbers I use and you seems to be using different set of numbers. There are no 4 quarter rolling period where I see $95 earnings starting Q1 2020.

The way I see is 8% increase in 2022 from 2021 and another 10% increase in 2023 from 2022. We can apply that to the number you are using.

Perhaps you can provide your numbers reference. Without that, we are arguing apples and oranges.
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So, you're saying...earnings aren't cyclical?
...
You are arguing against something that I didn't say. Why?


Well, because you pretty much said it?

You said that the assertion that earnings are cyclical was a "prime example" of being a permabear.
OK.
So, either you don't believe earnings are cyclical, or you believe being a permabear is a sound position to take.
Being a permabear is clearly an incorrect/nonsensical stance (we're on the same page there), so by extension, I can only assume you don't believe earnings are cyclical.
Or were you 'fessing up to thinking the permabears are right?

Either way--
No, believing earnings are cyclical isn't being a permabear, it's understanding how the world works.
In some years they're really high, and in some they're really low.
The main thing to understand is that neither one matters--only the trend level of earnings matters for the broad market.
That's because only aggregate future earnings matter, and that future, though squiggly at short time frames, will have an average level which the trend line follows.

It's certainly possible that 2023 S&P 500 earnings might come in at $250, however unlikely it seems to anyone but sell-side bankers.
But the bigger point is that it's irrelevant--that's definitely not going to be a point of the trend line, nor an indication of its future.
The average of the subsequent decade is going to be at least 20-25% lower than that in real terms even on optimistic assumptions.
(e.g., earnings continuing to rise faster than GDP, past their current record percentage)

There are no 4 quarter rolling period where I see $95 earnings starting Q1 2020.
Use the figures from Standard and Poors. That's the actual figure for the four quarters to end 2020.
Google "sp-500-eps-est.xlsx", check cell J142.
It's the same figure as is reported elsewhere, e.g. Pinnacle, who reports based on a different methodology.
(Dow Jones data services used by Pinnacle reports the sum of known and published bottom-up trailing
four quarters as reported, whereas S&P's figure is "profits earned during the 12 months ending on that date".
The S&P figure is correct, but can only be known well after the date in question. The DJ method is "as known at the time")

Jim
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Well, because you pretty much said it?
....or you believe being a permabear is a sound position to take.


WOW. You are attributing something I didn't say, because you think I almost said it, and then goes one up syaing I believe in "permabear is a sound position".

You are completely mischaracterizing what I said. Again, Not surprising, but why?


There are no 4 quarter rolling period where I see $95 earnings starting Q1 2020.
Use the figures from Standard and Poors. That's the actual figure for the four quarters to end 2020


OK. I use operating earnings, you used "reported earnings". Fair enough. Here is the another set of data from SP500 Index provider. On the second sheet "Sector EPS" On cell CN8, you can see the earnings at $122.37. You can also see the expected earnings for 2021, 2022 & 2023.

For 2023, SP500 Index provider is estimating $240. My numbers are Yardeni numbers which are adjusted so, they are slightly higher. But $240 per share is far higher than $140.

Even the reported number for the first 3 quarters are $143.93.

Setting aside the numbers, the key point which you have not addressed is, the economy is expected to grow. The economy is so hot, the big worry is inflation not deflation.

Under these circumstances projecting cyclical EPS is going to be about what we did in 3 quarters this year, is a perma bear argument.

https://www.spglobal.com/spdji/en/documents/additional-mater...
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I'm no expert, but it seems to me that the technology sector (with it's above-average margins and revenue per share growth rates) tends to occupy a larger and larger share of S&P 500 revenues and earnings with each passing year.

Your stereotypical tech centric investor probably expects this trend to continue (or accelerate) and reasonably expects future S&P 500 margins and growth rates to be materially higher than they have been in the past. No reversion to the mean. "This time is different." They're slapping a 25-30x multiple on $225-250 EPS for 2023 (13-14% net margins) and don't think those earnings need any major cyclical adjustment downward. If you bring up US index valuation vs US GDP, they'll tell you that indicator is meaningless due to increases in foreign sales in the Index. Price to sales ratios around 3x make sense to these folks, given the bright outlook. They're expecting quite good returns for the Index from today's price over the next 3 years.

Your stereotypical tech-shy value investor pretty much assumes a partial or full reversion to the mean for S&P 500 margins and valuations. For 2024, they're penciling in something like maybe 10% net margins or $165 EPS on $1,650 in sales in 2024) and slapping a good old fashion PE of 16 or 18x on it to get a 3 year price target around 33% or more below today's price. They're seeing a large bubble and probably sitting on a lot of cash waiting for a major bear market. If you bring up US index valuation vs US GDP, they'll nod in agreement. They will NEVER be foolish enough to pay 3x sales for the S&P 500.
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If you bring up US index valuation vs US GDP, they'll tell you that indicator is meaningless due to increases in foreign sales in the Index.

This is an argument with very strong underpinnings.

But, if you look at the actual size of the effect, it's surprisingly small.
The S&P 500 always had a lot of export earnings.
It's a larger share recently, but perhaps surprisingly, not all that much more.

One thing that's easy to forget is that non-US firms are also increasing their share of value added in the US.
Globalization works both ways.

Jim
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