Past performance is not indicative of future returns.
During the height of last year's (and the previous year) stock market frenzy, I have begin to become very wary of markets (of course, I do time markets). Massively unprofitable companies were shooting in value and retail seemed to be winning all the time. And imaginary coins with no value were going through the roof in value.
All that just kept made me referencing to Intelligent Investor by Ben Graham.
Cathie Woods and ARKK fund (I knew it was a bubble moment this thing took off in public):
” In mid-1999, after earning a 117.3% return in just the first five months of the year, Monument Internet Fund portfolio manager Alexander Cheung predicted that his fund would gain 50% a year over the next three to five years and an annual average of 35% “over the next 20 years.” “
Result:
“If you had invested $10,000 in Vilar’s fund at the end of 1999, you would have finished 2002 with just $1,195 left—one of the worst destructions of wealth in the history of the mutual-fund industry. “
And that tech is the future? Where's the earnings to boot?
“In 1999, portfolio manager Alberto Vilar ridiculed anyone whodared to doubt that the Internet was a perpetual moneymakingmachine: “If you’re out of this sector, you’re going to underperform. You’re in a horse and buggy, and I’m in a Porsche. You don’t like tenfold growth opportunities? Then go with someoneelse.”
I'm sorry. I work in tech but tech stocks are no exceptions. Companies are valued by the profits they bring in. Not by how much they are changing the world or going to revolutionize the world in the future.
Growth stocks are worth buying when their prices are reasonable,
but when their price/earnings ratios go much above 25 or 30 the odds
get ugly:
What I assume is going on going forward:
If no price seemed too high for stocks in the 1990s, in 2003 we’vereached the point at which no price appears to be low enough.
Retail loves to buy at the high. And run at the lows.
The words to take note:
And everyone who buys a so-called “hot” common-stock issue, or makes a purchase in anyway similar thereto, is either speculating or gambling
Very meme stock like. And all those ETFs that bubbled in. And even the big known tech firms to be quite frank that keeps getting mentioned as 'safe'. Not saying any of them are un-investable. But one should be very careful when investing known stocks.
And all those questionable SPACs and IPOs:
In late 1967 the IPO market heated up again; in 1969 an astonishing 781 new stocks were born. That oversupply helped create the bear markets of 1969 and 1973–1974. In 1974 the IPO market was so dead that only nine new stocks were created all year; 1975 saw only 14 stocks born.That undersupply, in turn, helped feed the bull market of the 1980s, whenroughly 4,000 new stocks flooded the market—helping to trigger the enthusiasm that led to the 1987 crash. Then the cycle swung the other way again as IPOs dried up in 1988–1990. That shortage contributed to the bull market of the 1990s—and, right on cue, Wall Street got back into the business of creating new stocks, cranking out nearly 5,000 IPOs. Then, after thebubble burst in 2000, only 88 IPOs were issued in 2001
When all those SPACs were hitting the markets, those who read Intelligent Investor would have been very wary.
Among the get-rich-quick toxins that poisoned the mind of the investing public in the 1990s, one of the most lethal was the idea that can build wealth by buying IPOs.
From 1980 through 2001, if you had bought the average IPO at its first public closing price and held on for three years, you would have underperformed the market by more than 23 percentage points annually
The idea that growth stocks (companies that lead the future innovation) should deliver superior results is not a supported one for much of history:
There is no reason at all for thinking that the average intelligentinvestor, even with much devoted effort, can derive better resultsover the years from the purchase of growth stocks than the investment companies specializing in this area.In the two years 1969 and 1970 the majority of the 126 “growth funds” did worse than either index.
The implication here is that no outstanding rewards came from diversified investment in growth companies as compared with that in common stocks generally
'Blue chips' (the 'safe stocks' everyone talks about). Are they actually safe if everyone is buying?:
In fact, at least subconsciously, they calculated that any price was toohigh for them because they were heading for extinction—just as in1929 the companion theory for the “blue chips” was that no pricewas too high for them because their future possibilities were limitless. Both of these views were exaggerations and were productive of serious investment errors.Dow Jones Industrial Average had advanced only40% from the end of 1938 to the 1946 high, Standard & Poor’s indexof low-priced stocks had shot up no less than 280% in the sameperiod.
By going to 'safe stocks', the actual returns after a downturn were abysmal at some time periods. And in the case of Japanese market, going to the blue chips was the best way to lose money.
US tech is the future. There's no way it can ever not return 10% CAVG a year in S&P 500.
It’s the end of 1989, and you’re Japanese. Here are thefacts:• Over the past 10 years, your stock market has gained an annualaverage of 21.2%, well ahead of the 17.5% annual gains in theUnited States.• Japanese companies are buying up everything in the UnitedStates from the Pebble Beach golf course to Rockefeller Center;meanwhile, American firms like Drexel Burnham Lambert, Financial Corp. of America, and Texaco are going bankrupt.• The U.S. high-tech industry is dying. Japan’s is booming.
In 1989, in the land of the rising sun, you can only conclude thatinvesting outside of Japan is the dumbest idea since sushi vendingmachines. Naturally, you put all your money in Japanese stocks.The result? Over the next decade, you **lose roughly two-thirds ofyour money.**The lesson? It’s not that you should never invest in foreign marketslike Japan; it’s that the Japanese should never have kept all theirmoney at home. And neither should you
We all know what happened afterwards. Past performance is not indicative of future performance but the notion of the past decade of US tech reigning supreme in stock market should actually be warying for US investors. For much of it is not the profits that increased, but multiples instead (tldr: just paying higher $ per dollar instead of more $).
Diversification is the only free lunch. Please keep in mind you only have 1 retirement. If you are wrong and put all your money in 1 basket, there's no going back. Sheer greed for higher returns can ruin your plans in ways that are unplanned.
What about buying unpopular profitable companies?
The concept of buying “unpopular large companies” and execution on a group basis, as described above, are both quite simple. But in considering individual companies a special factor of opposite import must sometimes to be taken into account. Companies that are inherently speculative because of widely varying earnings tend to sell both at a relatively high price and at a relatively low multiplier in their good years, and conversely at low prices and high multipliers in their bad years.In these cases the market has sufficient skepticism as tothe continuation of the unusually high profits to value them conservatively, and conversely when earnings are low or nonexistent.
As it happens Chrysler has been quite exceptional in the DJIAlist of leading companies, and hence it did not greatly affect the thelow-multiplier calculations.
end of 1968 and revalued on June 30, 1971. This time the figuresproved quite disappointing, showing a sharp loss for the low multiplier six or ten and a good profit for the high-multiplier selections. This one bad instance should not vitiate conclusions based on 30-odd experiments, but its recent happening gives it a specialadverse weight. Perhaps the aggressive investor should start withthe “low-multiplier” idea, but add other quantitative and qualitative requirements thereto in making up his portfolio.
How to put price on a stock:
Graham feels that five elements are decisive.1 He summarizes them as:• the company’s “general long-term prospects”• the quality of its management• its financial strength and capital structure• its dividend record• and its current dividend rateThe long-term prospects.
Refer to Security Analysis as you crunch up your own numbers. If you don't want to read that textbook, just standard DCA is basically what's needed using conservative assumptions and having some reasonable safety of margin (cause no one can reliably predict the future).
'Inflation is thing of past'. Deflation is an issue (and most likely is longer term).
In recent years, the true rate of inflation in the United States has probably runaround 1% annually—an increase so infinitesimal that many punditshave **proclaimed that “inflation is dead.”**More basically still, the intelligent investor must always be on guardagainst whatever is unexpected and underestimatedSince 1960, 69% of the world’s market-oriented countries havesuffered at least one year in which inflation ran at an annualizedrate of 25% or more. On average, those inflationary periodsdestroyed 53% of an investor’s purchasing power. We would becrazy not to hope that America is somehow exempt from such adisaster. But we would be even crazier to conclude that it cannever happen here.
Inflation in 1973-1982 in US:
In 1979 alone, inflation raged at 13.3%, paralyzing the economy in whatbecame known as “stagflation”—and leading many commentatorsto question whether America could compete in the global market.Goods and services priced at $100 in the beginning of1973 cost $230 by the end of 1982, shriveling the value of a dollar to less than 45 cents. No one who lived through it would scoff at such destruction of wealth; no one who is prudent can fail to protect against the risk that it might recur.
'Inflation is good for stocks'. Maybe in the longer run but:
Our figures in Table 2-2 indicate that so far from inflation havingbenefited our corporations and their shareholders, its effect hasbeen quite the opposite.
The debt of corporations hasexpanded nearly fivefold while their profits before taxes a littlemore than doubled. With the great rise in interest rates during thisperiod, it is evident that the aggregate corporate debt is now an
adverse economic factor of some magnitude and a real problem formany individual enterprises.
And if stocks happen to go up because of inflation (remember 2020 March to last year?):
if another bull market comes along, he willtake the big rise not as a danger signal of an inevitable fall, not as achance to cash in on his handsome profits, but rather as a vindication of the inflation hypothesis and as a reason to keep on buyingcommon stocks no matter how high the market level nor how lowthe dividend return. That way lies sorrow
that stocks failed to keep up with inflation about one-fifth of the time
Would commodities necessarily shield you from stock market downturns?
The near-complete failure of gold to protect against a loss in thepurchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation byputting his money in “things.”
Best to not think so.
As for conclusion to whether stocks will do well:
Common stocks may do better in the future than in the past, but they are far from certain to do so.
There is no guarantees in investing. There is no reason why stocks must do better than bonds. And that stocks must have positive returns (especially after inflation).
Personally, if anything is to follow, it is to buy profitable companies when there's nightmare in the markets. Historically, you would have been rewarded very well. This also shows up in Nick Sleep's letter in which Nick Sleep invests in a Zimbabwean firm despite the hyper inflation and government instability going on there. Hence, I put a portion of money on Alibaba, a Chinese tech stock.
And then Mr. Market went into a sudden, nightmarish depression.On September 30, 2002, just two and a half years after hitting$231.625 per share, Inktomi’s stock closed at 25 cents—collapsingfrom a total market value of $25 billion to less than $40 million. HadInktomi’s business dried up? Not at all; over the previous 12 months,the company had generated $113 million in revenues. So what hadchanged? Only Mr. Market’s mood
I am not saying to touch Chinese stocks. Please don't. There's so much political risks and your money is your money. And fundamentals in Chinese tech firms are struggling right now due to extreme policy (business is 'drying up'); it's a big bet even if you don't believe in political risk that business can slowly come back to pre-covid. But at least for me, it seems the only reason people really hate Chinese profitable tech stocks is because the price went down. Anyways, ignore this commentary cause it can come off as a shilling.
Now, you might be wondering, if it were so 'obvious it was a bubble', did I get out of markets? And the answer is a resounding no.
Markets can stay irrational longer than one can stay solvent. I never sold my US/International index funds and don't plan to. Dot com bubble was first pointed out as a bubble in 1992. It wasn't until 2000 that it burst (8 years). If you stood in the sidelines for 8 years straight, you would never have gotten in the price of 1992.
Stay invested. But also don't fall for media. Just because media tells you to buy/sell love/hate a stock/sector, doesn't mean you should. Try to stay objective. And if possible, with serious retirement money, please don't speculate and invest in broad well diversified low turnover index funds for the long run.
Good luck to you all!
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