Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.
I’ve got this interesting email discussing how I am missing many points:
Underlying factors that affect the metrics you used in your article:
The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
Stock buybacks from the new tax code (fudging the numbers you are working with).
The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
The sheer number of Zombie companies and historic high levels of BBB bonds.
Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!
All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.
And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.
When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.
One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.
We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;
You know it is rigged,
You know buybacks are strong,
You know interest rates will remain low, or inflationary due to the huge debt,
You stay away from zombie companies, buy those that will do even better when the competition dissolves!
Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.
Let me put the things into perspective!
The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.
Take advantage of it.
On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.
Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.
Artificially depressed interest rates
As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.
However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.
How to invest keeping the risks in mind
Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.
You have three options to invest your money!
The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.
Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.
I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.
The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.
I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.
The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.
Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?
To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.
in the news last Friday, we discussed the earnings of various companies and how a long-term investor should approach those, check the video out if you haven’t. As promised, today we will discuss the economic environment, the FED’s shift in gears and how one should think about long-term investing in relation to what might happen.
I’ll explain how:
we are most probably going for a global currency collapse, that will happen sooner or later,
the economy doesn’t have to collapse, and
how stocks might better than other things.
Just before we start, I wish to thank you all for the great reviews on Amazon, we are in the company of greatness on the Amazon best seller list, with Nobel prize winners like Shiller, legendary investors like Lynch and great trading books like Market Wizards. I thank you all for your support.
The FED’s pause
Let’s start with the news, the last two weeks were filled with crucial news that is important to systematize and put it into context.
The key piece of information is the FED’s pause and change in rhetoric.
We can say the FED capitulated! The committee will be patient with rate hikes and adjust for whatever might happen.
Prior to the FED’s change in heart, there was this expectation that we are in for a global slowdown. After the FED changed its rhetoric, said they will pause to keep the economy up, stocks rallied after the bad end of the previous year.
So, a decline of 15% in the S&P 500 and a 100 basis points increase in the cost of borrowing for the US government, led the FED to stop with raising rates.
Now, you can tighten interest rates, but that will increase the cost of borrowing for governments, that will consequently force them to borrow more as no politician is going to save money and not spend.
Given the FED, ECB, BOJ and others are ready to do whatever it takes to keep things as those are, the only thing they know how to do is to give more of the same medicine, thus more debt.
NOW, let me make this simple – Q4 2018 – people were selling because of the FED, the economic data was good!
Q1 2019, people are buying because of the FED, the economic data is not that good!
My conclusion is that there will be no more tightening, no more normalization because, over the last 10 years, politicians and central banks have seen that interest rates can be low and they are now like junkies on low interest rates.
I am looking at the data, I look at the FED’s and the politicians’ behaviour and I am thinking;
1) There will be more money printing, much more
The last recession unveiled a tool that hadn’t been really used before, it unveiled the possibility to use central banks’ balance sheets to help the economy. Before 2009, Central banks’ balance sheets had been mostly flat. After 2009, an explosion of money printing is what followed.
We have already seen that governments and corporations went on a borrowing spree to take advantage of the low rates. As it is normal with both governments and corporations, there is never the intention to pay back the debt, their only goal is to make money on the spread between what they are earning from the capital used and the interest rate they have to pay. For example, Apple can borrow at an interest rate of 3% on a 10 year bond, if they use that capital and make 5% on it, they make a lot of money. Debt repayment? Don’t joke, you might kill someone with unstoppable laughter.
With governments, it is even worse. US interest expenditures had been stable as interest rates had been declining and stood low. However, as the FED started tightening, US interest expenditures exploded and given the current budged deficit, higher rates would make the payments unbearable. The usual definition of a Ponzi scheme is when one has to borrow just to pay the interest on the debt.
If interest rates increase by just another 100 or 200 basis points (1 or 2%), the interest payments of the US governments would make most of the budget’s deficit and would force the government to borrow to pay interest expenses.
What does this mean for the long-term? Well, the FED can control rates until a certain moment, at some point it all breaks down like a house of cards. Interest rates go up because who wants to lend money to a government or corporation that is borrowing just to pay the interest, inflation creeps in as people want to spend their money and the FED has to hike to stop the inflation while still printing to save the economy.
2) Be a debt owner, not a debt holder
Debt holders are the suckers, thus all diversified portfolios like my friend’s portfolio with an investment bank is, will see their values erode. Do you know that in the 1970s, bonds were called certificates of confiscation as inflation would eat up most of their yield?
However, the situation gets tricky with stocks as those are businesses and businesses, the good ones can transfer price increases, i.e. inflation to customers. A good example is the Argentinian stock market. From February 2008 the Argentinian stock market increased 17 times.
And you thought the S&P 500 did well?!?
However, the Argentinian Peso did almost the opposite against the dollar.
So, prepare for a currency collapse down the road. It might happen tomorrow, it might happen in 2029. Whenever it happens, if you are not prepared, you are the sucker and you might lose it all.
4) The world will continue spinning
People often forget that the world will go on, the currency environment might be different but emails will still be sent. The cost might be different.
A good illustrative example is a normal postal stamp in Italy. The price in 1958 was 25 lire while in 1998 was 800 lire.
The current price is EUR 0.95, thus 2000 lire. So, over 60 years, the price of sending a letter in Italy increased 100 times.
The problem is that it will not be linear, it will be explosive so that will take many by surprise most. What to do? Well invest in great businesses, we will talk about one tomorrow, Disney, you can invest in commodities, we will talk about that on Monday with zinc, Glencore, Teck, Anglo American and you can make money on inflation, or at least stay protected as we discussed in the video on inflation this week.
My focus now is on businesses we can’t live without. That will give me protection over the long term, looking at margins of safety and healthy business returns.
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A month or something ago, I was contacted by an investor that had just set up a portfolio with an investment bank. He told them that his risk tolerance is minimal and that he would like some capital appreciation in the long term. He asked me to review the portfolio and that is what we are going to do now.
Here is the video version, while those who prefer reading, can find the article below.
$13 million-dollar investment bank managed stock market and bond portfolio review:
US equity portfolio exposure & issues
International equity portfolio exposure
Fixed income portfolio
General banking fees and value for money
Discussion about fees and risk reward opportunities
Risk and reward
What would I do differently?
Stock market and bond portfolio review
Here is how the portfolio has been structured:
US equity is 22.74%, international stocks 25.52% and as the requirement was low risk, 48.5% has been placed into US fixed income. This has been done by putting the money into 3 different bank funds (more about bank fees later). The yearly management fee is 0.9%.
Let’s start with US equity exposure.
US equity portfolio exposure
The portfolio positions are listed from the largest to the smallest. The client automatically replicates the positions held by the 3 funds within his account.
The largest position is Advance Auto Parts (AAP). I don’t know whether the fund bought the stock at the bottom in February of 2018 or it was a long term holding as the unrealized gains and losses in the above table go back to when the portfolio investment was made, which is February 2018.
AAP, has had free cash flows between $300 and $500 million per year over the last 10 years on a $10 billion market capitalization. I would expect the return there to be around 4% in the future. Auto parts are a competitive business but can be recession proof.
The next position is Comcast (NASDAQ: CMCSA), a company that recently won its bidding war and acquired Sky Plc for $38.8 billion. The all cash offer will put more pressure on Comcast’s balance sheet that already has $114 billion in liabilities. Plus, Sky Plc has had operating cash flows of around $2 billion per year in the last 10 years. This makes it a stretched acquisition as the interest on the debt will be close to the $2 billion of free cash flow coming from Sky.
Intercontinental Exchange (NYSE: ICE) is another stable company with high free cash flows and a potential return of around 4 to 5%. Free cash flows are $2 billion on a $42 billion market cap.
Danaher is the 4th largest US portfolio position (NYSE: DHR) is another stable company with $3 billion in cash flows on a $70 billion market cap.
Progressive Corp Ohio (NYSE: PGR) is an insurer and Kroger (NYSE: KR) is a grocer with similar characteristics as the above businesses. All have dividend yields of around 2%, stable business models, we can call them recession proof business models, and price to cash flow ratios of around 20 that should lead to a return of around 4 to 5%.
If we look at other portfolio positions, those mostly replicate the above. All good companies and fairly priced by the market. The portfolio also holds Google or better to say Alphabet (NASDAQ: GOOGL), American Express (NYSE: AXP), Mastercard (NYSE: MA) and we could easily say that the US equity portfolio reflects the client’s wishes: safety and quality.
US equity portfolio potential issues
I have two issues I want to discuss. The first is the value added in relation to the charged fee and the second is the fund management cost environment and investment process which is possibly even more important than fees.
Investment fees and value added
The first issue with the US equity portfolio part might be that there are 26 positions. If we look at professor and 1990 Economics Nobel prize winner Sharp’s seminal work on risk: Risk, Market Sensitivity, and Diversification, published in the Financial Analysts Journal in 1972, we see that as soon as you pass 20 positions in your portfolio, the risk equals the market’s risk.
We have seen that the expected returns from a price to cash flow standpoint will be around 4 to 5%. However, if we look at the top positions of the S&P 500, their price to cash flows don’t differ much from the ratios of the analysed portfolio and the businesses in the S&P 500 can be considered of quality too.
Microsoft (NASDAQ: MSFT) has a cash flow yield on price of 3.75%, Apple (NASDAQ: AAPL) of 8%, Amazon (NASDAQ: AMZN) of 1.8% but we might argue that in 10 years, AMZN might have higher cash flows than Kroger. Berkshire (NYSE: BRK.A, BRK.B) is a diversified portfolio focused on US equity by itself, it holds great businesses and it has a price to free cash flow ratio of around 4%.
This leads me to the question, is the 0.9% yearly fee our friend is paying for the above portfolio justified? One can buy the S&P 500 for a yearly fee of 0.04% which is 22.5 times smaller than what is being paid to the investment bank or there is always the option to simply buy Berkshire and let Buffett and his fellows manage the money at no cost practically.
To conclude on the investment fees, I don’t think that in this case, paying a yearly fee of 0.9% adds any kind of value given that the stocks might look a bit more conservative than the S&P 500 but such bet is based on past performance and not part of a strategy. In this digital era world, one might argue that Amazon is more defensive than Kroger.
Investment fund behavior
The thing when it comes to banks is that there is a lot your bank is not telling you.
Aside from the 0.9% yearly management fee, the bank makes money as they buy and sell through their own broker, perhaps they are even the market maker for the security, they pay for research, marketing costs, administration etc. that might not be included in the first fee you pay but might be included in the costs of the second fund that you actually don’t see. In this case, as the clients owns the positions directly, only the brokerage, custodian and market maker fees come into account, but that is still something extra.
Investment fund management process
Now, there is another thing when it comes to investment funds that is not discussed much. When things go well, all is good, but when things go south, some clients might want their money back. The investment manager is put into a tough spot because he then has to make investment decisions based on external inputs which might not be in the best interest of other clients. For example, if I manage a $1 billion portfolio, there is panic in the markets and clients want to cash in on $300 million. Liquidity usually dries up on the market too at such moments and you cannot sell your positions easily, especially your bond positions. (Remember that the positions discussed above are part of a much bigger fund)
The investment manager has no option than to sell the most liquid assets which might be the best assets to hold in the long term. Further, an investment manager has to be invested 100% all the time. Investment managers, collecting a fee of 0.9%, don’t have the option Buffett has. Buffett has $114 billion dollars practically lying on Berkshire’s bank account waiting for a market panic so that he can buy stocks on the cheap. (Buffett’s cash is invested in short term US Government Treasuries with an average maturity of 4-months – can be considered as cash)
This is something few think about when things go well, but crucial when things go south. Our friend has no influence on that and unfortunately this is where things often go wrong with funds managed by investment banks. An investment manager has to do as ordered, not as he wishes or what would be in the best interest of the client.
International stock portfolio overview
The international part is 25.52% of the whole portfolio and has a total of 68 positions. Since the inception of the portfolio, the performance of the international part has been really bad as almost all the positions are down with some like Ryanair (LON: RYA) down 34%. This is nothing strange given that international stocks and emerging markets have really suffered during 2018.
The largest position is Medtronic (MDT), followed by Unilever (UN), Compass Group (CMPGY), Aptiv (APTV) and Ryanair (RYAAY). There is a little bit of everything there with Tencent (TCEHY), BHP Billiton (BHP), the Indian Icici Bank (IBN), the Russian version of Facebook – Yandex (YNDX) and some interesting Chinese stocks like 58.com (WUBA) or South American payment processors like Cielo SA (CIOXY).
Now, Medtronic (NYSE: MDT) – the world’s largest medical device company makes most of its revenues and profits from the U.S. healthcare system but is headquartered in Ireland for tax purposes. Thus, this is not an international stock but goes under the international portfolio. Free yearly cash flows have been around $4 billion over the past 10 years and the market cap is $120 billion.
Nevertheless, holding 69 stocks doesn’t move the needle and we can expect them to perform equally as the market does. Therefore, one can simply buy the Vanguard Total International Stock ETF (VXUS) for a fee of 0.11% per year.
If I compare Vanguard’s top 10 positions and the portfolio we are analysing, I see that Royal Dutch Shell pls (NYSE: RDS) is in both portfolios, same as Tencent (TCEHY), Novartis (NVS), Roche (RHHBY) and Taiwan Semiconductor (TSM).
So, a portfolio I am paying 0.9% to be managed has 5 positions that are also in the Vanguard Total International stock ETF top 10 positions with a management fee of 0.11%.
Let’s see if there is more value added in the bond portfolio.
US fixed income portfolio
48% of the portfolio is placed into a bond fund and the holdings are the following.
The majority of the bond portfolio is in US Treasuries, 18% of it, with maturities ranging from 2021 to 2026. The yield on those is less then 2% or around that. Then there is a bunch of other corporate bonds with yields between 1% and 4% on average and maturities ranging from 2022 to 2028 on average.
Now, the first thing is that if 9% of the total portfolio is in Treasuries, why would you ever have to pay any fees on that as with a $13 million dollar portfolio you can simply buy them yourself. Or, if you want, the Vanguard Treasury ETFs has a fee of 0.07%.
Secondly, the investment grade US corporate bond ETF from Vanguard, offers much higher yields for minimal fees.
On a portfolio of 66 bonds, 60 excluding the Treasuries, I simply don’t see any difference except the huge fees. The intermediate corporate bond ETF, has a yield of 4.35% and is managed by Vanguard.
Conclusion – portfolio management and risk reward
The holder of this portfolio hoped that I can manage part of his portfolio and perhaps create an all-weather portfolio for his holdings. I declined because my current investing focus accepts a little bit more risk as we are focused on long term return maximization which isn’t what the goal of this portfolio is. I am completely devoted to what I do and creating another portfolio alongside building mine would be impossible. On the all-weather portfolio, I am partly working on it, but an all-weather portfolio focuses first on neutralizing risk and not that much on maximizing returns. You cannot get high, Buffett like returns with an all-weather and that is why I cannot focus my whole work around it and this portfolio. I takes at least a year of hard work to build a portfolio.
Secondly, if I would have to manage the money as required, the way explained above would be one way of doing it. I cannot charge $117,000 per year for the above as the investment bank is doing, I simply can’t. Well, you have it above for free.
What we actually did is that we have created a smaller part of the portfolio to follow my portfolio that I manage on my Stock Market Research Platform. This should add a bit more diversification as it is focused on absolute value and not that correlated to markets. Plus, there are some hedges too.
Portfolio risk reward
Now, what we still have to discuss are the risks of the above portfolio in relation to the rewards. We have seen that the yield on Treasuries now should be around 3%, and the return on equities could be at 4%, up to 6% on the international portfolio. Given the 10-year maturity of the bonds, that is what the holder can expect, deduct 2% inflation and you have a real return of about zero on the bond portfolio which would be closer to 2% with Vanguard.
50% of the portfolio is in stocks and given that the number of stocks held is 90, one should expect equal to market returns, US equity markets and international equity markets. The biggest risk here is a contraction in valuations. If global investors start to require a 6% investment yield in place of the current 4%, that could lead to a decline of 50% on global stock markets and a similar decline within the equity portfolio. Also, as bonds are priced in relation to interest rates, I would expect a significant decline in the bond portfolio too.
Thus, the upside is limited but the downside is pretty big. This is because there is no strategy behind the discussed portfolio, it is over diversified, there are no hedges in place, no real diversification as we have seen bonds and stocks move in correlation during the turmoil of the last few months.
What makes me sad is that most pension funds are managed in the above way with outrageous fees. In a video on Canadian pension funds I discussed how fees go up to 2% per year for practically nothing. This is outrageous and the first thing I would tell people to do is to start educating themselves about what can be done when it comes to investing their hard-earned money.
Perhaps, individual stock picking the way I do it will not be for most, but lowering a management fee from 2% per year to 0.1% makes a hack of a big difference within a portfolio. Actually, it makes almost a 100% difference on a long-term portfolio over 30 years based on current market return expectations.
If all that you change in your financial life and investment portfolio is that you get a lower fee or even eliminate fees, the above is how much it affects a $1 million portfolio over a 30-year period and 4% market returns per year. The differences are staggering.
From a general perspective, an approach like the one discussed above offers no strategy, it is a purely market following and extremely diversified investment. Thus, such a general approach certainly doesn’t deserve to charge a 0.9% fee. The lack of alpha, the lack of an investment strategy, a portfolio that resembles an index is just part of what is not good in story we discussed up till now.
The following chart shows how there are different investment strategies and the one discussed today is probably the most obsolete. However, banks still manage to sell it to clients due to a lack of financial education.
My opinion would be that the investor should first create a clear strategy about what is the goal for his funds and then put that goal into a risk and reward perspective within a well-diversified portfolio based on a well-balanced strategy.
Such a strategy is what we focus on so if you enjoyed this kind of investment educational content shared above please follow, subscribe, like and share.
About the author: Sven Carlin, Ph.D. is passionate about investment research and value investing. He also manages the Sven Carlin Stock Market Research Platform based on long term value and business investing principles.
Politics aside, it is important to have a clear investing perspective on how can our portfolio positions be affected by Brexit.
For now, markets are pricing in more pain for Europe, than Britain.
There are some stocks that should be avoided and some that shouldn’t be impacted at all, on the contrary.
Brexit is a very hot topic in Europe nowadays. However, it is important to separate your investing perspective from whatever might be your political views. I sit down with Niche Masters Fund with head investment manager, Peter Barklin, and discuss his very interesting, objective investing perspective, on the potential implications of Brexit for us as investors.
Just as an interesting note from the video, European stocks (VGK) (IEUR) have been hit harder than UK stocks (EWU). This shows that the Brexit isn’t just all bad for Britain and that we must carefully weigh the pros and cons.
1:40 Brexit for investors
3:27 What to own
5:08 Brexit benefits
7:04 Brexit and Europe
10:05 Portfolio positioning
11:29 Brexit risk perspective
Investing is a very important topic for all of us. However, not all of you can dedicate a lot of time to it. I do research all day long and still the time is never enough. Plus, given a Ph.D. in financial risk management, 3 years of teaching International financial accounting at university level and researching stocks, listening to conference calls and reading annual reports day in and day out, I think I have some skills that few retail, part-time investors have. That is normal for the way we live, I am sure you are much better than me at surgery if you are a surgeon, law if you are a lawyer, software if you are a engineer or in whatever your specialty is.
In the follow video I discuss what I do and how I go about investing.
For those interested in more information, please check my Stock Market Research Platform here:
I recently had the privilege to interview dr. Per Jenster. He is a Fullbright scolar, author of many books, former dean of the Kopenhagen Business school, entrepreneur with more than 20 ventures of which many went public for hundreds of millions and he is an investor that has his own hedge fund. A person from whom we can learn very much. Enjoy the interview.
Investing is about risk and reward. I feel many miss the risk part when it comes to investing, especially in the mining environment.
I discuss 7 risk factors that will help you avoid investing in the wrong miners.
ETFs, with their mindless investing strategy, are increasing the danger of investing in the mining environment.
Miners, especially gold miners (GDX) (GDXJ), don’t have a great reputation in the investing world. Unfortunately for them, that is rightfully so. It is often the case that the management is more focused on the stock market, than on business performance. A quote from the 19th century explains it very well!
In such an environment, one must be very careful. The key is to understand the risk and not do stupid things like investing on hope or going after a good story.
An investment in a miner has to be founded on a real business analysis of its fundamentals and a careful assessment of the risks and rewards. On top of that, one should know the miner’s sensitivity to the respective metal’s cycle.
Investing while excluding the above, cannot even be called speculation, it is pure betting and you know what are the odds when it comes to betting.
In this video I share 7 things to analyze when investing in miners, or at least to take into consideration when analyzing the risk and reward of a specific investment. The things to watch are the following:
(0:39) – ETF ownership and business value
(1:47) – A general valuation of miners
(3:40) – Book values are often misleading
(6:05) – Advertising your own stock with Google ads
(7:09) – Example of operational risks in the mining industry
(7:53) – Dividends and cash flows
(9:00) – The value within junior miners and the Van Eck Junior miners ETF
I recently summarized Dalio’s last book, Big DEBT CRISES and there he shares his questions, check list, to see whether the stock market or economy is in a bubble or not. In today’s article, in light of the FED’s tightening, we are going to go through his questions, to see whether we are in a bubble or not.
my name is Sven Carlin and I am an independent investor, independent thinker who doesn’t really like to follow the crowd, that has served me well in my life and, I have the feeling it will serve me well in the future too. Let’s go through Dalio’s questions one by one and then conclude with what to do, where Dalio’s option is to have an all-weather portfolio.
We are going to look at whether the US economy and stock market are in a bubble. As for Europe, I’ll make a special article about it due to the many economies.
PRICES ARE HIGH RELATIVE TO TRADITIONAL MEASURES
The US stock market is expensive and prices are much higher than traditional measures.
A look at the cyclically adjusted price to earnings ratio for the S&P 500 that takes into account 10 years of earnings, shows how stock prices were higher only during the dot-com bubble. But, let’s not focus only on stocks, let’s look at housing.
The home price to income ratio is not higher than it was in 2007 but is getting close to it and it is much higher than it was in the past 50 years. Incomes were low in the 1950s so that isn’t really comparable.
To answer question one: yes, prices are high relative to historical measures.
2. PRICES ARE DISCOUNTING FUTURE RAPID PRICE APPRECIATION FROM THESE HIGH LEVELS
If we take a look at the S&P 500 and at S&P 500 forward expected earnings, all we can see is fast growth.
So, perhaps what we have seen up to December of 2017 will again be called a bubble as higher interest rates inevitably put pressure on asset prices. Not yet on stocks as the sentiment is still strong but you can’t escape when it comes to housing.
ANSWER: YES, prices are discounting fast future price appreciation, certainly in stocks, whereas it might be over for housing.
3. THERE IS BROAD BULLISH SENTIMENT
Let’s see, Kudlow states the US economy is crushing it.
The middle class left after 2008, typical behaviour, buying high and selling low. If we see another bump like in 2007 where the participation jumped from 61% to 65%, we will know it’s a bubble. Those aged 35 and above are investing a bit but not yet like it had been the case.
Answer: with stocks it is a no but with houses it is a yes. Also, it is important to note the widening wealth gap where those that have invest more and push stocks higher while those that don’t have, simply don’t have to invest.
7. STIMULATIVE MONETARY POLICY THREATENS TO INFLATE THE BUBBLE EVEN MORE (and tight policy to cause its popping)
Interest rates have been already tightening and we can expect more in December.
We are at bubble top – so a lot of opportunities to diversify by selling what is in a bubble and buying what is in depression. In a global world you can do that today.
If you wish to check how am I building my portfolio as I cashed out of most my long investments during 2015-to 2018, the last being Nevsun – you might want to check my Stock market research platform where I am slowly building my model portfolio that should do very well in this environment.