Fund manager: ‘Nightmare’ US stock valuations driven by ‘young, dumb’ investors(cnbc.com)
cnbc.com
Fund manager: ‘Nightmare’ US stock valuations driven by ‘young, dumb’ investors
https://www.cnbc.com/2020/10/15/smead-nightmare-us-stock-valuations-driven-by-young-dumb-investors.html
39 comments
Classic fund manager who can't make returns in a new market regime and decides to cope by complaining on CNBC
> Classic fund manager who can't make returns in a new market regime and decides to cope by complaining on CNBC
I'm disappointed that the top comment at HN regarding such an interesting topic is nothing more than an ad hominem that sidesteps any of the points made in the article.
If the fund manager quoted in the article is wrong then you should have no problem presenting a rational case on how and why he is wrong. Instead, all you did amounted to name calling. How does this elevate us?
I'm disappointed that the top comment at HN regarding such an interesting topic is nothing more than an ad hominem that sidesteps any of the points made in the article.
If the fund manager quoted in the article is wrong then you should have no problem presenting a rational case on how and why he is wrong. Instead, all you did amounted to name calling. How does this elevate us?
This is a typical example of a mediocre active manager. All you need to do is take a look at one of his funds.
It has high fees, and lower returns than the S&P over the past 10 years: https://smeadcap.com/smead-value-fund/
I think he's saying the long play has a lot of risk right now.
Congress doesn't seem too eager to pump the market right before election either.
Congress doesn't seem too eager to pump the market right before election either.
The market is already pumped, pricing in a stimulus policy that is highly unlikely to arrive, or if it does arrive, it won't be sufficient to support a robust recovery that would justify current valuations (outside of tech companies dragging SPY up). Entirely possible we're at "the top", but there currently is no alternative to equities if you're chasing yield.
Is GDP really that far down? (and will it stay down without a stimulus package?) I'm not convinced the market really needs a recovery. Sure the majority of people need it but I'm not sure that has much of an effect on production, especially if cost of living is going to go down due to the bottom dropping out of the real estate market.
>especially if cost of living is going to go down due to the bottom dropping out of the real estate market
where's the evidence of this so far?
where's the evidence of this so far?
>Is GDP really that far down?
GDP is down. Bigly.
https://fred.stlouisfed.org/series/GDP (click on the 1yr timeframe to see it better).
GDP is down. Bigly.
https://fred.stlouisfed.org/series/GDP (click on the 1yr timeframe to see it better).
>especially if cost of living is going to go down due to the bottom dropping out of the real estate market.
This sure as heck isn't happening in my market... all year long I've listened to a group of potential buyers tell me they are going to wait because the bottom is going to fall out any day now ... every piece of data I have shows that the opposite is happening - we have more buyers than physical homes here and prices have been on a steady upward trajectory for the past five years. With interest rates at historic lows, there's no reason to believe buyers aren't going to continue to acquire homes.
Now - in other markets? Maybe there will be a correction, but that's actually bound to help my market and likely others too, as people move from expensive areas to less expensive areas. SFO / LA / PDX / SEA aren't going to collapse overnight.
This sure as heck isn't happening in my market... all year long I've listened to a group of potential buyers tell me they are going to wait because the bottom is going to fall out any day now ... every piece of data I have shows that the opposite is happening - we have more buyers than physical homes here and prices have been on a steady upward trajectory for the past five years. With interest rates at historic lows, there's no reason to believe buyers aren't going to continue to acquire homes.
Now - in other markets? Maybe there will be a correction, but that's actually bound to help my market and likely others too, as people move from expensive areas to less expensive areas. SFO / LA / PDX / SEA aren't going to collapse overnight.
What compels you to chase yield?
How do you make the case that the risk (probability of loss multiplied by magnitude of loss) doesn't exceed the expected yield?
I think hedge fund manager in original title is saying he's uncomfortable with the risk/yield equation right now.
How do you make the case that the risk (probability of loss multiplied by magnitude of loss) doesn't exceed the expected yield?
I think hedge fund manager in original title is saying he's uncomfortable with the risk/yield equation right now.
In the case of institutional managers, they live and die by their returns. Take pension funds: if they do not meet their return targets, pensions get cut (or debt is issued to make up the gap, big yikes).
I agree with your last statement: the amount of risk isn't realizing a corresponding risk premium in the returns available. Yet, you must invest somewhere. That's your job (as an institutional investor). A lot of structural financial heartache ahead.
I agree with your last statement: the amount of risk isn't realizing a corresponding risk premium in the returns available. Yet, you must invest somewhere. That's your job (as an institutional investor). A lot of structural financial heartache ahead.
> there currently is no alternative to equities if you're chasing yield
What about DeFi?
What about DeFi?
Has no intrinsic value. Might as well go to a casino.
The present administration has gone to great lengths to prop the stock market up through any means necessary because the President makes no distinction between the market and the economy as a whole.
The present condition of the market is entirely artificial, and unrepresentative of the actual state of the economy. Thus, whenever the stock market is allowed to return to its natural level, it's going to take a bearish turn to surpass all others.
Even a government can't manipulate the market forever.
The present condition of the market is entirely artificial, and unrepresentative of the actual state of the economy. Thus, whenever the stock market is allowed to return to its natural level, it's going to take a bearish turn to surpass all others.
Even a government can't manipulate the market forever.
My first question was where these Millennials got the money to drive the market. The answer appears to be "derivatives". Key quote: "There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders."
When do these options expire? What happens when they do?
When do these options expire? What happens when they do?
I don't understand how to read into P/E ratios. Wouldn't a low ratio imply both a lack of investment by the company in itself and a lack of confidence by investors in long term prospects?
It’s just the price to earnings ratio. Literally all it means is you divide the price and earnings. There is no canonical way to “read into” it, however typically higher P/E ratio means the market is pricing in growth or is (perhaps overly) optimistic, a lower p/e means the market does not anticipate as much growth and thus will only pay a price that is justified by the earnings (meaning people buying it intend to recoup the investment through dividends or because they thought the market sentiment about lack of growth was wrong)
Gov bonds yield below inflation levels. In such conditions anything that can give you any return is worth extra. Stock market valuations are extreme because the monetary conditions are extreme.
It's interesting how many people seem to overlook this. It, over-proportionally, affects assets with a far pay-off date. A stock could be worth $1 and $10 depending on the interest rate and have the same yield over xx period of time.
I have written about this in more details: https://omarabid.com/zero-rates-world
I have written about this in more details: https://omarabid.com/zero-rates-world
It couldn't be due to a decade of easy money trying to chase yield, no sir, couldn't be that at all.
For those who agree that the market is massively overvalued--what is your advice for young investors (assume a high risk tolerance). I know you can short specific stocks if you think they will go down, but I don't want to do any margin trading. Where can we invest that is not overinflated/will benefit when the rest of the market crashes?
I have exactly the same problem. Michael Burry (notable for profiting off of the 2008 housing crash) is predicting an enormous index fund bubble, or the "safe" investments that people are so fond of in 401ks and IRAs. Even the market indicators like the S&P 500 are somehow outperforming the prior year.
High-risk investments and stock picking is high risk and a bad idea; index funds are a bad idea because they're overvalued; cash is a bad idea because of the inflation risk; where should a young person (<40) put their money?
I wouldn't even mind hearing "there is no safe investment right now, buy real-world assets like land and weapons and wait for the crash", but I only hear that from gold-standard idealists, not from professional investors. What do the investors recommend?
High-risk investments and stock picking is high risk and a bad idea; index funds are a bad idea because they're overvalued; cash is a bad idea because of the inflation risk; where should a young person (<40) put their money?
I wouldn't even mind hearing "there is no safe investment right now, buy real-world assets like land and weapons and wait for the crash", but I only hear that from gold-standard idealists, not from professional investors. What do the investors recommend?
I don't know how sophisticated of an answer your looking for, but I can tell you what I'm doing.
1. I have a standard portfolio of index funds split between stocks, bonds, real estate and cash, weighted more into bonds. The bonds and cash weight is because I think the market will tank at some point, the stocks are because I might be wrong.
2. I rebalance periodically to take profit from whatever is doing best.
3. I've tried to broaden my investments further by adding a "market neutral" fund from Vanguard, and an asset fund.
That's the basic setup. As I said, I'm pessimistic about the stock market, but not out of it, so I've based my allocations on that. I'm not too worried about index funds being a bubble themselves. If the market goes down enough to trash index funds as a class, there won't be anywhere to hide... That's why I'm trying the market neutral fund. I'm hoping it won't correlate with the stock or bond market. That's my big concern, that everything will crash at once.
I am somewhat concerned about the Fed's actions, so I have added an asset fund in case we end up with more inflation than people expect.
Personally, I think we will have a crash, but I've been wrong so far. I just don't see how the market will go up rapidly for another 5 years, and if it doesn't, that doesn't justify the current prices, but who knows...
1. I have a standard portfolio of index funds split between stocks, bonds, real estate and cash, weighted more into bonds. The bonds and cash weight is because I think the market will tank at some point, the stocks are because I might be wrong.
2. I rebalance periodically to take profit from whatever is doing best.
3. I've tried to broaden my investments further by adding a "market neutral" fund from Vanguard, and an asset fund.
That's the basic setup. As I said, I'm pessimistic about the stock market, but not out of it, so I've based my allocations on that. I'm not too worried about index funds being a bubble themselves. If the market goes down enough to trash index funds as a class, there won't be anywhere to hide... That's why I'm trying the market neutral fund. I'm hoping it won't correlate with the stock or bond market. That's my big concern, that everything will crash at once.
I am somewhat concerned about the Fed's actions, so I have added an asset fund in case we end up with more inflation than people expect.
Personally, I think we will have a crash, but I've been wrong so far. I just don't see how the market will go up rapidly for another 5 years, and if it doesn't, that doesn't justify the current prices, but who knows...
Im putting some everywhere, and looking to take out a loan to put some cheaply loaned capital into desirable real estate. Crossing my fingers.
There is really no way to time the market. If you could do it, you’d be rich quickly and massively. The only sound advice is to buy an broad ETF, preferably by Vanguard, and just hold it for a long time. You’ll probably make something around 12-15% per year compounded after a decade or so. Will your portfolio be at 50% of its initial value at some point? Could very well be. You need to see through it and just hold the stocks.
Read JL Collins for more depth.
https://jlcollinsnh.com/manifesto/
Read JL Collins for more depth.
https://jlcollinsnh.com/manifesto/
> 12-15% per year
That seems unreasonably optimistic.
That seems unreasonably optimistic.
It's not. I've had a Vanguard account since 2007. My 10 year returns are right in that range.
I've had a Vanguard account since 1997. 500 index. Put the minimum in at the time and never touched it since. I do not have 12% annualized returns.
Indeed, I just checked portfolio visualizer, which gives a 1997-2020 return of 8.5% CAGR for the 500. My guess is you started adding in 2007 (so your principal was very small during the great financial crisis) and you've been adding during the entire recovery. You don't know how lucky you are. Of course, maybe you just bought QQQ in 1997. Again, you don't know how lucky you are.
The number of fallacious assumptions embedded in your syllogism is difficult to unpack. I'll start with one, past returns are not indicative of futures results. I'll add another, the relative expensiveness of stocks at a given point in time are negatively correlated to long-term future returns. Someone won a nobel prize by illustrating the last one.
Indeed, I just checked portfolio visualizer, which gives a 1997-2020 return of 8.5% CAGR for the 500. My guess is you started adding in 2007 (so your principal was very small during the great financial crisis) and you've been adding during the entire recovery. You don't know how lucky you are. Of course, maybe you just bought QQQ in 1997. Again, you don't know how lucky you are.
The number of fallacious assumptions embedded in your syllogism is difficult to unpack. I'll start with one, past returns are not indicative of futures results. I'll add another, the relative expensiveness of stocks at a given point in time are negatively correlated to long-term future returns. Someone won a nobel prize by illustrating the last one.
Yes, I started that account in early 2007, painfully added through the financial crisis, and just kept on adding. At some points I was adding over $1K/week, every week, year after year. I invested heavily in growth (VGT and MGK ETFs, specifically) which boosted my returns, especially over the past 5 years.
Of course, past returns are not indicative of future results. Of course, stock prices are expensive right now. But what is the alternative? CDs? Bonds? Look at any long term chart. I'll take the risk.
Of course, past returns are not indicative of future results. Of course, stock prices are expensive right now. But what is the alternative? CDs? Bonds? Look at any long term chart. I'll take the risk.
>Look at any long term chart. I'll take the risk.
There are 30 year periods where US stocks (spy 500 or a close proxy thereof) posted a negative total return. Are you prepared for that?
My larger point is that 12-15% return assumption is absurd. There are very few long-term periods where that has ever been achieved in the US market, most (but not all) of which were followed by a deep and long-lasting correction.
The alternative is to assume a lower return like 5% and plan accordingly.
There are 30 year periods where US stocks (spy 500 or a close proxy thereof) posted a negative total return. Are you prepared for that?
My larger point is that 12-15% return assumption is absurd. There are very few long-term periods where that has ever been achieved in the US market, most (but not all) of which were followed by a deep and long-lasting correction.
The alternative is to assume a lower return like 5% and plan accordingly.
Despite these huge gains over the past 10 years, I do agree with you. I plan for a 3.5% withdrawal rate during retirement (hopefully early retirement.)
You can still plan for a 3.5% withdrawal rate and be way off of what you need to retire if you are assuming a 12-15% return rate.
I already hit my FIRE goal, so not a problem for me.
Good for you, but your FIRE goal either explicitly or inherently assumes both an inflation rate and an expected return rate. It is crazy to ignore both as you seem to be doing with your statement that you are safe from failing to meet 12-15% returns simply because you are assuming a 3.5% withdrawal rate. In addition to inflation and expected return, you also should consider max draw down potential.
Call option 101:
A call option is basically a right (not an obligation) to buy a specific stock at a specific price (strike price) some time in the future. Loss is limited to the premium paid for option and gains are basically unlimited.
If for instance I buy a 2-week NFLX Call option at a $2 premium with a strike price of $545, and in two weeks the price of NFLX is trading at $560 then I would exercise my option to buy 100 NFLX stock at $545 and could immediately sell it for a profit at the market price $560.
A lot of times also, speculators never exercise the option and just close the position by making the opposite bet. (i.e. sell the call option to another investor/speculator rather than buy 100 stock at the strike price)
Thoughts: I think this guy is making a fight against times as well as believing a fallacy that the stock-market 100% correlates with fundamental analysis of the underlying company. Yes P/E is high for many companies, and I have heard of a current "tech-bubble" but who knows. How much is "too much"? No one really does. Bet on the total markets long term and you'll probably be ok. Also buy BTC
If for instance I buy a 2-week NFLX Call option at a $2 premium with a strike price of $545, and in two weeks the price of NFLX is trading at $560 then I would exercise my option to buy 100 NFLX stock at $545 and could immediately sell it for a profit at the market price $560.
A lot of times also, speculators never exercise the option and just close the position by making the opposite bet. (i.e. sell the call option to another investor/speculator rather than buy 100 stock at the strike price)
Thoughts: I think this guy is making a fight against times as well as believing a fallacy that the stock-market 100% correlates with fundamental analysis of the underlying company. Yes P/E is high for many companies, and I have heard of a current "tech-bubble" but who knows. How much is "too much"? No one really does. Bet on the total markets long term and you'll probably be ok. Also buy BTC
Its also because the fed has flooded the market with cash and at the same time reduced bond yields to near 0%. There's nowhere for cash to go. And if you sit in cash it slowly becomes worthless over time.