Karl Denninger compares our present situation to earlier collapses, and thinks we're ripe and ready for another one.
You see, when people are buying stocks of companies that have nothing but negative free cash flow as far as the eye can see or sky-high P/Es of 60, 80, 100 or more they're betting with their eyes taped over on exactly one thing: Indefinite exponential growth of the business and, of course down the line, profits.
The problem is that this is an impossible premise. There is no way for that to ever happen because it is mathematically impossible.
Today we have Amazon, Facebook and Apple all priced in this way.
. . .
Every morning some percentage of people wake up with a raging hard-on and then buy stock. They believe ... Then there are some percentage of people who wake up in a cold sweat. They ate the red pill. They used to believe, but today they do not. Something changed their mind. They recognize that Amazon isn't a zero, but it's probably only worth 10% of its current stock price. Apple isn't a zero either, but as a commodity player it's priced at twice it's value -- so it's worth $70-75, not $150. Facebook is worth $30 or $40, because you can't keep growing user base in a saturated market, those not on the platform are either too young, too old or make $2 a week and you also can't keep adding ads without eventually causing a user revolt. Netflix is worth $10 for its user base but zero for anything else and Tesla is a literal zero. They add up their shares, they multiply by the current prices, compare with the above and immediately vomit.
The day that there are a lot of the second and few or none of the first is the day the suspension of disbelief and continued buying into what is outrageously overpriced, and in many cases arguably worthless securities, ends and selling in size begins.
Is it tomorrow? Probably not. But today feels eerily familiar. The vomit-inducing upward spikes have come, and now we're seeing people starting to ask questions.
. . .
The screams, cries, and gun-in-mouth suicides are coming folks. I can't give you a date and neither can anyone else but this is the exact pattern that I've seen play out before, and this movie ends with the protagonist jumping out of a 75th floor window.
My camera is pointed upward and I'll have film of the splat at 11.
There's more at the link.
Mr. Denninger provides compelling evidence, tied to an historical perspective that's right on the money (you should pardon the expression). I think he's more likely to be right than wrong.
Peter
9 comments:
Yeah, but if you have money, putting it in a bank or even in bonds doesn't keep up with inflation, much less "Quantative Easing". Kinda like keeping it in your mattress.
So if you have a retirement or other savings, you really have no other choice than the market....until the music stops. Hope you can get out quickly enough, if and when.
Karl Denninger is a professional BEAR MARKET pundit. You can always find compelling arguments for dire and catastrophic market outcomes when you listen to him. For some interesting viewing, type in his name and "wrong" on YouTube. It's a gas!
Smart investors avoid market timing. One of my mates growing up is a Wall Street big money guy, flying around in Gulfstreams and his paychecks look like phone numbers. I asked him at a class reunion what he PERSONALLY invests in, and he just laughed. Said his personal investment advice came from his great aunt: Buy and hold boring long term stuff, then don't watch the newspaper to see how it's doing daily or you'll get ulcers. When I tried to pin him down specifically, he said he bought index funds and had a small side investment in commercial rental property, and his investments were stable, boring, and doing very well.
Want evidence to support this? Some 70-80% of mutual funds and hedge funds UNDERPERFORM the S&P 500 and the Dow. Yet the total markets have AVERAGE annual returns near double digits, going back 100 years or more. How do you match the Market and overperform 80% of the professional investors? Buy and hold, and don't sweat the swings.
My friend had one further gem of wisdom. He says there's a common saying in the industry about market timers. "Bulls make money, and bears make money, but pigs go to slaughter! If you try to time it, you're sausage." The average non-professional day trader loses money. Of those that do make money, the average return is about 1/3 of what they'd earn in the S&P. And, as pointed out above, the PROFESSIONAL investors mostly underperform index funds. What do you think are your chances of predicting the market? My friend said his chances were about zero, and he's in the business!
My rules:
Don't put money into markets unless you can let it sit for 5 years or more, because that eliminates the effects of all but 2 or 3 of the biggest down markets, and that's assuming you bought ALL of the funds at peak, which you didn't. If you do invest short term money, be prepared that you might be in a down cycle when you NEED to pull it out. (Corollary to above, when the market goes down, don't sell unless you need the money right then. Selling after a crash LOCKS IN YOUR LOSSES. Instead, recognize that the market is ON SALE, and buy if you can.)
Buy mutual funds that have DECADES long track records of beating the markets. They're hard to find, and your 401(k) may not have any available, because why would the investment house that set up the portfolio offer your company the performers, when they can sell the dogs and your administrators won't know the difference? If that's the case, then;
Buy the lowest fee index funds you can find, and don't mess with them (only if you can't buy good mutual funds). If your personal broker can't find you funds with decades-long track records of beating the market, fire him/her and get a new broker. They are out there.
Don't put all your eggs in ANY ONE basket. Buy some in mutual funds, buy some in index funds, buy some INCOME PRODUCING real estate if you can afford it. Buy in different categories such as; growth and income, growth, aggressive growth, S&P 500, Wilshire 5000, etc. (Real Estate takes much bigger blocks of money, and will take a separate book all of it's own, so tread lightly here. And I say that as a Realtor that loves to work with investors, so am speaking against my personal interests here, but I tell my investors the same thing.)
And then don't read the market tickers or worry if the DOW or the S&P is down this week. Be interested if it is down over the last year, but not the last week or month. But don't be concerned even then if you can ride out the variation, because it will come back. It always has.
ALWAYS.
FormerFlyer
Are we past time for a market correction? Most definitely, YES.
Are we in for a market wide collapse? I doubt it - My bet is that we see the most correction in the high profile stocks talked about publicly the most - Apple, Amazon, Facebook, Tesla, etc.
Personally, I expect Tesla to come to earth, and the sooner the better - it is being traded like a high tech stock, not a manufacturing stock: it is valued at more than Ford, who made millions of cars last year and had billions in profit, yet last year they delivered (from memory) about 80,000 cars and in their entire history has had only 2 profitable quarters.
I agree on the mutual funds: look for funds with long term success. For example, 2 pick a couple of examples from my research (caveat: this research was 2 years ago; I have am not an investment advisor and I do have small positions in all 3 of these) the Fidelity Contrafund has averaged 12.47% a year since 1967, the Hennessy Focus Investor has averaged 12.38% a year since 1985, and the T Rowe Price Health Sciences has averaged 14.91% a year since 1985. These 3 all allow relatively small starting investments; if you have large amounts to invest you can get even bigger returns. At those kinds of returns, I don't mind 0.8 to 1.4% fees - they are worth it!
Jonathan, you are dead right about corrections, and I agree, probably in select stocks rather than market wide. By the way, Tesla has delivered about 160K vehicles since 2015, so not far off on your numbers, but profitability is better than that. Their first profitable quarter was in 2007, and has been sporadic but there have been profitable quarters since then.
Amazon was in similar straights once, and now has bankrupted Sears and put Walmart and Costco on red alert.
Your mutual fund picks are great. Without naming any, I found over a dozen through my broker with over-market performance and similarly low fees, and never found any of the 3 you found. There are over 8000 mutual funds available to US investors, and about 10-15% regularly beat the market, so you can shop from over a thousand performing funds.
Of course, if you can afford a share of Berkshire Hathaway, you can do substantially better. If my parents had purchased $1000 worth of BH instead of pre-paying for a Gerber Baby Food whole life policy, when I was born, I'd have $13,000,000, instead of a $50k life insurance policy worth about $10K. If I'd put a thousand of my college graduation money in BH in 1990, it would be worth about $38K right now. And, boy, would that have been a better return that what I DID with the money, the less said about that the better. . . .
FormerFlyer
https://m.xkcd.com/1827/
http://blog.dilbert.com/post/158069201161/my-1-million-climate-model-bet
The problem with with all the 'it worked for me' investment claims is that you are only hearing from the people who succeeded.
mutual funds with long track records are good, until the people who directed them retire and you have new people picking the stocks.
I do agree that you need to look at the track record and what the companies are doing, but many of the people who are claiming that we're due for a crash can't tell the difference between a company that is not investing in itself and not making a profit and a company that is taking all it's potential profit and investing in itself (the way Amazon did for so long).
David,
Yes, Mutual fund management is important; I passed on some high return funds that had recently changed management. Another factor to look at is return versus risk; you want a high return fund with average or below average risk, or an average return fund with below average risk. You definitely DON'T want a fund with average returns and above average risk!
FormerFlyer,
You are correct - there are many thousands of mutual funds; I limited myself to no-transaction, no-load, 5 star funds, with small initial investment requirements ($2500 or less) listed by my brokerage. The 3 I gave were examples of long term high performing funds - if you look around enough, there are many similar ones and some that are better. I know of one fund with a long term average of over 20%, however the initial investment for it is $500,000.
Personally, I'm skeptical that any high tech company will give high performance long term; look at the swings Apple has had over the years, or how MySpace, Napster, and other high tech companies have disappeared. When Tesla consistently produces a profit, I'll consider them. As for Amazon, eventually shareholders are going to expect a profit, and other big players have finally figured out online commerce enough to grow as fast or faster than Amazon, for example Walmart, who is leveraging their stores to provide services with online items, such as tire and battery installation, special order guns, and other things that can't be shipped to your door or don't make sense to be shipped to you.
As with all things, time will tell ...
Jonathan:
Mostly agree with you on Tesla, just filling in the gaps where you said, "From memory."
Also, I don't own ANY single stocks, so I really don't follow the fundamentals of any one company. I think some Tesla stock is probably in my "Aggressive Growth" portfolio, which has done quite well, but I couldn't tell you for sure. I just know that I've averaged about 14% NET OF FEES on it, so I don't care what it's in. If the funds start to under-perform, I'll get new ones, like you said.
David Lang:
If I read you right, and I may not have, I think that you were agreeing that Karl Denninger is the recipient of Survivorship Bias, in which case I suspect both Jonathan and I agree.
If not, then I think you may have misunderstood the difference between "Survivorship Bias", which is selecting one outlier and focusing on and promoting the ridiculous results, vs. "Best Practices", which is studying the largest segments of a market that CONSISTENTLY perform as you wish to, then emulating them. I couldn't tell for sure which you meant.
All best wishes,
FormerFLyer
The unrealistic pricing of fashionable stocks can be caused by a few latecomers determined to get in on the game at any cost. I suspect that most shares of fashionable stocks were bought for much lower prices, and so when the price collapses those buyers may be disappointed, but not devastated. Those few who joined the mad rush to buy near the end will lose their money, but they hold only a small fraction of the shares.
Chuck:
"Those few who joined the mad rush to buy near the end will lose their money"
Near the end of WHAT? If the company files for bankruptcy, the shareholder's equity may go away, but not one of the companies we've talked about is likely to do so. During a price ADJUSTMENT, value goes lower. It may fall to penny stock status (anybody own any Theranos stock?). But we are mostly talking about adjustments, where the percentage of ownership you have of a single company doesn't change, but the current value of that ownership changes. Sometimes it comes back up, even dramatically.
On the whole, just another reason to avoid single stocks and not sweat the market. Buy and hold, wait and prosper.
FormerFlyer
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