Have the record number of investors in the stock market lost their minds?
newyorker.com
newyorker.com
I did not invest heavily during the 2008 financial crisis, and looking back, I have regrets about that. I invested more aggressively this time around on the downturn.
And my younger siblings and colleagues all seem to be taking the same long-term approach. They all read /r/personalfinance and some are trying to “FIRE”—again, on a 10-20 year plan.
The article seems to take an implied short-term view by talking about how the recovery might or might not be V-shaped. Honestly that seems like the crazy approach. I don’t know anyone, personally, who is investing today with hopes of pulling that money back out in a few months. That is what a symmetrical “V” would be at this time. Obviously that is not going to happen.
For the USA, business is affected, the question is if it's long term: Will closed businesses reopen? Will unemployed find work? Will the US lose its centrality to China? But however bad it is, the market overreacts.
Plus, you don't really retire, your job is now investing. If you really love that particular job (like Buffett does), then this works out well.
But if your innate talents and interests lie elsewhere, you'd be happier doing that... and the need for money can help motivate you, during those times you don't feel like it.
It doesn't seem like extra motivation should be important, but is was for me personally. Maybe I'm lacking somehow, as I note that many independently wealthy people do keep working without that motivation. e.g. YC itself. (Though pg now does seem to have really retired, or maybe is a fulltime career parent - there is no more important job!)
Thoughts on motivation?
Lose yourself in the service of others (Ghandi). Find a problem that speaks to your skills and curiosity, something that feeds your soul by doing.
This has helped me find my path, I hope it helps you find yours.
I live off grid in the middle of nowhere, and I am busy and engaged, all day, every day, doing and learning. I’ve become an infrastructure engineer, a construction engineer and labourer, a farmer, an arboriculturist, and at night I’m an astronomer, an author, and an automation coder. Right now I’m putting together a multi-stage solar and hydro dump heating setup. All sorts of interesting challenges, and I’m experimenting with welding and (safely) testing large pressure vessels, which is a first for me.
Am I contributing to society? Not really - but I’m not taking anything from it either, other than passive income. My portfolio just sits there and grows for my dotage, the rental properties provide an income, and I do a tiny bit of tech consulting, both paid and pro bono, because it’s fun.
So, motivation? Do something you enjoy. That’s pretty much all there is to it. I like screwing around with matter and information and learning and making things, so I do that.
- Moreover, is it stolen labor if you provide goods (land) in exchange of money (rent)?
But then so is making money from index funds so I suppose we're all going to hell!
(Just to be really really clear, I'm being sincere. I'm glad that somebody out there is okay in a deep and meaningful way, as contrasted with the horror show that nearly everybody has had to put up with since... 40,000 A.D.? 1,000,000 A.D.? Fuck yeah dude!)
My business started out as trying to solve precisely this - we wanted to democratise ecommerce, and make it accessible for anyone, even with no capital, to become bourgeoisie.
Unfortunately, I learned the hard way that the lure of lucre is too strong for most to resist, and my partner, and our investors, dragged me kicking and screaming down the road of helping the rich get richer. There’s a reason (well, among many) that I cashed in my chips and left.
This way, I’m at least not actively making the world worse, and don’t feel the crushing guilt that came to characterise my existence.
And it's not like the right will continue indefinitely - if they fail in their skill they will start losing returns and losing that right (capital).
There are plenty of examples of highly paid execs making poor choices, and getting rewarded well for it. Even more reason spent capital is poor evidence of quality.
Your adventure sounds like trememdous fun too. I think you retired with much more money than me (I stopped at the absolute minimum, when it was really taking off).
Learning etc is creating value, and could well be valuable to society long-term - just lacking that immediate feedback. Your consulting gives that. (I did some consulting too, but can quit if non-tech issues make it unpleasant. That's the point of wealth, isn't it?... but it also meant I didn't have work to out how to solve/overcome/deal with it).
Maybe, maybe not - I know many, many people far wealthier than me who are still deep in the rat race, and can’t see a way out. I had enough to blow a chunk on travel (highlight was a month in Antarctica, and I’m toying with applying to do a season or two with the BAS once things are a bit more settled on the homestead), to buy two apartments (well, unused basements with scope for conversion in a world heritage city), and two rural houses (one with half a roof, one with no roof), and to renovate them, which we did on a shoestring by doing everything we could do ourselves. My wife has become an accomplished conservation mason in the process, and I learned how to roof, plaster (lime, never worked with gypsum), pour concrete, plumb, wire, and all the rest - got offered jobs by the people I asked to come inspect and sign off on my work, which was really flattering.
The remaining cash I stuck in stocks I believed in, and continue to believe in.
I’m 36 now - it took three more years of hard graft (but enjoyable graft) to turn a lump of cash (oh, screw it - £400k) into earning assets that we can comfortably live off in a country with a low cost of living. Going off grid was part of the formula, as after the capital outlay for power and water, our cost here comprises food, and diesel for the truck - although I plan to do a TEC this summer and dispense with fossil fuels entirely, and their cost, and I’m hopeful that we’ll have two decent harvests this year. Good thing I like beans and potatoes and fruit.
I’ve got mortgages on the rentals, so do have exposure on interest rates, but this is why I went for mid term furnished rentals - allows me flexibility with rents, and means my tenants are usually businesspeople deployed elsewhere, with a corporation paying their rent, so I can command a premium, and not feel like I’m exploiting workers who can’t get out of the rent trap.
I’m toying with the idea of starting a YouTube channel to share the adventure, but I’m held back by the prospect of haters - I dealt with enough venom in the business to just not want to expose myself to it again, and I don’t want to accidentally turn my “quiet” life into a business.
Re youtube channel: I think you're right on both counts, people will love it, people will hate it. Ironically, charging for it would be one filter. FWIW I think you're right to not risk it! (maybe a book would be safer?)
In a country with a low cost of living, one can live like a king for £1k a month. With £400k that's yearly withdrawal rate of 3%, which seems safe enough.
If the world doesn't go to hell, I will keep farming the excess back into working assets - most likely property, following the same formula of buying shitholes in nice areas and turning them into miniature palaces and renting them to banks and tech firms.
If the world does fall apart, we have everything we need here to be entirely self-sufficient. Land to grow food on, a river for power and water.
We're actually spending less than €500/mo on living expenses - more on hardware, tools, materials - which we do in Spain (as does everyone else in this neck of the woods), as it's a lot cheaper than Portugal for that kind of stuff, and the border is only 10km away. For the really esoteric stuff, there's Alibaba, if you don't mind waiting for the slow boat from China.
It sounds like your first business was particularly soul-crushing, but do you view this as an inevitable quality in any for-profit activity? Or is it more that with any business there will always be lots of annoying tasks to do that you'd rather not spend time on, whereas your retirement is characterized by total freedom in what you learn and make?
Bonus if you pick a bad accent and use a lot of nonsense swear words.
This can be as easy or lazy as you like. Don't want to do anything? Get a target date/balanced fund and eat the slightly larger expense ratio and realised income. Ok with rebalancing maybe once a year or so? Put X% into a stock index fund, Y% into a bond index fund, reinvestment on and look on your birthday/whatever day once a year to see if you need to rebalance.
You can of course spend more time, but if you don't like it, you don't have to.
And over decades, things change, e.g. GFC and now covid19, world wars etc. I'm not sure, does a bond index protect you? You'll at least need sufficient buffer to ride it out, perhaps several years worth.
House rentals have issues too, long-term maintenance, council issues, vacancies in a depressed economy.
The "expertise" you need is to buy & hold and try to avoid selling when it is low.
Not to mention most americans' retirement is tied to their homes\ equity and their 401k/stocks. So it is political suicide for the government to let either drop in value for an extended period of time. Therefore, over the long term, house prices and stock prices will likely go up because politicians want to be reelected.
The only caveat is that eventually, we will reach out "limit" ( demographically, economically, etc ) and then housing/stock prices will drop and stay down for decades/maybe forever. Japan hit their limit in the early 90s and their housing prices and the nikkei today is a fraction of what it was back then.
https://tradingeconomics.com/japan/stock-market
If the check the 50Y chart, you'll see that the nikkei was at 37000 in the early 90s and is now at 20000. 30 years in and still nearly 50% down.
The obituary for Capitalism will point to this factor. The politicians killed it.
Politicians have different time horizons than the cities, provinces and nations that they govern.
It's not political suicide if the politician enriched himself at the expense of the public and is out of office when the consequences are realized.
Pretty sure the Fed has been spending trillions to keep asset bubbles from bursting.
So far it's been working, but also exacerbating social tensions and wealth inequality.
For example, Bush Jr left the economy in a mess but he was a 2 term president with no political future. So Bush Jr is fine, but Obama who was elected and who wants to be re-elected has to re-inflate housing and stock prices. That's why the housing prices and stock prices won't stay low for extended periods of time. That is until we arrive at the limit of our growth/expansion when no political or economic measure will do any good.
Don’t get me wrong, I’m a Brit and, though generally conservative, believe we have a batter balance between social support and economic flexibility. The US health care system appals me for example. That doesn’t blind me to the advantages of the US system.
That's why the unemployment rate (which measures the dynamics of job losses) has been so low.
Palantir is privately held and thus not super relevant to this discussion.
We haven’t even felt the main wave of bankruptcies and disruption yet.
Credit is locking up (try getting an unsecured loan) and people aren’t paying bills. 50% of New York tenants didn’t pay rent. Every seasonal business is dead. Life looks ok for IT people working in their underwear right now, but we are heading into a very challenging time with fundamental changes in consumer behavior.
The next big thing will be underwater mortgages.
How are people who can't afford three morgage payments going to afford a triple payment at the end?
Though to be clear, there are some lenders that implementing it as "at the end of shelter-in-place", but they're in for a hard lesson.
There is also the corner case where the mortgage matures ~now, which is unfortunate, but that's not the case for most of them.
My understanding is that the traditional reading was that the mortgages would be extended for N months, so there is no balloon payment ever; just the loan lasting a bit longer than expected.
Supply and demand. If people are moving out of Manhattan (and they are), then demand went down and the house is less valuable. If people have lost their job and can't afford mortgage and sell their home and move into a rental apartment, supply for homes increased and the house is less valuable.
"Supply and demand" is a nice platitude and economic theory but it doesn't reflect reality.
In NYC at least, almost all restaurants, bars, and retail stores absolutely depend on very high volume.
That volume is simply not coming back.
The tourists are not coming back anytime soon.
And the office workers are not all coming back ever. Many will continue to work from home and many more will work only 2-3 days a week in the office rather than 5. And many of those will pack lunch or get lunch delivered rather than go out to restaurants.
And a lot of locals are going to be very reluctant to eat in crowded restaurants where tables are 3-4 feet apart and everyone is constantly bumping into each other.
I believe there are going to be a lot of vacant stores and shops in nyc once the immediate crisis is over.
And they’re taxed accordingly. Governments are going to be facing huge revenue shortfalls, too, and they’re going to be coming after already squeezed taxpayers to make up for it.
Two things are sure: (1) Things are gonna get weirder (2) Landlords aren't going to do as well.
https://www.propublica.org/article/whistleblower-wall-street...
To pull out just one of several frightening figures from that article, just one of the commercial backed securities they analyzed appeared to have over half its properties fudged to appear more profitable.
It's hard not to imagine some pretty frightening scenarios on how this might play out over the next 12-24 mos. The far-reaching unemployment this could cause (if/when lenders start calling these loans) has significant long term implications.
i don't see any issue here as long as everybody wears their rabbies ... err .. coronavirus vaccination and immunity certifying tags/armbands/bracelets. Those can even be automatically read upon entering businesses, offices, subway, etc.
The crisis in many respects is incorrectly blamed on the virus whereis it is mostly self-inflicted by lack of coherent response and is self-prolonged and made much more severe by the failure so far to launch any real counter-pandemic measures like for example massive testing and contact tracing.
Wrt. the stocks - the government has already made it pretty clear that they are propping those pure numbers up, real economy and people be damned, at least until the elections.
I keep hearing versions of this. Such dire finality. Do you actually believe that in 1 or 2 years time bars in Times Square won't be as busy as ever? If yes I think you are radically underestimating New Yorkers.
More effective treatments, a vaccine, herd immunity, better testing and tracing, or some combination thereof could make people feel safe in crowds again.
But I do think there will be a large shift toward more "work from home" for office workers with fewer open office cube farms and more contained offices for individuals/small teams, so I would expect the lunch and afterwork crowds in Manhattan to thin out. It's not going to be fun going out to happy hour when you might get sick with a dangerous virus that could kill your parents if you visit them that weekend.
And 1-2 years is more than enough time for all of those bars in Times Square to go out of business. Someone will open new ones when a vaccine comes out, of course, but that could be a long time.
And if the schools do not reopen in the fall in the city but they do in the suburbs, a lot of families will leave. I might :(. Remote schooling has been a disaster.
So are you making the argument that mortgage-centric stocks are going to go to zero?
It should be no surprise that Tech/NASDAQ is doing well since both individuals and companies are investing more in tech during this crisis, while industrial/travel/etc are all still down substantially.
Maybe the banks will take a larger hit, but the overall market has already priced in what you are saying.
This is important because people overbuild SFH not understanding the expenses, and people ruin their financial lives buying mobile or fake-mobile homes to put on rented land, not understanding that the land is where all the value is.
And don’t forget, property taxes are based on their value as of Jan. 1 - huge, unpayable tax bills are coming this year, too.
They’re already deep in the red financially, but there is some relief for the property owner.
In 2008 we thought that the problem was contained to the subprime housing market, and once the Fed started supporting that market people breathed a sigh of relief and there was a rally and recovery from March-May. It wasn't until first Bear Stearns and then Lehman Brothers failed that people realized we were in a crisis. These were centuries-old, multi-hundred-billion-dollars institutions. The idea that they could cease to exist was unthinkable to anyone not actively looking at their balance sheet and doing the math, which is why there was such a panic when they did cease to exist.
what possible justification is there to be worried about their FDIC-insured bank accounts? even sticking that in as an off-hand comment is spreading FUD.
As a result:
> The Emergency Economic Stabilization Act of 2008 is signed on Oct. 3, 2008. This temporarily raises the basic limit of federal deposit insurance coverage from $100,000 to $250,000 per depositor.
The limit was subsequently permanently raised. So with a limit of $250,000 there’s less reason to worry about bank accounts today. But the important point remains, what causes panic is when things that everyone assumes to be safe turn out to no longer be so safe after all.
And who cares if rich people take a haircut in a recession?
But this isn't really a risk to the broader market, because the government has already made it plain that it's going to backstop the liquidity to prevent any liquidity crisis, from buying commercial debt, to even buying equity. ...so if the gov't is the lender of last resort, then your argument doesn't make sense because.
Lehman Brothers going under is something the Fed has said it will not let happen again. Particularly in this scenario where bad debt is due to a pure externality.
...not to mention that people's bank accounts are protected by FDIC, and equity/retirement accounts are protected by a similar program.
Not that it really matters, because the banks are all much better capitalized than they were in 2008.
The real danger here is the potential for snap-back inflation (in a stagflation scenario), which I'd argue actually makes equities MORE attractive, not less - since stocks are inherently inflation protected.
So it's not a useful comparison.
Governments and central banks will certainly attempt to prevent contagion by buying assets and handing out bailout cash.
Does that fix the problem and then we go back to normal? Does it result in Weimar-style hyperinflation? Does it cause negative rates on long-term bonds?
I can only think of two historical precedents for guidance on how this might play out. First, Japan's "Lost Decade" (which was really more like 25 years). And second, the 2008 financial collapse.
Not sure either of these are directly comparable to the current predicament, though.
Stocks tend to perform chaotically during major inflationary episodes. Over the long run corporate earnings are inflation-protected. The problem is that inflation hits unevenly, depending on where relative shortages are, and some businesses can raise prices much more than other businesses can. That can make some businesses non-competitive (= insolvent) during an episode of high inflation, while also pooling profits within a small number of survivors. You often see a big consolidation of winners, great companies of the next era born, and then a lot of bankruptcies. Mainstream investors are often not very good at predicting the winners, so you get panic and malaise in the short term.
Index investors don't care about that part.
To some extent, this is already happening: the S&P 500 is down about 15%, but stocks like Amazon, Zoom, and Beyond Meat are skyrocketing.
> then the index rebalance forces index fund investors to buy in
That's not really how it works for cap weighted whole market indices. They remain cap weighted as prices change, there's no need to "buy more" of a winning stock, you already had the stock, it won, now you have more of it (in USD terms).
Ah ha! The MUI is being skewed by IT workers expanding their new office wardrobes: https://en.m.wikipedia.org/wiki/Men%27s_underwear_index
Now it all makes sense!
Yep. Wife works for one of the big banks. They stopped taking applications for personal lines of credit this week. Stopped taking HELOC applications a couple of weeks ago.
I told a friend about it and he looked at me like I was crazy. "The system is melting down! What makes you think the stock market is ever going to recover?"
Six years later I sold that stock for a pretty massive profit.
The stock market will always recover because people are always going to want to make money. Yes, some businesses will fall by the wayside, and yes, we don't know when it will get better, but people like making money and that fundamental truth will always keep the economy moving forward after things like this.
The fed, however, is more interested in preventing deflation and/or complete economic collapse, than it is in rewarding prudent investers.
Maybe.
SPY closed at ~$145 in June 2000
SPY closed at ~$80 in October 2002
SPY closed at ~$145 in July 2007
SPY closed at ~$75 in March 2009
SPY closed at ~$145 in December 2012
Nothing but dividends for a decade or so unless you did some clever selling high and buying low.
It's been mostly up since 2012, but there is no guarantee it is up from here in 2030.
You have to do something with your savings. “Nothing but dividends” over 10 years still beats the heck out of holding cash over that period of time, for example.
Literally. POTUS could wake up tomorrow and say anything and do almost anything. That rolling of the dice problem with a very serious economic disaster makes it exponentially more dangerous in this phase.
We’re probably closer to a depression that we have been since 1929, and that depression didn’t bottom out until 1932.
Also my assumption is that folks in a public forum are middle class people with retirement funds and some home equity. Gambling with your retirement or the kids college savings is dumb. If you’re sitting on a few million liquid bucks or are very young, your situation is different.
And even in the great depression GDP rebounded within 10 years and had grown substantially by 20 years.
Everyone forgets about Climate Change...
It's not just climate change either. There's a whole host of interconnected ecological crises brewing, and most people with a stake in the global financial system either don't recognize or believe this, choose to ignore it, or have much more pressing problems (e.g., providing for themselves and their families).
I do think “things are different” in many ways, in the sense that it’s impossible to ignore the interventions the Fed has taken to blow up their balance sheet to $7T and will likely reach $10T by end of year. The speed and size is unprecedented.
Unfortunately I think Millennials will be the ones that have to deal with the massive debt we are in as a country and unwinding of the Fed’s massive balance sheet, which will play out 10-20 years from now.
This is spot on. There are a lot of regulatory forces which help to prop up the stock market artificially. It's hard to imagine that pro-corporation regulations can go much further without severely damaging the underlying economy on which the stock market depends.
This market is highly manipulated and disconnected from reality on many levels - that's overtly obvious and intentional maneuvering via fed and pres. Only this pump and dump scheme isn't perpetuated by some shady OTC penny stock hype stunt.
When the equity bubble does burst (not if, but when) it will be very painful and unfortunately not just for those who are directly exposed but the collateral damage of all the free money will adversely affect those who are not day trading on the golf course, instead sold their clubs just to put food on the plate.
I feel like this presumes some "baseline" market that never really existed. The Fed has a dual mandate - they will and should engage in whatever sort of outlandish monetary policy is necessary to achieve that mandate.
> When the equity bubble does burst (not if, but when)
Absurd that so many people think they can make predictions like these.
Fed tried to raise rates and let bonds purchased mature naturally and roll off the balance sheet. The market immediately tanked hard.
I'm with you on this one, but it also feels like there's no other choice. Where else can you get high liquidity, with good returns, and a government ready to spring into action if the market goes down too much? European and Japanese markets generally have lower returns. Emerging markets are iffy. Bonds don't yield as much as equities.
It's like "I'm gonna take a bet that I'm going to keep working a 9-5 job". Most people have no other real choice.
You have no choice but to invest in a mix of US equities and bonds to be able to retire in a sane timeline.
This is an important aspect to the current craze not mentioned in the article.
There are people - retail & institutional players - literally banking large sums of money on this dynamic of socializing losses. So long as this continues, we'll see an artificially inflated market.
1) The government trying to preserve businesses and jobs (both capital and employment) in a crisis through general Keynesian stimulus and industry-specific bailouts (a sort of corporate clientelism, whatever the justification may be).
2) The government having to pay to shore up losses of business where the business should have known better. This is the general populace taking the hit for particular bets gone wrong by private actors. I don't see that as much in this crisis. The closest I can tell is companies spending so much on dividends and buy-backs in the past few years without keeping any sort of cushion. The companies that are most distressed are the squeaky nails that get the hammer. This is a moral hazard. Of course, you must seem sympathetic to the present administration and, to a lesser extent, the public too. That's why airlines have been bailed out but not cruise companies.
Stock market vs. cryptocurrency vs. cash vs. guns in a bunker is all a bet on what the future looks like. When you say "There's no other choice - where else can you get high liquidity with good returns and a government backstopping the risk?", that's an implicit bet that a.) people will continue to demand stocks b.) for more money than they pay now and c.) under the government as it exists currently. That has been a good bet for the last 80 years.
But there's a saying in financial markets: "past performance is no indicator of future results". If you believe that the future will be worse than the present for the vast majority of people, your priority shouldn't be to make more money in the future - it should be to preserve what you have and make sure you're not the one left without a chair when the music stops.
And the way in which the music stops determines which asset class you might want to hold. If you believe that investors en masse will have a loss of confidence in the future earning power of American business, but without a monetary or political collapse, you should move to cash. If you believe that the government's support of the stock market will hyperinflate the currency, you might want to look into one of the many cryptocurrencies that promise quick transactions. If you believe we're headed for widespread social collapse, you should get some guns and plant a garden in a small non-descript home (or bunker) in the middle of nowhere.
it's like the US government has been bluffing about capitalism being the answer the whole time and that bluff just got called.
Plant trees in the tropics, then your money has roots and grows fast.
Different types of hardwoods give you a 5, 10, 20 year time to harvests.
Plus the monkeys, parrots etc like it (if you do it right). Many of my 5 yr old trees are already 10" dbh and 15m tall. Straight timber, some with cacao below.
~75 acres can increase your net worth by about $3k/day, indefinitely.
This year we'll have planted another 7 hectares of Guazuma ulmifolia at a density of 2mx3m or ~1700 trees/hectare using the Inga alley cropping method. They should have an average trunk section at least one foot square and 26' tall in 10 years. (ie 1x1x26x12= 312 board ft) so if you do the math at just $1/board ft then it's about $150/day/hectare. (ie 1700x312x1/10/365= ~$145). So 7 hectares makes your net worth increase by about $1000/day. The nice thing about these type of trees is that they re-sprout after harvest so no need to replant, ie continuous harvest indefinitely by cutting blocks only 1/10th of your trees per year, so the first cut trees are ready to cut again when the last, much bigger, are harvested.
(I've got some teak & mahogany planted too but not a big fan, too slow. I'm not a fan of non-native pines nor eucalyptus either.)
Those numbers go way up if you process the lumber and make furniture, flooring etc.
Also many trees are valuable medicinals. For example a water extract (ie tea) from the bark of the G. Ulmifolia tree (bolaina negra, not blanca) kills virus, lowers fever and reduces pain. See https://www.rain-tree.com/mutamba.htm
Along with bark from uña de gato with lemon (immune system stimulus), chanca piedra (other antivirus & more), tumeric with black pepper (anti-inflammatory), ginger, moringa and matico leaves (antibacterial). Is our anti-virus go-to, much better than what is available in pharmacies.
I am not a financial planner, but just a few thoughts. First, folks who try to invest in crashes or divest on peaks tend to do it too early. Most of such events give you more than one opportunity to buy/sell and not being first in/out can give big advantages.
Second, we did not (yet?) see a big drop. A rise of 20% would put S&P at or near all-time highs. For comparison, during the 2008 crash, S&P dropped by over 50%, so the rise back would give you ~120% return. Thus the reward for "catching the knife" today is much, much smaller than in 2008.
Finally, a lot of stocks are now indexed and held in retirement accounts. Many folks there hold more than they should in stocks because they have been going up and seem to be the only game in town beating inflation. And all advisors say "leave your retirement accounts as is, long term view, yada yada". If a significant number of people start moving retirement money out of index funds, which they might do in uncertainty, there may be a lot of pain for stocks. For example, many smaller stocks just do not have the trading volumes to withstand even a moderate sales increase driven by index funds. My 2c.
A significant number of people do not also control a significant portion of total stock ownership. Droves of retail investors could sell, but their ownership is rather inconsequential: the top 10% of Americans own 84% of stock. https://money.com/stock-ownership-10-percent-richest/
And personally I'd say that the 90th-99th percentile investor (if not 99.9th percentile) would still qualify as "retail" - what proportion of stocks do the top 1% (or 0.1%) of holders own?
If a significant number of people start moving money out of index funds, causing a decrease in the price of index funds, then that is just an opportunity for profit-making from other investors, which will stabilize the price.
This is not a problem for actively managed funds, which have caveats that allow managers a lot of freedom. If there are no buyers for stock X, they do not have to sell it. Index funds do not get any such flexibility. The impact is amplified as the amounts invested in indices ballooned in recent years.
I do not think anyone knows if this scenario will happen and, if so, how bad the fallout will be, but there are systemic risks that go beyond sales uniformly depressing a price for a basket of stocks.
Selling doesn't automatically trigger more selling, that's just a media narrative.
This might be true for very illiquid assets, but that is not publicly traded stocks.
https://taylorpearson.me/thedragon/
The basic idea is that you create a balanced portfolio of assets that are negatively correlated with each other so that, over a very long time horizon , your wealth retains its value even in the face of uncertainty, black swan events, and volatility. An example would be owning an equal proportion of stock, cash, bitcoin, gold, fixed income, commodities, and volatility. (Harder for the average person to get exposure to commodities and volatility - but I think bitcoin checks those boxes).
Edit: include original paper that describes the portfolio by Christopher Cole: https://docsend.com/view/taygkbn
Christopher Cole is wicked smart, deserves attribution.
It seems like one of the selling points must be "set and forget," which makes me wonder if the target audience is just people who don't want to actively learn about a thing, but would rather take someone else's word.
However, I offer up two counter thoughts to consider:
1) You say you don't need the money, but how do you know? There could be a better investment opportunity that comes up or we could go into a prolonged depression. Leaving some money not invested gives you more flexibility to allocate your capital down the road. You'll have lower highs but higher lows, which in the long run is good.
2) I actually do know a lot of people who are investing toady in hopes that there is a V-shaped recovery. This is particularly worrying to me and I can't tell you how many times I've overheard amateur investors at work say things like "the market is at a bottom so now is a good time to invest". These are people who have never invested before and only look at the stock price as the determining factor. Like Howard Marks says, market bottoms don't occur until all hope is lost. I'm not sure we've felt that yet.
What would that look like for a regular, middle class person? We've been educated to stay away from individual stocks; there is too little money and connections to suddenly be part of some lucrative real estate development plan or invest in some rocket ship ML startup. Most "normal" people incrementally a few grant here or there and what's available in the Vanguard or Fidelity account is what's on the menu. Maybe I am too narrow minded?
Are familiar with Japan's history over the last few decades?
This is not a bad bet at all. The dominant ideology in Washington seems to be laissez faire when big businesses are doing well and bailouts when they aren’t. It must be nice to play with a stacked deck like that.
Our entire economy is like a mining company that steadily mines a gold seam, paying out healthy dividends and executive bonuses all the while and then as soon as the seam is mined out declares bankruptcy leaving toxic waste cleanup and employee pensions for the government to take care of. We don’t just allow ourselves to be exploited by sociopaths, we actively seek it out.
Why would anyone, including other libertarians, be charitable toward them?
If Libertarianism isn’t implemented fully then it will almost for sure devolve into cronyism. It can only work if there is no way to influence government or courts to do things your way. It also can’t really deal with things like pandemics or probably even war. In a pandemic you would have a lot of people die before the truly free market figures out which treatments work and which are scam.
libertarianism for YOU
socialism for ME
What we have is, those in power take from those that aren't.
Libertarian thinking on antitrust is that it's unnecessary because there is no such thing as a natural monopoly; monopolies are the result of government regulation. Eliminate the regulations that privilege certain businesses over others, and competition will ensure an efficient market.
In reality what we have in the US is a political class which constantly molds regulation to further benefit the shareholders of big businesses. Sometimes they remove regulations to this end, but much more frequently they create or alter them. There's no philosophical bent behind this at all, it's just the strong using government as a tool to oppress the weak (exactly what libertarianism warns us about).
Nobody has ever pandered to libertarians when trying to justify their policies, so I have no idea why people like to blame them.
To me a sign that the libertarians are on to something is that no government has ever dared to try it. Governments are comprised of powerful people and if they did they would lose all that power...
The political class you are talking about serves specific masters. They also mold ideological discourse which is where modern libertarianism comes from in the first place. Go check who's funding all of these libertarian speakers and institutes.
The size and scope of government continues to increase every year, so I don't see how anyone could call that libertarian.
Furthermore, libertarianism ends up being quite left-brained which makes for a quick short circuit to authoritarianism via logical contradiction. The Party entertains these to gain sponsors the same way the reds and blues do, and there is little doubt it would take on the same corrupt role as the other teams if given a whiff of power.
Basically my take-away was: don't bet against the house, even if it's crumbling. Because they won't agree you've won the bet until they resell it off to some other sucker; or they'll declare bankruptcy and you won't get paid; or they'll get bailed out and you'll be wrong even though you were right. [I'm not a finance person, so this is all a layperson's interpretation.]
> You still believe in the system, don't you
Why do individuals think they should receive the same treatment as key infrastructure companies?
"Save the ship if it sinks, let it float if it goes."
Someone has to pick favorites. Everyone loves fast travel. It enables business.
No brainer.
They need a bailout every 10 years, otherwise, they're autonomous. While far from perfect, they're better than the government could do if they had to develop their own systems for handling travelers.
Pennies.
The same is true of most industries, bailouts protect investors not economic capacity, but there are exceptions. I don’t like it but there are very few big banks, and it’s just not possible for fresh investors to rapidly buy up the assets of a failed bank and start a new bank. The heavy regulation of the industry is a serous obstacle to that kind of renewal and this is a dangerous problem.
Ship breaking is big business.
Inflationary expectations and wage growth remain low and the Fed has plenty of tools to tame it (interest rates, a huge balance sheet), so the question really is now: where is the inflation going to come from?
If it really is the case that 30+ million Americans can be out of a job and the stock market reaction is to continue climbing on the assumption that the fed will continue to grow the balance sheet, doesn't that point to a fundamental decoupling between the value of the currency and real-world value? I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors.
I'm not sure what the catalyst would be for that kind of a system to come crashing down, but I just don't understand how it could be sustainable.
Unfortunately media has everyone misdirected to worry about guns/race instead of demanding the government serve the people instead of corporations.
It’s possible that the scale of the current corporate welfare program + health pandemic + inaccessible healthcare + unemployment leads to faster and larger response from the plebes.
The revolution, as they say, will not be televised.
To the last sentence, yes, a totally blatant wealth transfer scheme. Anecdotally, I think many of those suddenly "engaging" are just playing into the game - getting their dopamine and ego fix by showing dumb gains on nominal investments thinking that they too are wealthy and smarter than the next one :/
Of greater long term concern though is the decreasing transparency into which companies are benefiting disproportionately from government intervention.
These fed manipulations will lead to an even more dysfunctional marketplace down the road because once the water is tainted - we don't know how much, where, or with what exactly. It's impossible to go back to safe and clean drinking water again from this source.
Historically, the real value of the "stock market" has been that of a place for informed decisions based on consistent measurement and analysis of commonly reported variables regarding the well being of corporations. There's a reason a public company must abide by certain rules and regulations to go and remain public...it's so that investors can expect a certain amount of disclosure to actually make decisions on whether or not to invest. While public disclosure requirements have not changed lately (to my knowledge) - there is no way for the feds bailout factors to be decoupled from earnings.
I would argue that aspect, which represents a huge value proposition of the "stock market" to investors of all sizes near and far, is quickly disappearing. I'm not sure what this means for the future.
The wealthiest already have huge amounts of money saved and invested in the markets. Adding to the money supply primarily benefits those who already have the most money. So something like 80% of new money winds up in the hands of the top 1%, who save it, consume no extra (aside from stocks), and have no impact on the basket of goods.
I think this also partly explains the high P/E ratios we’ve seen over the past decade+.
Nothing in economics is that simple. But this feels reasonable to me. Anything I’m missing?
But for the later, it will come from the reduced value of the dollar. Which (for more than a decade) has been muted by the reserve currency status of the USD.
It is another one of those cases of Goodharts law. The way they are measuring inflation is no longer capturing the drop in the value of money.
If you believe economic fundamentals support historically-high valuations, I think it does deserve an explanation.
Forward P/E at highest levels in 18 years: https://markets.businessinsider.com/news/stocks/stock-market...
That may not be for awhile, but the more debt the government takes on the more likely it is to happen. (The US government can literally print money to pay debt, but that devalues the dollar, aka inflation.)
How long will the USA be the most trusted economy?
Aka you don’t have to outrun the bear just the other guys.
Otherwise why has the value of the dollar increased since early March?
Also, you realize that when the fed “sets rates” it’s not literally the rate of interest in your bank account, right?
It is not clear how these two are sustainable.
Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, not that seven percent is the highest return in market history. Or said another way, if there's ever a chance to buy a treasury bill with a seven percent or better return, take it, because that's the best you'll earn in the market but with much much much less risk.
Where does 7% come from? It is Inflation adjusted correct? 2-3% profits, 2-3% gdp growth? 2-3% others (growth at the cost of smaller companies, other countries etc). I'm not sure how this is all sustainable.
Looking at Japan, none of them are sustainable, not even Inflation. Even as bank of Japan prints immense amount of money and props up all the assets as liquidity injections.
You said "Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, ". Also, When people say "historical return is 7%", they do not say it as a historical fact, but as a forward expectation like you did.
So, you need to provide why 7% is generally accepted, and why not 2%, or 70%.
Comparison to gdp and inflation definitely apply. Business profits in an index grow with Inflation and gdp growth, and stock value is the expectation of future profits discounted over time.
Says who? For which stock? I understand a company's stock price to represent the net present value of the expected future performance of that company alone. I don't see how there can be one expected return on investment that applies equally to all companies, as expected return on investment will be determined heavily by risk which will vary considerably company by company.
I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
https://alhambrapartners.com/2020/03/11/what-happens-when-ce...
That’s basically how you evaluate what to pay for a company. When you buy stocks, you buy fractional ownership in a company.
Edit: many think the market is overvalued, because it’s currently at historically high price relative to the estimated earnings potential. This, while risk of insolvency for many companies is much higher.
However, other factors could play a part, as certain industries are favoured over others, risk, projecting earnings growth, etc.
As such, you can make the argument that stocks are overvalued because they're trading at all time or near all time highs in terms of price to earnings ratios and other metrics. And especially so now given that projected future earnings will have dropped considerably while stock valuations have not.
Why? I'm not saying it's incorrect but I've never seen such an approach to valuation.
Really that depends on your time horizon. The Fed has signaled that it is willing to act aggressively to boost AD, so that seems to me to be a signal that projected future earnings will not be that low.
We're above the mean earnings ratios, FCF yields, etc, while at the same time knowing that we're almost certainly in the first leg of a major recession, and a period unprecedented economic uncertainty.
I think the bear case is much stronger than the bull case right now.
Most retail investors are not making any valuations whatsoever. The investment criteria is "this company's future is bright/bad", even though price is the most important factor. Then, recent momentum makes you look good...for now.
It's high compared to expected earnings over the next year. Which is to be expected, because the ratio of expected lifetime earnings over expected 12 month earnings is also at a high, owing to a pandemic significantly impairing earnings for a year or so but not forever. Looking at 12 month numbers is usually fine as a proxy, but terrible now.
We are still at the highest point ever except for the dotcom bubble and black tuesday of 1929 (and directly before the recent crash, although not by much).
So to answer the parent, pick a ratio somewhere below that. Price has been the main thing moving upward disproportionately for the past decade, now earnings will take a dive.
> I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
As you are suggesting, prices are simply what they are, whether or not someone views them as being "too high" or "too low" the only Goldilocks price is the one you agree to.
However, the markets can be distorted. The Federal Reserve, through policies such as lowering interest rates to zero, eliminating reserve requirements, and announcing purchases of corporate debt, has all but published "we will not let the stock market crash under any economic circumstance" as their official policy.
Of course the price is what it is due to supply and demand but I don't think that's what most people mean when they say the price is 'not sensible'.
The stock prices are so high because stocks and real estate are the only investments that might provide any sort of real return, and we've been in that situation since bond returns crashed in the wake of the 2008 financial crisis. In that context, stock values are massively inflated (in terms of P/E) relative to what investors may have considered sensible before 2008.
Even academic detractors of the efficient market hypothesis agree that it is accurate on the macro-scale.
It's a 2 month old article by perhaps the most respected figure in valuation. He came up with 2750 for S&P at that time (market value was much lower, maybe he would be more pessimistic now). You can enter your own assumptions into his spreadseet and it will output a valuation.
When I say "I think stocks are overpriced" I don't necessarily have a specific number in mind. Rather, it's shorthand for "I think that the Fed and USG attempts to avoid deflation at all costs have created an economic environment that over-promotes stocks as an investment vehicle. In addition, I feel that these attempts have worsened inequality by injecting liquidity in a way that increases asset prices more than it increases the velocity of money".
But what else is there? Holding cash is terrible because it even loses value and the real estate market feels grossly over-expensive. So if you earn more than you spend, where do you put your extra money? I don't think that bonds, p2p-lending or precious metals perform better in risk/reward.
That's my point. Stocks outperforming cash, bonds, and precious metals isn't some universal truth. It's a product of Fed/USG policy (and other factors).
Cash is more than an accounting system too, especially since the end of the gold standard. There isn't a fixed supply of dollars that businesses just move around.
Also, with regards to both cash and precious metals: their value is as media for economic transactions; their value increases each time they change hands. Would you want to barter to buy shares of a company? Trade sheep to invest in Microsoft?
You're saying that businesses generate value. No disagreement from me there.
But then you're saying that stocks are the only way to share the value that businesses create. That's where you lose me. Selling shares is not the only way for a company to raise funds to operate. Companies can also sell bonds or take out loans (i.e. cash). Your argument that stocks are inherently more valuable would only make sense if stocks were the only way to invest in a company.
Someone already owns a company before company sells (issues / dilutes) shares. That ownership is just shares. No shares need to ever be sold for them to exist. Founders create shares out of nothing when they create a business.
If companies don't sell shares, then there's no stock market. If there's no stock market, then there's no rate of return for stocks. If there's no rate of return for stocks, then stocks aren't an inherently superior investment to bonds, cash, or goods.
If someone founds a company that's 100% owned by that one person, then you (as an outside investor) aren't partaking in any of the value that that business creates. Let's say you want part of the ownership of that company. Companies don't just give out shares of ownership because they feel like it. Companies give out shares because they need liquidity. They can exchange fractional ownership for liquidity directly (e.g. selling shares) or indirectly (e.g. giving employees stock options instead of salary). However, shares are not the only way for companies to gain liquidity.
Ownership that is not traded has no value to investors. Ownership that is traded is traded for a reason, and must be compared to alternatives. Those alternatives are not inherently less valuable than shares.
Companies get funding from two sources, equity and debt. The sum of those are equal to assets in the balance sheet. Both represent different forms of ownership of the company. Equity holders decide how the company is managed, debt holders have priority in income distribution and in liquidation.
The highway down the street from me was funded using Bonds. I even own a few Hospital bonds, which were used to construct hospitals.
Do any of us actually believe that Snap's stock price is reflective of its value to society?
Today, stock prices are all about perception and company image. Most shares are non-voting, and don't pay dividends. And you can't take your stock and march to a company headquarters to demand that they give you something of value in exchange.
To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector.
Equities are a piece of creative energy applied to capital.
I am not saying you can’t lose money with wallstreetbets or that you can’t make a business of cash. But a creative business around money transmission and risk management is equities not cash itself.
> Do any of us actually believe that Snap's stock price is reflective of its value to society?
of course not. the stock price doesn't represent the value to society; it represents the (perceived) value to investors, taking into account potential for growth. ford is an established, stable company, but it's hard to see any avenues for massive growth over the next decade. I don't personally believe snapchat will grow massively, but it's more likely than ford to do that or get purchased for a huge amount of money by a tech giant.
In context, the GGP is positing that stocks should have a higher rate of return than other modes of investment because, to paraphrase, "companies create value". The point of the GP is that perceived value to investors drives the stock price more than value to society, thus countering the notion that stocks are inherently "better".
first of all, whether or not a company "creates value for society" is a red herring. it doesn't matter to an individual looking for an investment vehicle.
> To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector
this is true to the extent that thinking of stocks this way probably wouldn't hurt you as a small investor, but it obscures the reason why stocks have value and are different from bonds. when you buy a stock, you are locking in a fraction of future real productivity, whether or not you can derive cashflow from it directly. with a bond, you are locking in a nominal return, which could result in a real loss over time. although stocks have significantly outperformed bonds historically, I would hesitate to say that one is inherently better than the other; they just carry different risks.
as an aside, I'm really not sure why non-voting shares that don't pay dividends are valuable, but AFAIK, these are not as common as nrclark suggests.
80% of S&P 500 companies pay a dividend [0] and non-voting shares are actually very rare. In fact, Snap even wrote in its IPO paperwork that "to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange" [1].
[0]: https://www.forbes.com/sites/investor/2019/11/20/20-bargain-...
[1]: https://www.vox.com/2017/2/21/14670314/snap-ipo-stock-voting...
Holding cash might be terrible. Certainly the returns are and it makes sense that (the entire world) would be chasing higher yields elsewhere.
However, if those assets take a 50% haircut at some point in the near future, holding cash will have looked like a fantastic idea.
Given the current Schiller P/E of 26 (!) that was mentioned elsewhere in this discussion, a 50% haircut in US equities is not at all outlandish to consider.
I would think to calculate a "good" ratio you would need to compare it to returns from property and other investments?
This begs the question. You've just hidden your premise in this paragraph. What external metric makes an asset over-promoted or under-promoted?
If the fed had given that money directly to consumers we might have inflation problems. They’ll never do that. Socialism only exists in America for corporations.
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
Congress authorizes $300 billion in direct checks to consumers. The remaining $2.7 trillion went to businesses.
The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
What should the stock market be at right now? Who knows. We have no way to know because we won’t allow the market to tank.
Nope (and the total bill was 2.1 trillion not 3 trillion): https://en.wikipedia.org/wiki/Coronavirus_Aid,_Relief,_and_E...
> The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
Also not even remotely true, they are predominately buying U.S. Treasury securities and Mortgage-backed securities: https://www.federalreserve.gov/releases/h41/current/h41.htm
Got any sources to back up your claims?
Respectfully, please read an economics textbook.
Please tell me more.
The fed is engaging in aggressive monetary policy to prevent deflation.
The suggestion that buying corporate bonds (while holding everything else constant) is not inflationary is just not right. You can hold on to your mistaken beliefs, but just know that if you do so, it is in willing ignorance of the facts.
And, if history is any guide, SPX can fall all the way to ~500 without breaking all time lows on CAPE (this would be extreme, but is not entirely impossible, and inflation is not required for this scenario - look at 1950s).
Numbers would have to be adjusted if inflation speeds up. It hasn't sped up at all yet, in fact all we see today is deflation.
The problem, of course, is that we've been in an unprecedented financial situation since 2009 fueled by massive debt inflation among corporations due to near-free money from the government for an entire decade. When will the party end? Who knows. The other problem is that it's hard to predict what will happen post-lockdown globally. As a result, traditional analysis is easily beat by irrational investment even on multi-year timescales these days.
MSFT +21%
AAPL +15%
AMZN +37%
FB +6%
NFLX +50%
UBER +21%
SQ +22%
SNAP +16%
MTCH +10%
NVDA +60%
TSLA +128%NFLX - streaming is up but consumers exhaust the content library faster and competitors (Disney) will now want to gain market share at any cost
FB, SNAP - exposure to ad dollars (brand, travel, hospitality, entertainment) that won’t be coming back for awhile
UBER - unit economics of food delivery aren’t attractive + hyper competitive market, demand for core rideshare business likely depressed for a long time given it’s dependency on events and business travel
SQ, MTCH - no opinion, neutral sentiment
TSLA - with gas so cheap, electric vehicles are less attractive
I buy the tech multiple expansion thesis but that would apply to every company on this list.
One suggestion was that the big players will postpone electric while their ICEs get a temp boost, thus giving TSLA an even more unassailable lead.
It does make me wonder how many people are using total market indexes without caring about anything in them and how that could prop up the underlying assets.
This isn’t an original idea, there’s been lots of talk about index funds being a bubble, but there isn’t a great alternative.
Though I’m starting to wonder if I should pull most of the money out and split it between Apple, Amazon, Google, Microsoft, and Facebook.
The long tail of the market index funds I find more likely to have issues than these companies (particularly Amazon and Apple).
The stock market is generally governed by two feelings: confidence and fear. Often times those feelings are outwardly feigned for one's own self interest
I'm also leaning towards a longer recovery in consumer discretionary right now. Someone posted a story here about how people started self locking down before government lockdowns. While I think people are over the strict versions and are ready to get out of the house, I also think they'll be slow to return to malls and movie theaters.
Pricing takes into account projected future earnings.
I do wonder and am concerned what the endgame is. Is this all gonna crumble like a Ponzi scheme? Is it just gonna smooth off as more investors start retiring and pulling money out? Maybe at that point this will all just turn into a fairly indirect redistribution from working, young people to current retirees, as we see in some national pension systems?
One thing is for sure, the stock market reflecting on people's near- to mid-term outlook of the economy is likely over.
What else should it be backed with? Dollars are subject to (hyper)inflation. Real estate is nice, but I need more liquidity.
Seems like owning a chunk of the economy is where the action is.
At a certain point, we should just admit that we're taking money from the middle class and using it to play-act private investment while actually socializing investment. We should then go the full distance and actually socialize most of the economy, so that twice a month people are compensated not with abstract, speculative 401(k) prospectuses, but with an equal vote and a dividend in their own workplace.
https://www.jacobinmag.com/2017/08/sweden-social-democracy-m...
https://journals.sagepub.com/doi/full/10.1177/08969205134853...
Yes. That's where my RIA has 33% of my assets now, we moved them in 2019. We will be "piecing back into" the market over the next 12 months. I'm 50 and have a 30 year investment horizon. I've been investing since I was 21. I've been through two massive drops in the market that took years to recover. Don't panic. Valuations will correct themselves and fundamentals will continue to hold until the next bubble. I think that is model we're facing at the upper limit of an exponential.
> Is this all gonna crumble like a Ponzi scheme?
It has to stay alive so that the rich can get richer. Remember the players in the Panama Papers? There's an entire society that runs the planet. And this isn't a conspiracy, it's out in the open! Look at the Carlyle Group: it is an investing firm funded by people liek MBS (The Saudi), the Clintons, the Bushes, and many other politically-culturally diametrically opposed clients. It's no mystery that rich world leaders who go to war with each other give their money to the same investors.
You know that there are investments only available to people with $5, $10, or $100 million more in holdings? There are entire class of investment devices that you and I will never see. It takes tens of millions to even play in hedge funds. The "real" markets are for the 0.1%. Those will continue to feed off the other markets, which they need to distance themselves from the pack. (Look at wealth distribution over the past 50 years.) But these top tier funds require us schlubs to hand them money while we scrape by with 5-8% yearly returns. They will keep the dials set just right so that we'll have a reasonable retirement while they own the planet (Larry Ellison owns a Hawaiian island. Techbros are buying up New Zealand [Theil]. Think about what happens when trillionaires start to buy entire countries.
Yeah, the market will survive and make sure the upper middle class continues to invest, otherwise there won't be a wealth generating machine for the 0.1-0.01%. As for people who can't afford to even put money in a 401k? Well, we know what one political party things about those people.
That's a bummer - you missed out on the rally and pricing is about the same as what it was in 2019.
Honest question about FIRE: you hear stories about people retiring and dying a few years later in part because they lost their purpose in life, or people nearing 65 asking themselves "what am I going to do with my time." Purpose in life is strongly tied to emotional well being. What's FIRE's answer to that? Retirement is not an end unto itself.
Perhaps we are approaching a time where capital can be converted directly into labor in a way that scales. If this is the case the market is ridiculously undervalued, almost comically so.
I have maintained high savings rates and acquired capital ever since I read that book, regardless of valuations. I consider my portfolio insurance against this scenario.
The shutdown already spotlights the fact that the true economic value of non-essential business and workers is primarily as consumers.
And investors probably are too optimistic about some tech companies since the recession will surely impact enterprise spending.
But it’s not as irrational as you may think once you look at the individual companies doing good and bad now.
Chipotle has bought some good will in the past and probably is making decent cash on deliveries.
I am not advocating for removing old people from the economy. I am just thinking of some economic consequences of this terrible pandemic.
I see you haven't met my dad.
I'll take it a step further. Animals have coexisted with nasty viruses for a long time, and lots of animals are still susceptible to them. Are threats that constantly cull the population beneficial to the strength of the species? Are there viruses some species are genetically immune to because the virus killed indiscriminately, while other viruses provided a net benefit?
https://seekingalpha.com/article/2788885-how-old-was-that-sh...
That's a low risk premium if you measure it against historical interest rates, but it doesn't seem completely unreasonable when interest rates are expected to be ~0% for the forseeable future, and the inflationary pressure on the dollar could be on the order of 40%.
It's certainly very high in historical terms, but you can't consider the history in isolation.
Average, but to believe it you have to assume the E doesn’t change meaningfully over the next couple of months.
This document looks at the historical trend from a variety of perspectives: https://www.yardeni.com/pub/valuationfed.pdf
Current valuations are roughly in line with post-2008 history, but looking at a longer history suggests that they’re actually undervalued relative to other assets.
If there's a sharp rebound and everyone gets re-hired in a month when things open up again, and there's no second wave, then perhaps this will all blow over soon given valuations are based on future cashflows of which two months isn't a big deal.
But there's lots of reason to believe that will not happen. There is no vaccine, the virus is highly infectious, restrictions will be relaxed but they will need to remain in partial effect and this will impact employment/productivity in many sectors.
And eventually (particularly leveraged or low-margin industries) companies will simply collapse, there won't be any organisational framework to rehire these people and you'll just have to rely on new companies to form from scratch, which is a much slower process than rehiring furloughed workers under business-as-usual.
After the previous bottom sUch threads here, on reddit and on the financial times were convinced markets had nowhere to go but down and couldn’t possibly go up.
The price of any asset in the market is best viewed as a predictive time portal into the sum of all potential future value that can be generated by that asset. So, when you see TSLA at $800, that does NOT mean that investors, the market, et. al. are perceiving Tesla as worth that much today or even this decade. The market is continually modeling and adjusting how much that asset could be worth in 5+ years considering everything everyone knows at current time.
It is easy to fall into the trap of believing that the market is operating in first-order terms. Obviously, stocks react immediately to bad or good news on a quarterly or better basis, and this can send hilariously-conflicting signals regarding the longer-term modeling that is implicit with every asset price. This is where day-traders and other near-term speculators always get stuck. They make a few observations and then believe they have identified a regime in which the stock market does indeed operate in first-order terms. And then out of nowhere, their assets are wiped to zero or worse because of some sell-side risk model that was just run at Goldman Sachs indicating that no one wants electric cars in 2025. Obviously, this example is totally bullshit, but it's conceptually how you get burned when you play the short game.
https://futureoflife.org/2017/07/31/podcast-art-predicting-a...
Absolutely, and quite a few people making this error on this thread.
Update: I think I need to add that I have no economic education - I wrote this after reading recent Ray Dalio posts to see what others think about it.
Anyone ever seen such indices?
Most consumers don’t have direct access to cheap FED money and the trickle-down effects (startup boom) have had limited impact on average wages.
The source of the flow of dollars is changing, because businesses are shut down, so dollars are flowing more directly from the Fed, which is trying to make up for the loss of flow elsewhere in the economy.
Gold prices are up because of the collective fiction around the idea of "assets" and "store of value."
There is no risk of loss of "reserve currency" status. There is always jostling around relative currency valuations, but the Fed has only strengthened its position as world premiere source of liquidity. And for the west there is no viable alternative.
The stock market is growing because the owners want to start the new growth cycle. They think that's enough value have been collected, they have no intent to destroy the engine, and want to start the new cycle. They achieve it by letting Fed print trillions and buy the stocks. This dilutes the share of everybody not invested in the stocks, but it works for the US because dollar is the internatiinal common stock and the US has the right to issue new shares. Whoever complains gets a friendly visit by aircraft carriers and experiences sudden difficulties in participating in the international economy.
It's possible that the owners have messed up this time, as they are often just lazy greedy types, and the engine will stall, but in that situation it won't matter whether you hold dollars or sp500.
What the Fed is buying is bonds. Which are non-dilutive.
I understand the sentiment, but let’s try to get the facts right
The author is way out of touch if he thinks this. Many of my friends playing around in the stock market have a portfolio of less than $1000. When I started learning it my portfolio wasn't much bigger. At that level, if you trade even semi-actively, you get eaten alive by fees
The stocks are not worth more inherently, you just need more (depreciating) dollar units to describe the price.
But the borrowed funds used to do this is probably not as productive as investing in capital infrastructure.
Equities are less exposed to low to moderate inflation than assets with fixed pay-outs. No need to model stocks as currency.
Long story short, corporate earnings can absorb small and moderate inflation shocks. That lets dividends, and enterprise exit values, respond to low inflation.
Does it take a lot of companies going bankrupt?
Is it enough for lots of companies to report big revenue drops? Or is that priced in the minds of most investors?
Maybe I have some shares I bought for $10; the price dropped and now I can only sell them for $8. There is a solar farm off to one side selling bonds at some unreasonably high yield.
I could be stubborn and hold the shares until the price comes back - but that would lose me money in the big picture. Instead I sell for whatever I can get and put the money where it will be generating a good return.
If a bunch of people behave like that, sellers quickly overwhelm buyers (potential buyers are flocking to the new opportunity too) and the price corrects to something reasonably fair.
https://en.m.wikipedia.org/wiki/Order_(exchange)
For assets with high liquidity there will always be buyers and sellers, depending on how many are on either side and what their price limits are (if they set any) transactions will occur at different prices. Depending on the order size the price can vary even within a single order (if you need multiple buyers or sellers with different limits to fill it). The market price is just an indication of the current equilibrium price at which there is the most liquidity for an asset. If there are more people that want to sell than people that want to buy at a given price the sellers will have to reduce their ask price to close orders, that drags the market price down. The same dynamic moves the price up when there are more buyers than sellers.
So, in this room, the price of each transaction, from any negotiations, is a consequence of the conviction of each party in the negotiations and eventually the trade. This includes how optimistic or pessimistic they feel about the value of the stock, how aggressive each one's stance about the predicted future price of the stock, how much greed or fear exists in the minds of the traders etc. This is what moves the price. Prices can move just as rapidly (be more volatile) with a few traders and many sitting on their hands as can be the case that prices hardly move with the entire 100 people transacting.
Conclusion: what moves prices up or down are opposing beliefs with differing levels of conviction in the minds of the traders.
Here are a few ones of the top of my head:
- Someone getting liquidated on a big contract and crashing the whole market with him. (see Oil prices a few weeks ago).
- Someone trading exotic/complex derivatives. His trades on the stock will not make sense unless you account for his whole trade/structure that he created. He can/does move the market in unusual ways.
- Someone trading in a certain way because of taxes. His trades will not make sense if the tax rate was 0%.
- Someone laundering money through the market by buying the stock somewhere and selling it somewhere else in a derivative market making his net position neutral and trying in the process to move proceeds from one place to another. This is, actually, a big one.
- Someone getting out of position when it would be profitable for him not to. But he has better alpha somewhere else he is going to chase.
Sellers do not overwhelm buyers _when_ the price goes down, or vice-versa. There is no "overwhelming" of one group over the other. Nor do prices go down _because_ of an independent phenomenon other than buying and selling. The price is judged on the _value_ sellers and buyers ascribe to the stock at a given time. If they match, a transaction takes place. In the end there are always exactly equal buyers as there are sellers.
Buyers and sellers only match under normal trading conditions. Good luck expecting your stop loss orders to mean anything when there's a mass panic.
If there are 60 investors who want to sell stocks and 40 who want to buy always equally as much for simplification purposes and the price is $50, the price will keep moving down until there's 50 investors who want to sell and 50 investors who want to buy.
40 trades will happen on $50 price, but then there is 20 sellers still left who want to sell at this price. Since there are no buyers, price will go lower and slowly some sellers don't want to sell lower than $50, so there might be 15 sellers left at $45 and 5 buyers, they will do the trade and then there will be 10 sellers left. let's at $40 there will be 5 who decided it's good to buy now and this is where the fair price will have landed, at $40.
How about not "correcting" the corrections in the first place? Let the market actually be a market, don't inject huge amounts of money into it?
Not to be confused with helping out ordinary people who need money for spending.
Technically the current value is the correct value. The question isn't whether this value is "wrong" - it isn't, by definition - but whether or not Mr Market is delusional and prices will crash at some point in the near/mid future.
Explicitly, the distinction is between investors who are looking at fundamentals, and investors who are looking at market momentum and trying to factor in their guesses about politics and Fed policy.
If you consider fundamentals, P/E is up to insane levels in a barely functioning economy. If you consider politics - optimism may be justified. Possibly.
But if it is - what does that say about the value stock markets are supposed to provide?
What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?
There might be a few companies that fall into neither group, being so fundamentally unsound that they will simply be shuttered with no sale, but that would surely be a small percentage of the stock market.
Markets need to go way down before things normalize ( eg. Tax cuts won't hold I think)
We are now back at the level before tax-cuts, which is nuts considering people are not spending currently.
I bought any way.
I'm up 24%. The average annual increase for the S&P 500 is 6%.
Now HN is saying it's crazy to buy.
I see stores reopening. Local stores in Seattle, but also chains. Apple is planning to reopen its US stores soon. Grocery store shelves are full.
NYC is opening its beaches for Memorial Day.
Yet again, "it will get worse." I see the market going sideways.
I think I'm going to hold on.
Sure, US stocks is a pyramid, but Euro stocks have been and keep performing very bad. Only china could surprise the world , but they are not going to open up their economy anytime within the next 2 years.
They certainly don't explain what people are actually betting on.
It makes total sense to bet now. The incumbants are fish out of water. Their algorithms isn't built for this.
Does it make more sense to compete in a normal decade long stable market against billion dollar companies? That's stupid.
These are two different ways of expressing the same thing. (Gambling versus investing, on the other hand, are different. But a “bet” can be utilitarian, i.e. not entered into for fun.)
The article is talking volume not so much me. You can't sit at home and watch tv and invest without some volume.
Basically they wanted a /r/WallStreetBets angle but didn't want to say the word which confused the article.
Purchasing power is what's important.
Say, you are risk averse investor who has 15-20 year investment time horizon. What you should do? Will bonds yield better returns? I don't think so. You should keep doing what you do. Dollar-cost averaging reduces the volatility over long term. If you have some balanced strategy like 60/40 stocks/bonds then rebalance like before.
I would also of thought volatility over 15-20 year term when choosing between DCA or lump investment is largely irrelevant and not worth hedging against.
You can see the effect for the total return of your investment even in 15-20 years. Try for example SP500TR for 20-year period and slide the starting point over dot-com-bubble. 20 year ROI(TR) alternates from >300% to 180% and back to >300% within 3-4 years.
a higher expected value. If you expect positive returns, the sooner all your money is earning the better.
I wrote up a more detailed argument at https://gitlab.com/kragen/derctuo/-/blob/master/pandemic-col....
(Condé Nast publishes the New Yorker)
And, investors know that Republicans, Democrats, everyone will sacrifice everything to save "market growth".
Seems like a rational, safe bet.
No, investors haven't lost their minds. They are betting that the Fed will backstop the stock markets by any means necessary.
Try this though experiment. Which US companies will not be allowed to fail under any circumstances? You might be surprised to find companies far outside of the banking and national defense industries on this list. Given the chain reaction that often takes place in debt defaults, you might be surprised to find almost every large US company on the list.
That's what the Fed needs to "backstop." The scale is beyond any balance sheet expansion currently being discussed. Of course, this isn't capitalism, either, but that seems to bother fewer people than it should given their rabid espousal of anti-socialist doctrine.
Whatever you calculate the current US national debt to be needs to factor in the market value of those companies that can not fail under any circumstances. Most tallies don't.
Now, try to use any traditional metric of value (P/E ratio, dividend yield) or risk to buy some stocks. You'll quickly throw in the towel and remember that ultimately the Fed has your back. Right?
I'd dump all stock right now if I was holding, thank the tax payer and buy bullion.. don't know why people would still remain invested in a market that will obviously crash..
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
The best way I’ve found to trade is to listen to what the market is telling you. Take positions with discipline. Scale out when you have profits. Wait for next sign of direction.
It is as easy as that while at the same time very challenging.
None of what you said means anything. You may as well be saying "Listen to what the roulette wheel is telling you".
For all the scare mongering sheltering at home the facts are that the disease is not radically dangerous.
Note the hysteria and the fake outrage when pointing out that an 80 year old' "premature" death is not nearly as sad, impactful or tragic as that of 30 year old'.
Modern society keep its citizens in check by promising them that they are all "equal" and that they will do "everything" possible for everyone. The outrage is to salvage that facade, that illusion.