Market Concerns anyone?

[merkhet]

I figured it was a typo, PLynchJr. :)

[giofranchi]

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me…

Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D

 

Gio

 

[ERICOPOLY]

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me…

Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D

 

Gio

 

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

[merkhet]

 

 

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me…

Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D

 

Gio

 

 

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

 

 

+1

[writser]

Also, the S&P 500 is just an arbitrary selection of US large caps. Why would you base your expected returns for the next 10 years solely on that benchmark? If these stocks are overpriced, look somewhere else!

[giofranchi]

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

 

Unfortunately, future earnings are not a sure thing. I am not sure what the businesses I personally manage each day will earn next year, and have absolutely no clue what they will earn 5 years from now.

 

Gio

[ERICOPOLY]

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

 

Unfortunately, future earnings are not a sure thing. I am not sure what the businesses I personally manage each day will earn next year, and have absolutely no clue what they will earn 5 years from now.

 

Gio

 

Unfortunately, future earnings are not a sure thing.

 

Your post is based on a forecast of what the entire market will earn over 10 years.  Somebody brings up a counterexample are you reply the future is uncertain!

[stahleyp]

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me…

Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D

 

Gio

 

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

 

That's a very good point, too, Eric (as always from you). If you don't mind me asking, how are you currently positioned and getting to that number? I'm guessing you still have a lot of BAC that's mostly hedged.

[giofranchi]

 

Unfortunately, future earnings are not a sure thing.

 

Your post is based on a forecast of what the entire market will earn over 10 years.  Somebody brings up a counterexample are you reply the future is uncertain!

 

Well, but I didn’t say the S&P500 earnings cannot surprise on the upside, did I? They certainly might! And I hope so! :)

 

I just said I think it is useful to know what the tide is probably going to do:

There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries.

--William Shakespeare

 

Gio

 

[ERICOPOLY]

 

Unfortunately, future earnings are not a sure thing.

 

Your post is based on a forecast of what the entire market will earn over 10 years.  Somebody brings up a counterexample are you reply the future is uncertain!

 

Well, but I didn’t say the S&P500 earnings cannot surprise on the upside, did I? They certainly might! And I hope so! :)

 

I just said I think it is useful to know what the tide is probably going to do:

There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries.

--William Shakespeare

 

Gio

 

This is a pretty crappy flood tide.  Did the ocean get drained?

[ERICOPOLY]

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me…

Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D

 

Gio

 

Well, I ignore that simple fact because my portfolio has an earnings yield of 14%.

 

That's a very good point, too, Eric (as always from you). If you don't mind me asking, how are you currently positioned and getting to that number? I'm guessing you still have a lot of BAC that's mostly hedged.

 

That number come from BAC's earnings pre-tax about $1.90 per share -- which is the pre-tax consensus earnings among the 20 or so analysts.  The DTA provides the restorative boost while the after-tax net income figure rises with resolution of the legacy issues in runoff.

 

And it requires no growth... it requires below-mean performance from the bank.  Reversion to the historical mean would deliver much better earnings.  This is hardly the flood tide!

[giofranchi]

Furthermore, if the average expected return for the market is 4% and your average expected return is 14%, then you are probably going to beat the market by an average 10% annual for the next 10 years. 1 person in 1000 will be able to achieve such a result… no, wait, 1 person in a million!! And usually they become billionaire... Why should this kind of outperformance be very relevant to an average entrepreneur like me?

 

Gio

 

[Palantir]

I don't know what the market will do, but I don't know of any legendary value investors that would agree with you here.

 

Proof by reputation? :)

 

I'd like to believe we have an epic bull run, but I don't see how's that's possible. Keep in mind I'm not saying that it isn't possible, but I don't see how it is. Valuations, while not exceedingly high, certainly aren't cheap on a historical basis. Investors aren't shying away from risk really (though they aren't taking great leaps of faith like the 90s either). I do see the possibility of people getting greedier and that could drive things up a bit higher. Could we see an expansion of P/Es on the basis of quantitative easing over the short term? sure. I can buy that. But should expansions really be happening if the government has to support that? I don't see why that's the case. What's making you feel this way?

 

I disagree, I think expansions can happen even if the government has to support that. My expectation is that the US will see significant growth in the future, significant productivity gains, growing populations, rising exports, and helped by a weaker dollar. I think there needs to be help from the fiscal side too - by reducing federal deficits etc.

 

If you haven't guessed already, I'm very strongly in favor of QE, and I think this will help preserve liquidity levels, and prevent serious downside.

[ERICOPOLY]

Furthermore, if the average expected return for the market is 4% and your average expected return is 14%, then you are probably going to beat the market by an average 10% annual for the next 10 years. 1 person in 1000 will be able to achieve such a result… no, wait, 1 person in a million!! And usually they become billionaire... Why should this kind of outperformance be very relevant to an average entrepreneur like me?

 

Gio

 

Isn't it below the 15% that you are making long-term in Fairfax?

 

[giofranchi]

That number come from BAC's earnings pre-tax about $1.90 per share -- which is the pre-tax consensus earnings among the 20 or so analysts.  The DTA provides the restorative boost while the after-tax net income figure rises with resolution of the legacy issues in runoff.

 

And it requires no growth... it requires below-mean performance from the bank.  Reversion to the historical mean would deliver much better earnings.  This is hardly the flood tide!

 

Well, good for you that you have come to know something like BAC so well, and are so sure about its future prospects. Unfortunately, I don’t know that bank so well, and I don’t have your kind of confidence. Therefore, I cannot invest in BAC. Are there other businesses in which you have great confidence and which still provide a 14% earnings yield?

 

Thank you,

 

Gio

 

[giofranchi]

Isn't it below the 15% that you are making long-term in Fairfax?

 

That's because, not in spite, FFH is fully hedged and holds a lot of cash today! ;)

Furthermore, a 15% increase in BVPS means they have to achieve a 7% return on their portfolio of investments, right? Hey! I know very well that it won’t be easy… but I’d rather bet on a 7% by FFH than on a 14% by myself!! ;D

 

Gio

[ERICOPOLY]

Isn't it below the 15% that you are making long-term in Fairfax?

 

That's why FFH is fully hedged and holds a lot of cash today! ;)

 

Gio

 

You have a lot of great quotes, and I don't -- but I'm trying to think of the one that says something about a man being guided by his incentives... or his heart lies where his treasure lies... something like that.

[giofranchi]

You have a lot of great quotes, and I don't -- but I'm trying to think of the one that says something about a man being guided by his incentives... or his heart lies where his treasure lies... something like that.

 

No Eric,

I repeat: I’d rather bet on a 7% by FFH than on a 14% by myself. That’s all!

Business is business for me. And the heart has nothing to do with it. I can assure you that! As soon as I stop believing that FFH might achieve a 7% more easily and safely than I can achieve a 15% by myself, I am gone. Period.

That time has not come yet.

 

Gio

 

[Investmentacct]

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me…

Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D

 

Gio

 

Thanks Gio. Good to know that you are projecting 54-72 $ Earnings of s&p based on recent prices of 1770 to earn yield of 3-4% .

 

Good time to open and check s&p earnings history

 

http://pages.stern.nyu.edu/~%20adamodar/New_Home_Page/datafile/spearn.htm

 

Do agree with you future is always uncertain.

 

Rgds.

 

 

[giofranchi]

Thanks Gio. Good to know that you are projecting 54-72 $ Earnings of s&p based on recent prices of 1770 to earn yield of 3-4% .

 

Good time to open and check s&p earnings history

 

http://pages.stern.nyu.edu/~%20adamodar/New_Home_Page/datafile/spearn.htm

 

Do agree with you future is always uncertain.

 

Rgds.

 

No, not me!

Mr. John Hussman says 3%, Mr. Ray Dalio says 4%... I have just used both numbers! ;D

 

Gio

 

[ERICOPOLY]

You have a lot of great quotes, and I don't -- but I'm trying to think of the one that says something about a man being guided by his incentives... or his heart lies where his treasure lies... something like that.

 

No Eric,

I repeat: I’d rather bet on a 7% by FFH than on a 14% by myself. That’s all!

Business is business for me. And the heart has nothing to do with it. I can assure you that! As soon as I stop believing that FFH might achieve a 7% more easily and safely than I can achieve a 15% by myself, I am gone. Period.

That time has not come yet.

 

Gio

 

I've mentioned before in a prior discussion with you, I'd rather take an operating yield of 14%.  To each his own.

[lessthaniv]

At the end of 2012 the average dividend payout ratio for dividend payers in the S&P500 was about 34%. The historic average is 52%.  The balance sheets of corporate America look good and there are a lack of projects that make economic sense. I expect to see a continued increase in payout ratios going forward.

 

 

[giofranchi]

I've mentioned before in a prior discussion with you, I'd rather take an operating yield of 14%.  To each his own.

 

Eric,

I am not really arguing with you! At all! But, let’s face it! You are no average investor!!! You have an astronomical track record, that almost no one can match! And I cannot base MY strategy on what YOU are able to do!! It would lead to an utter debacle…

 

Gio

 

[stahleyp]

Eric, thanks for your thoughts. I like the way you think.

 

I don't know what the market will do, but I don't know of any legendary value investors that would agree with you here.

 

Proof by reputation? :)

 

I'd like to believe we have an epic bull run, but I don't see how's that's possible. Keep in mind I'm not saying that it isn't possible, but I don't see how it is. Valuations, while not exceedingly high, certainly aren't cheap on a historical basis. Investors aren't shying away from risk really (though they aren't taking great leaps of faith like the 90s either). I do see the possibility of people getting greedier and that could drive things up a bit higher. Could we see an expansion of P/Es on the basis of quantitative easing over the short term? sure. I can buy that. But should expansions really be happening if the government has to support that? I don't see why that's the case. What's making you feel this way?

 

I disagree, I think expansions can happen even if the government has to support that. My expectation is that the US will see significant growth in the future, significant productivity gains, growing populations, rising exports, and helped by a weaker dollar. I think there needs to be help from the fiscal side too - by reducing federal deficits etc.

 

If you haven't guessed already, I'm very strongly in favor of QE, and I think this will help preserve liquidity levels, and prevent serious downside.

 

Palantir,

 

I like your positivity. Yes, I am basing some of my decisions on people much smarter than myself. When a bunch of billionaires are saying one thing (watch out) I think it's wise to at least listen up. Though, they aren't perfect, either.  What do you think may happen when QE gets turned off (I'm making an assumption that it will happen...someday)? Do you think the companies will be healthy enough to justify the artificial valuations bump due to QE? We're already trading at higher than historical average valuations (so you'd have to assume that their more valuable to justify it not dropping, let alone growing). I know of no epic bull market that has started with this type of valuation. This time may be different...but you know how that usually ends up. I agree with you that the US will see significant growth in the future. and with the productive gains. I think we sometimes tend to underestimate with technology can do. I don't see population growth though. It's certainly not through birth rates. From what I've read, we are at all time lows. Unless you're calculating massive amounts of immigrants, which might be doubtful given our legacy issues and that other economies are growing more rapidly. I think it's wise to not only think about what could go right but also the opposite view.

[ERICOPOLY]

That number come from BAC's earnings pre-tax about $1.90 per share -- which is the pre-tax consensus earnings among the 20 or so analysts.  The DTA provides the restorative boost while the after-tax net income figure rises with resolution of the legacy issues in runoff.

 

And it requires no growth... it requires below-mean performance from the bank.  Reversion to the historical mean would deliver much better earnings.  This is hardly the flood tide!

 

Well, good for you that you have come to know something like BAC so well, and are so sure about its future prospects. Unfortunately, I don’t know that bank so well, and I don’t have your kind of confidence. Therefore, I cannot invest in BAC. Are there other businesses in which you have great confidence and which still provide a 14% earnings yield?

 

Thank you,

 

Gio

 

Nope.  No other companies that I have great confidence in yielding 14% (though I'm sure they exist).  Of course, it's not that I'm sure about BAC's future prospects -- it's that I'm sure about their present prospects.  No growth, just a conservative balance sheet on which to earn a conservative spread.

 

Nostradamus looked to the future, I am looking at the ground right under my feet.