What generally follows that expression is a succinct synopsis. We’re always trying to be concise; however, distilling complex economic and investment matters usually requires several pages.
Most think so.
And up and down.
We normally start our letters on a positive note.
No, we did not run out of titles.
Investors generally are still expecting above-average returns for U.S. stocks over the next several years. Meanwhile, since valuations are so high, models that have been historically accurate predicting 10-year returns point to negligible returns.
The pandemic forced us all to communicate via Zoom.
Many investors think there are only two options in a market where participants have become overly exuberant, either 'I want in' or 'Get me out.' Our strategies are more nuanced, and we believe fit better with what we expect to transpire.
A new normal is the norm. Changes are inevitable and therefore imaginable, even during this era of ever-growing technological breakthroughs such as cryptocurrencies, blockchain, robo-everything, 5G, EVs, AVs, AI, VR, AR, and IoT.1 We remember when ecosystem referred to a Costa Rican rain forest.
While this article is specific to Apple, we could have written a similar piece on Facebook, Amazon, or several other leading tech names whose valuations, based on our analysis, have lifted to levels we believe are unsustainably high in the short run.
While some cook with a dash of this and a dash of that, the best chefs follow a recipe to a T. Without abiding by a set of instructions, you’re at risk of inconsistent results or worse, omitting steps altogether. Sugarless baked goods rank right up there with eating cardboard. And too much of even basic spices can ruin any dish. Overcooked foods can be dry or burnt. Undercooked foods can cause illness. Clearly, following a recipe precisely is essential.
Everybody handles change differently. Some embrace it, rolling with the punches. Many even seek change because they require new or additional stimuli. Others can’t cope with the slightest change, becoming anxious or frightened from non-life altering unexpected change, like flight cancellations.
As value investors, we are always on the lookout for bargains—stocks or bonds that are trading at prices below our estimate of Fair Market Value (FMV). Both research and common sense dictate that the greater the discrepancy between price and FMV, the better—it provides a higher possible margin of safety and implied upside.
The current expansion is the second longest recorded, after the '90s boom. And stock market valuations remain full. So we will constantly monitor our overall market risk tools in an attempt to time the end of the bull market. Meanwhile, since alerts have not yet triggered, we will continue to hold shares, and buy others, as long as they’re trading below our FMV estimates. We will worry top down but invest bottom up, buying well managed, appropriately leveraged, high quality enterprises with ever-growing earnings, at discounts to our estimates of their intrinsic value.
We are amused when commentators cite just one factor for a market movement because there's almost always a confluence of factors influencing the markets at any one time.
Economic growth continues, and although this cycle has been the slowest recovery in post-war history, the slower growth has allowed for a prolonged cycle. Inflation remains low—since peaking in 1980, the U.S. has experienced consistent disinflation.
History shows, and investment strategists tout, that small cap stocks are the best performing asset class. While small caps outperformed the runner-up, large cap stocks, over the last nearly 100 years, research has shown that the outperformance hasn’t persisted over all multi-year time periods and that the outperformance is concentrated in microcap stocks.
The term “trend” now has a broader use. Trending is a term used in reference to the buildup of posts on social media. And we find ourselves in a day and age when the leader of the free world is posting using stream of consciousness—annoyingly against a department store that no longer supports his daughter’s line of clothing or worse, tweeting against judges who disagree with his policies. This is a trend we shouldn’t miss.
There are a lot of economic negatives to worry about these days. Slow growth, annual GDP rising at only 2.1% on average since the '08 recession. Stagnation. Low inflation. Burgeoning government debt relative to GDP. One third of global government bonds at negative yields (and a few corporate bonds now too). Corporate earnings per share declining for 6 consecutive quarters, even after historically high share buybacks. High share prices from relatively high earnings multiples—the S&P 500 at 17x forward earnings. Falling worker productivity for the third consecutive quarter. Flat retail sales, likely as a result of an over indebted consumer. High inventories relative to sales. The U.S. government putting the kibosh on several potential deals. Corporate insider buying at only one third of their selling—a poor ratio. General uncertainty, much stemming from an election year with two controversial candidates espousing controversial policies.