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Jim once called this "My favorite chart" or so:
https://drive.google.com/file/d/18WexgXb68oh8jk4Zm...

Please compare it with an S&P 10-year-chart:
https://drive.google.com/file/d/18XYbJDFegwWZcLFYI...

They couldn't be more perfectly in synch.

I didn't mark this post "OT" because if they continue to be in synch it would be dramatic not only for holders of a highly valued S&P but for everybody, Berkshire shareholders not excluded.

Perfect support for this: While super-conservative me's cash the last year's was always 20-25% of net assets, it's now only 14%. I am practically fully invested in stocks and with horror thanks to those charts are becoming aware of a frightening fact: That after all those bull years my view completely changed, that I am only looking for the highest returns as if positive returns are to be taken for granted, with the thought of a bear market - contrary to the last years - not even coming to my mind anymore.

The same goes for this board. Years ago we discussed intensly "How much longer can the bull last?", "Is Grantham finally right?", "The S&P has to half to get back to historical valuations" etc. And now? Who is Grantham? Nothing like that any more. All those bull years wiped out those serious concerns which were on our minds after the first really extreme bull years. Typical for us humans: We get used to anything if it lasts just long enough - and then we take it for granted.

As more I think about it as more I come to the conclusion that nobody, not me, not this board sees the danger of a really(?) big and long bear anymore. We may play with that thought - but it's just playing, not really serious concerns as we had just a few years ago. And that's for me the sign to get off the train.

It's time for me to follow that adage "You have to get rich only once" mentioned shortly ago here, which I interpret as ".... after that you only have to stay rich", and to heavily reduce my exposure and to increase my cash at least to the levels it was when we all really seriously were concerned about "How much longer can the bull last?"

I do love that chart's narrative, but it does come with the health warning that you never know where you are on it : )

It's true that there are pockets of the market that seem very optimistic lately. I guess that's always the case, but I find some straws in the wind are quite striking.
For example, according to Bank of America's strategy team, the typical equity beta within private client portfolios in 2009 was about 0.75 and the equity allocation was 39%. Today the beta is 1.20 and equity allocation is 60%. The total equity market exposure, the product of the two, suggests a pretty substantial amount of confidence on this permanently high plateau.

Breadth is terrible, often seen when a bull market is on its last legs. The S&P has had a total return of about 17.3% year to date, but the median stock within it has managed under 5.5%.

And of course some valuation metrics seem high, as they of course seem to have been for a long time. Over the long run, profits can't rise faster than sales. As a pointer to how much net margins have expanded in recent years, (remembering that this is something that is cyclical, not extrapolatable), real S&P 500 sales rose inflation + 1.50%/year in the 16.25 years to March, while net earnings rose inflation + 3.42%. The start date was chosen to be neither unusually high nor unusually low. So, the real index returns without dividends can be though of as growth in the revenue of 1.5%/year, plus 1.9%/year of unreproducible net margin expansion, plus 1.9%/year in growth in valuation multiples (without cyclical adjustment on earnings). That is, most of the returns before dividends have been from effects that are either transient or at best a one time bump. Extrapolation from here would be presumably be unwise. A much better back-of-the-envelope is that a long term holder of SPY ought to expect the dividend yield plus real GDP growth. Both ideally with cyclical adjustments for the starting point, but both metrics are pretty steady. The current dividend yield is around 1.5%, and US real GDP growth is likely be around 2% in the next several years, give or take. A person retiring today and buying SPY ought to plan on getting no more than inflation + 3.5%/year indefinitely.

Other than just before I paid off a mortgage a few years ago, I've raised more cash this year than I've had in quite some time. That doesn't mean I think the market will plunge any time soon, but cash has many potential uses. And Berkshire, though not overpriced, has been more expensive than this only around 10% of the time in the ~15 years since the credit crunch so that recent history does not really lead one to expect a positive real return in the next year.

Jim

The difference between the two of us: You are the number crunching guy, and while I am usually that too, here I am the psychology/sentiment guy - - - and interestingly both are currently going in the same direction, more or less: You don't say the market might tank any time soon, just that one should expect only meagre returns from here, for the market in general and for Berkshire too.

In the end this means the same I see: That the risk-return ratio is much more unfavorable now than it was say 3 years ago, that the risk now is high but the potential reward of being fully invested is low.

That of course can be dismissed if one intends to sit on both, the market and Berkshire, for many years to come and has no psychological problems to sit out years of no returns or even a crash, but otherwise....

A much better back-of-the-envelope is that a long term holder of SPY ought to expect the dividend yield plus real GDP growth. Both ideally with cyclical adjustments for the starting point, but both metrics are pretty steady. The current dividend yield is around 1.5%, and US real GDP growth is likely be around 2% in the next several years, give or take. A person retiring today and buying SPY ought to plan on getting no more than inflation + 3.5%/year indefinitely.

Likely still better than aggregate bonds - AGG current yield 4.45% nominal.

Just a follow-up: True to my thoughts mentioned here on Tuesday I sold not only a full 50% of all stocks I have other than Berkshire (things like Meta and Googke, but also completely different ones like Verizon and Berkley), but even some Berkshire (shedding a tear as it was like saying goodbye to an old friend). A day of huge selling for me, really moving the needle of investments versus cash (Ha! What to do with now with the latter?).

I am writing this here to "keep myself honest": If the market continues to rise and rise I won't be able to ignore or suppress what I did, will have to acknowledge to myself that my feel for market sentiment, my opinion re valuations, and my timing is shitty.

On the note of market sentiment: Did anybody notice that the S&P moving averages are either crossed downwards or close to being so? Just wondering that nobody mentions this (I do here because it's probably not even a topic for the mechanical investing board. They are posting about much more sophisticated stuff and screens than those trivialities).

'I sold not only a full 50% of all stocks I have other than Berkshire (things like Meta and Google, but also completely different ones like Verizon and Berkley), but even some Berkshire'

Wow, Very noteworthy! Will be interesting to see where you go from here but nice to get paid 5% or so as you contemplate your next move. Do you mind us asking, were these sells in a taxable or a non-taxable account? For better or worse, this has had a significant effect on my decision making, although Jim has reminded us, the tax man is going to get his piece ultimately.

'I sold not only a full 50% of all stocks I have other than Berkshire (things like Meta and Google, but also completely different ones like Verizon and Berkley), but even some Berkshire'

Remember, even if those things rise in price from here, that doesn't mean it was a bad decision!
A motion to adjourn is always in order. There will be some good way to deploy that cash some time or other.

FWIW, my Berkshire share count is 2/3 what it was at the start of the year.
Of course the price is up 18.8% since then, so the dollar value of my shares is down less than 20%.

Jim

Jim has reminded us, the tax man is going to get his piece ultimately.

WEBspired, not always. My Berkshire shares are a very special and not repeatable (Germany only, key word "Altaktien") situation, they are nearly all tax/cap gains free. That made selling those 3% of my Berkshire more difficult, as always when I sell some.

Gains of all other stocks are taxable (around 5% gains for most since I bought them 9-11 months ago). That had no effect on my decision to sell them.

my Berkshire share count is 2/3 what it was at the start of the year.
You sold 1/3 this year, I sold 1/6. Funny similarities :-)

my Berkshire share count is 2/3 what it was at the start of the year.

My number of shares "controlled" has been reduced, due to converting calls to shares. Does this account for any of your share reduction?

My number of shares "controlled" has been reduced, due to converting calls to shares. Does this account for any of your share reduction?

Personally, I count everything the same. So selling 1 call is the same as selling 100 shares. All long exposures are the same.
(I also count writing a covered call against existing long positions as equivalent to a stock sale)

I think of switches between shares and calls as a separate financing activity: borrowing money or paying it back.

Jim

Will be interesting to see where you go from here but nice to get paid 5% or so as you contemplate your next move.

Is it nice?

If inflation is running at 4% you're earning 1%.

I have a large stake in Berkshire. And I'd rather keep it invested in Berkshire. Even if forward returns are temporarily low.

Because the other option is to sell and earn 1% while you hem and haw about what to do with the cash and if now's the right time to reinvest.

My number of shares "controlled" has been reduced, due to converting calls to shares.


Similar for me. Shares controlled down about -40%. Dollars at risk down less than -15%. Converted some calls to cash and holding for an opportunity to put calls back on.

Jeff

"If inflation is running at 4% you're earning 1%.

I have a large stake in Berkshire. And I'd rather keep it invested in Berkshire. Even if forward returns are temporarily low.

Because the other option is to sell and earn 1% while you hem and haw about what to do with the cash and if now's the right time to reinvest."

I see things similarly to carolsharp probably because even at my advanced age I am still working and receiving income from work and other sources. I numbers crunch through the tax implications and usually it is not worth cashing in our winners despite some of the positions now seeing limited upward appreciation in recent years. Berkshire is now 55% of our holdings and has certainly juiced our portfolio value this year. We've ridden up and down in previous years (2008 -2009) and are prepared to ride up and down again . . .. . . as the up and down ride will come again one day.

The fun comes with continuing to do research (reading, always reading), listening to podcasts and reading the wonderful comments by folks on this and other boards. As available cash comes in, investing in opportunities is just as much fun with a small amount of money as is grinding out decisions involving selling large positions during major market down moves to enable jumping on something with more long term potential. Paraphrasing Munger (I think he said something like this statement), be prepared for making sudden moves is a good practice.

Uwharrie

Sorry for my grammar:

"being prepared is good practice for a sudden move."

<<Is it nice?

If inflation is running at 4% you're earning 1%.

I have a large stake in Berkshire. And I'd rather keep it invested in Berkshire. Even if forward returns are temporarily low.

Because the other option is to sell and earn 1% while you hem and haw about what to do with the cash and if now's the right time to reinvest.>>

The vast majority of my net worth is in Berkshire. The only way I can justify
having so much in Berkshire is by having way more than a couple years of
living expenses in cash.

So I am using something of a Barbell approach with my having so much in
BRK and cash. What Carol says about cash earning 1% is true when you look
at the cash only but I choose to look at the whole pie.

There is an old saying in Financial Planning that there are not good
or bad investments but appropriate or inappropriate investments.

Am I maximizing returns? Of course not but I recommend to even seasoned
investors that I know that they read Chapter 3 in the excellent
book The Psychology of Money titled "Never Enough."

I congratulate Said for his decision and for having the courage of his convictions. If I agreed with the predictive power of his chart as applied to my portfolio, I would do the same. And I have sold some stocks recently - partly because I thought they had more downside than up, and party to keep my cash levels healthy. However, I do not sell BRK, which I consider equivalent to the S&P 500 only better. It will reliably outpace inflation, and it is built to last well past my lifetime. I do buy and sell other stocks opportunistically - buy low sell high, and I like to have cash on hand at all times so I can sleep at night. If BRK is really low (rare) I buy more but not otherwise. I would sell BRK if I really needed cash but not otherwise. It will probably be the last stock I sell as it is the best one I own.

The ups and downs of BRK's price and its ratio to peak book interest me but do not concern me. The future of the company does. Management (Greg & Ajit) seem to be doing fine, but I don't see how they can do as well in the equity markets going forward. To deploy the cash BRK generates, they will need to keep investing and growing the businesses they have (BHE) and increasing their investment in companies like OXY and AAPL that will reliably generate cash for years to come. I suspect Warren's wet dream is a collapse in the price of AAPL so he could buy more.

I take great comfort in the belief that Warren built this company for the long term, and the man is good at what he does.

Here is Warren's explanation of why a good business is one 'your idiot nephew' could run:
https://www.yahoo.com/finance/news/warren-buffett-...

Also, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." That's my attitude towards BRK.

abromber

You have to get rich only once" mentioned shortly ago here, which I interpret as ".... after that you only have to stay rich", and to heavily reduce my exposure and to increase my cash at least to the levels it was when we all really seriously were concerned about "How much longer can the bull last?"

I hear you. There have been two periods since WW2 where the S&P was essentially flat for the whole time period:

1929-1952
1969-1982
2000-2013

From that peak in 1929 to the trough in 2013 the market grew at 5% per year. From the peak in 1969 to the current price the return has been just over 7% per year.

However, there have been long periods of out performance as well. The trough to peak returns above were 9% for 1952-1969, 15% for 1982-2000, and 11% for 2013-2023. I'm not sure the current run is over yet, so it's too early to close the books on this run. Interestingly, if you only look at the Jan. 1 data point each year, the COVID recession doesn't even show up.

Essentially the S&P is roughly tracking gdp growth regardless of the starting point, unless you take the peak to trough or trough to peak as your snapshots.

What does this mean for wealth preservation? Well the first lesson is don't try to time the market. The second is to be a steady buyer throughout the roller coaster ride. The third is that maybe modern portfolio theory still has something to say to us (excepting the recent period of ultra low rates). Finally, I'd recommend that we start thinking that we are 30% less wealthy than our portfolios suggest and plan around that assumption.

'There have been two periods since WW2 where the S&P was essentially flat for the whole time period:

1929-1952
1969-1982
2000-2013'

I remember in 2010 being so frustrated with pain from the.com bust and the GFC and the 'lost decade' despite being a pretty good saver and steady investor. Stark contrast to my father's value portfolio had compounded nicely for 17 years starting with the early Reagan years. However, this period and frustration also led me to start investing in BRK and thoroughly reading everything Buffett- letters and all the essential books and I experienced true enlightenment. The pain and adversity ultimately became a real blessing. Fortunately, it's been a fun ride since that lost decade and a great lesson in learning, patience, discipline and temperament which I hope to pass along to the kids.

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