No. of Recommendations: 13
Very interesting stuff, thank you, EVBigMacMeal! Three remarks, though:
1. Buffett Indicator: I do not believe that the Buffett Indicator is reliable anymore, for several reasons. More revenue is being generated overseas, especially by the large Mag 7 companies, as you mentioned. In addition, a greater share of economic activity now takes place in private companies rather than in public markets. The Buffett Indicator (which is based on the ratio of total public stock market capitalization to GDP) has therefore become less representative of the overall economy:
https://shorturl.at/RVe0U2. High P/E: I see overvaluation in many traditional market segments (Costco or Walmart come to mind) as well as in overhyped sectors like quantum computing or energy. Many of these stocks have already pulled back sharply from their recent highs when I last checked (Rigetti –56%, D-Wave Quantum –48%, IonQ –45%, Oklo –42%, and so on). One could argue that a crash has already occurred and will possibly continue. There have also been some sharp corrections in the so called cryptocurrency world (and much more money will be lost there in the future, I have no doubt).
3. Value matters: The common view seems to be that the winner—or the few winners—will take it all in AI. I have some doubts about whether the much touted OpenAI will be one of them, since they are burning too much money they don’t have. Personally, I also would never touch Tesla. But the Googles and Metas of this world with tons of FCF—why not? I can see why Berkshire bought Google (and Amazon some years ago) and wouldn’t be surprised if they added some Meta with its forward P/E of 21 and excellent ROE (32%)and ROCE (34%). Of course Meta will suffer if the AI bet doesn’t pay off. They already have experience with this—Metaverse was a debacle. But as long as they continue to show such solid numbers in their core business, the risk seems limited to me. A friend of mine who is running a large company (for Swiss standards) has used Meta. He was quite impressed how they employ advanced AI and machine learning systems for ad targeting, creative generation, budget optimization, and campaign performance analysis. Ironically, my friend has worked for Google in the past - so he has some experience in this matter. This tells me that it is not hot air, that they use what they sell and sell what they use.
