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- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 8
No. of Recommendations: 4
Berkshire has made it easier (for me anyway) to HODL. Asness claims that a long time horizon is key to taking advantage of market inefficiencies, and the “cult like” aspect of Berkshire has made it fairly easy for me to maintain a long ownership period over 25 years.
His theory of social media making markets less efficient over time also makes sense to me.
Thanks for the interesting article!
No. of Recommendations: 5
A lot of good stuff in the paper. This stood out for me:
Do not think you can hide from volatility. It either finds you very painfully eventually or you pay too
dearly for the fake smoothness along the way. Don’t trade the wrong direction on 3-5 year results. Don’t
be fooled by valuation changes, even over some very long periods, into throwing away what’s right.
No. of Recommendations: 29
Nice article.
He doesn't touch on one related factor that worries me a bit. He talks about how emotionally hard it is to follow a strategy that takes more years to come good, but he doesn't talk about the fact that the long delay itself may make the returns worse.
For example, say in olden times a value investor could find nice stuff at 30% off and wait maybe 4 years to get a normal valuation and a good exit. Annualized return 9.3%/yr from the value and mean reversion effect.
Let's say he is right that you can now even more extreme deals, say 40% off, but that it now frequently takes 10 years for the mean reversion investment thesis to work. That's only 5.2%/year from the mean reversion. The case for this style of investing is much weakened.
The basis of value investing could be summarized as buying something at well below fair value, then just wait for fair value in the marketplace. But as the wait gets longer and longer, the "well below fair value" MUST get more extreme too, or it erodes the whole Graham approach.
Jim
No. of Recommendations: 13
"Fair value" is a funny thing.
Stocks have outperformed long-term government bonds by quite a lot over the past 100+ years. So much so that the wider-than-expected disparity is often referred to as the "equity premium puzzle." Humans being irrationally risk-averse tends to be the most common explanation.
But what if we're collectively wising up? Higher equity valuations now and in the future would do much to close that gap.
The notion that stocks might earn say 6% real annualized returns vs say 1% real annualized returns from long-term US treasury bonds over the long haul really does seem like too much of a "free lunch."
Unfortunately, this free lunch disappearing would lead to very much worse future equity returns than most are expecting. And that means the savings rate needed for a young person or couple starting out today to ever become financially independent is very much higher than most are expecting and perhaps completely unattainable for an uncomfortably high proportion of the population.
No. of Recommendations: 0
The notion that stocks might earn say 6% real annualized returns vs say 1% real annualized returns from long-term US treasury bonds over the long haul really does seem like too much of a "free lunch."
It's also possible that the government is enjoying the "free lunch" with such low real rates. And that could be for a variety of reasons.
No. of Recommendations: 5
The unknown variable is the ACTUAL future GROWTH rate, which, according to Buffett, is the single most important component , ironically, of “value”.
If the ACTUAL achieved growth rate slightly exceeds your projections in your DCF valuation—then the longer you wait to sell..the GREATER the return.
OTOH if it’s the other way around and growth flattens out—the opportunity cost waiting for fair value compounds in a big way…..a bad way.
This is a somewhat of a roundabout way to look at the Munger influence on Buffett decades ago.
No. of Recommendations: 5
There is lot of evidence that the markets got more efficient. Maybe we need to write about "Underperforming Managers and Lying Liars Who Don't Want to Acknowledge That".
Value stocks underperformed because of fundamental reasons. Many of them got disrupted and their earnings did not recover like they used to in the past. To make matters worse, the companies doing the disruption are growth stocks, which further increased their relative performance as compared to value stocks.
Stop blaming the market.
No. of Recommendations: 7
"Stop blaming the market."
This is so true. I am always amused at all the "Investors / Fund Managers" with podcasts and their lousy returns. Same with most if not all of the Buffett devotees.
Holders of Berkshire or simple index funds outperform the above high priests and enjoy life.
No. of Recommendations: 7
I am always amused at all the "Investors / Fund Managers" with podcasts and their lousy returns. Same with most if not all of the Buffett devotees.
Holders of Berkshire or simple index funds outperform the above high priests and enjoy life.
mmmm…I’m both a Buffett devotee and a BRK holder. My returns are pretty decent. I don’t follow…🤷♂️
No. of Recommendations: 3
You don’t actively promote a fund or investment firm charging people for sub par performance.
I’m a Buffett cultist myself 😉
No. of Recommendations: 19
There is lot of evidence that the markets got more efficient. Maybe we need to write about "Underperforming Managers and Lying Liars Who Don't Want to Acknowledge That".
Value stocks underperformed because of fundamental reasons. Many of them got disrupted and their earnings did not recover like they used to in the past. To make matters worse, the companies doing the disruption are growth stocks, which further increased their relative performance as compared to value stocks.
Stop blaming the market.
I think that's a bit harsh, if you actually read his paper. He's not banging on about how value stocks have done badly so his fund's recent bad returns are not his fault. The main analysis is about the currently unusual dispersion of valuations (which is pretty clear in the data), and his speculations on why that might be the case.
Growth stocks definitely always deserve higher multiples on current valuation metrics than value stocks because they are expected to have higher growth in the years to come. Rationally speaking, both groups should have relatively similar multiples of their respective FUTURE valuation metrics. Different market participants may have different investment horizons, but eventually the value has to arrive. I'll happily pay twice as much for a dollar of current owner earnings if I'm pretty sure the owner earnings per share will at least double pretty soon. If they do arrive, the premium multiple of current metrics is deserved.
He starts with the observations that (a) there is currently an unusually wide dispersion in multiples of current valuation metrics between the groups, and that (b) this unusually wide gap has persisted a fair bit longer than in prior cycles. The question is what that means, beyond the obvious. (that growth firms are collectively expected to grow faster than ever for a long time)
To me, the high dispersion has to be some mix of three different factors: firms with high multiples of current metrics (growth firms) will in fact collectively grow in measurable value considerably faster than they have in the past, and therefore justify their unusually large valuation premium. And/or their valuations are temporarily and irrationally stretched. And/or valuations are temporarily very low among the value group.
Emphasis on the word "collectively". There will certainly be some very high growth firms that will more than justify their lofty multiples of current observable value metrics, but as always those huge winners will be fairly few in number (and incidentally hard to identify in advance). However any big group of hundreds of "growth" firms will perform in aggregate a lot more modestly: faster than the average company's growth rate no doubt, but probably not (say) twice the overall average growth rate. If the pricing premium of the growth group collectively is not justified by their collective superior growth in value in the years to come, they're currently overvalued. We'll know the answer in a few years.
Jim
No. of Recommendations: 1
The notion that stocks might earn say 6% real annualized returns vs say 1% real annualized returns from long-term US treasury bonds over the long haul really does seem like too much of a "free lunch."
Two questions for you. All rates real, not nominal.
1. Should corporate bonds, of the same duration, pay higher interest rates than government bonds?
2. Should investors demand higher required rates of return from stocks than from corporate bonds?
That should tell you why a positive equity will always exist over the long term.
No. of Recommendations: 6
The OP article argues that "over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks". If the market is getting the prices wrong, there would be more extreme price movements, and so more extreme equity returns. There would be more bubbles with ridiculously high prices, and more busts when the prices return to reality. But the data does not show this. The equity risk premium is within its historical range.
Shiller calculates Real 10 Year Excess Annualized Returns (EAR) (S&P 500 stocks minus 10-year government bonds). The most recent 10 years is at the high end, but below previous booms that started in 1954 and 1944.
Date EAR over the next 10 years
1964.08 -0.5%
1884.08 0.5%
1924.08 0.9%
1874.08 1.2%
1984.08 2.4%
1904.08 2.6%
1994.08 2.7%
2004.08 3.2%
1914.08 3.8%
1974.08 5.6%
1894.08 5.6%
1934.08 6.2%
2014.08 11.5%
1954.08 12.0%
1944.08 12.4%
See the ECY chart in the ie_data download from
https://shillerdata.com/Stocks underperform bonds when there is bad news (war, depression, inflation, GFC). Real returns:
from to bonds stocks avgEAR yrs
1881 1897 6% 4% -2% 17
1912 1922 -3% -5% -2% 10 war
1922 1941 6% 2% -4% 19 depression
1964 1979 -1% -3% -2% 15 inflation
1998 2012 4% -1% -5% 14 GFC
avg avg 2% -1% -3% 15
Stocks outperform when the bad news has passed:
from to bonds stocks avgEAR yrs
1896 1906 0% 11% 11% 10
1917 1931 5% 17% 12% 13 post war boom
1940 1965 -1% 13% 14% 25 post war boom
1990 2000 6% 16% 10% 10 post inflation boom
2008 2024 -1% 11% 12% 16 post GFC boom
avg avg 2% 14% 12% 15
The most recent boom is similar to the previous booms, with stocks outperforming bonds by about 12% a year for about 15 years.
