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Concerning BRK naturally too, so not really OT: Jeremy's last "Superbubble" piece is now 4 months old and at the moment we - and Berkshire - are still "alive and kicking":

https://www.gmo.com/americas/research-library/ente...

First, the bubble forms; second, a setback occurs, as it just did in the first half of this year ..... and valuations take a half-step back. Then there is what we have just seen ' the bear market rally.

On which he elaborates later in the piece:

Bear market rallies in superbubbles are easier and faster than any other rallies. Investors surmise, this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap. Outside of the late stage of a superbubble, new highs are slow and nervous as investors realize that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita. Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again

Interestingly that's what I regularly read lately on Saul's board: Though posts about valuation over there are banned, on the "new" TMF board the leading figures posting their year end portfolio summary extensively did talk about valuation, and it's usually along the lines "Ok, valuations apparently DO matter, but our companies are still great and now, with their prices nearly 70% down in 2022, they are cheap". They still don't do valuations, the companies are cheap because the share prices are lower, in line with what Grantham says.

That's not limited to Saul's. I remember that a few months ago, at the end of the "old" TMF boards I similar posts here and on the "Falling Knifes" board, kind of: "After that extreme fall BABA now is sooo cheap, GOOGL now is sooo cheap ... DIS ... AMZN ... " etc.

On with Grantham:

Fourth and finally, fundamentals deteriorate and the market declines to a low ...... in the U.S., the three near perfect markets with crazy investor behavior and 2.5+ sigma overvaluation have always been followed by big market declines of 50% ...... these few epic events seem to act according to their very own rules, in their own play, which has apparently just paused between the third and final act. If history repeats, the play will once again be a Tragedy

It's worth reading the article as he also talks about deteriorating economical environment, shrinking margins etc.

So, is he right and all set for "a Tragedy"? What are the opinions and comments here after quite an interesting year we just had (I'd love to set up a poll :-) ?

at the end of the "old" TMF boards I similar posts here and on the "Falling Knifes" board, kind of: "After that extreme fall BABA now is sooo cheap, GOOGL now is sooo cheap ... DIS ... AMZN ... " etc.

I disagree. The difference is that folks, including myself, advocating for the value proposition of BABA or GOOG last fall were doing so based on objective valuation metrics rather than mere price declines. At $65 last November, BABA was objectively cheap. It was trading at a PE well under 10. This is an absurd price for a company growing earnings and revenues at the rate BABA has been growing. This is a company that at one point during its decline was worth $170 billion with $70 billion in cash on its balance sheet! Obviously there are sound political reasons for staying the hell away from BABA, and China in general. First, it's not a free enterprise economy and the owners of BABA are always at risk of some form of expropriation. Second, US investors own it through an ADR with no tangible or enforceable stake in the company. We profit at the will of Xi. Third, the $70 bil in cash may not ever belong to BABA since the CCP has already set the precedent that Chinese corporate profits ultimately belong to the state. All of these are reasonable fears and rational reasons not to invest. However, if these do not explode in the face of the investor, there is reason to expect pretty fabulous returns if and when the bad news subsides. I think we have already seen some of that this past week.

The same could be said of GOOG. Sure the price has declined, and continues to flounder, but that is not the reason given for recommending a purchase at these prices. The company is trading under 18 times ttm earnings, which rarely happens, as well as a relatively low PS of under 5. The risks are obvious: chatgpt displaces google's algo for search, a recession kills its ad revs, a nuclear war breaks out in the Ukraine. The risks and fears are ever present. However, should these fears fade ... watch out!

PP, that's why I said "similar".
And what do you say to Grantham and where we are right now? Any Macro opinion?

. what do you say to Grantham and where we are right now? Any Macro opinion?

It's taken me a long time to learn this lesson from Buffett, but the macro doesn't matter. You can't control it, and the world seems ever in danger of ending one way or another, so the focus should only ever be on the value proposition of individual companies. As long as I am focused on creating a portfolio of well chosen equities purchased at a decent margin of safety. I don't expect that portfolio to be unaffected by macro forces, I just expect it to outperform the indexes during those downturns by falling less than the averages.

Focus on companies and ignore the noise. It's that myopia that has made Buffett such a great investor.

As I have mentioned many times on the Berkshire boards, I have been following Grantham for close to 40 years. Grantham writes and then he invests or his firm does, they aren't the same. Although I haven't followed Grantham's investment results for some time now, his firm did apparently achieve returns of 3 percentage points above the market for a long time.

Grantham's firm investment model is far different from his intense writings. I'd be far more inclined to invest the way he invests rather than to run my money the way he writes. In my view investing according to his investment columns would make anyone/everyone act like the man who was swallowed by a while then spit out. Lunatic crazy crap is all you'd be doing if you invest via column verbatim, and that would be nothing but stupid.

The Grantham stuff is a gotch moment, an easy fear sale. Too bad he doesn't take his own advise so we could see how that turns out. Grantham is smart, I admire him. But his stuff is over-thought, and for the most part something to plug in to outlandish expecation curbing or self-control.

As most of you kown I'm not young and I have held many of my stocks now well into 4-5 decades. This hard sale of Grantham is not what you want to be concerned with. Picking the bottom is the game in down markets and those screaming the lowest figure get the most media. And in up markets chanting ownership of the correct "names" (remember valuation no longer matters) is the mandate and get you air (read Cathie) time. Neither picking the bottom nor having the "names" is relevant to successful long term investing.

It's taken me a long time to learn this lesson from Buffett, but the macro doesn't matter.

Why did he sell the Airlines?

It's taken me a long time to learn this lesson from Buffett, but the macro doesn't matter.

He may say that, but he clearly doesn't invest that way--and quite appropriately so. If the past year has shown us anything, it's that macro absolutely matters.

Why did he sell the Airlines?

Said, I think Buffett sold the airlines because the operating environment and outlook for the airlines suddenly became much worse and much less predictable due to COVID-19. There's also been speculation that, given the airlines' need for a government bailout to survive the worst of the pandemic, Buffett recognized that Berkshire's substantial ownership stakes in the airlines could impede that process, thereby imperiling their survival (because what politician wants to be seen as having bailed out Warren Buffett?). In other words, the airlines might have done worse if Berkshire had kept its ownership stakes.

I don't view these as "macro" calls in the sense of, for example, making predictions about the U.S. or global economy or about what interest rates might do in the next few months or years. Instead, they are very sector- and company-specific reasons for selling the airlines.

When Buffett says to ignore the macro, I don't think he means to ignore the knowable operating environment and impact on demand for a company's products or services. And the knowable operating environment at the time included a pandemic that shut down the airlines and would significantly reduce the demand for airline travel for an unknown period of time. How things would play out for the airlines was very unpredictable. I suspect Buffett thought either that the airlines were no longer a good investment because their prospects for the reasonably foreseeable future were severely impaired, or that they belonged on the "too hard" pile.

Why did he sell the Airlines?

There are presumably plenty of insightful ways to consider that question.
The simplest view is that they were all clearly about to be bankrupt without a huge and prompt bailout.

But as a side note, has anyone looked at how they have performed in the last 7 quarters?
They have really tanked. Not much above the price at which Berkshire sold.
For example, Southwest has gone from $64 to $35.

I don't miss 'em.

Jim

I was thinking recently about past recessionary bear markets, considering how useful the degree of drawdown in past recessions could be as a guidepost for what to expect in this one. And a potentially significant wildcard this time is high inflation.

Last year, we saw almost 10% inflation. So if we measure the drawdown in the market since then but also account for the decline in purchasing power, one could argue that we've already experienced a much more significant drawdown than measuring the indexes' falls from highs would suggest.

And if we saw another couple of years of ~10% inflation, even if equity prices remained flat/stagnant from over that time period without significant further deterioration, the real losses in terms of purchasing power would be approaching 50%.

This train of thought leads me to think that if anyone intends to use past drawdowns as a guidepost for when to re-enter, it'll be important to account for the effect of inflation in doing so.

I welcome any thoughts on the above.

This train of thought leads me to think that if anyone intends to use past drawdowns as a guidepost for when to re-enter, it'll be important to account for the effect of inflation in doing so.
I welcome any thoughts on the above.

Take a look at the long term S&P charts here https://www.macrotrends.net/2324/sp-500-historical...
The picture changes a lot if you adjust for inflation - especially in the 70s.
There was no real return from 1968 to 1992 - thats an incredibly long time to wait for some return (I'm not sure if dividends are included in this chart).

It was no coincidence that by 1967 Buffett felt 'out of step with present conditions' (read: the roaring bull market). And by 1969, he decided to shut down his partnership.

My 2 cents. Investing is a little like trying to loose weight. The simple truism: eat less and exercise more. It works.

Buffett explained it in his forward to the Intelligent Investor as we all know well. 'Chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years'.I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.'

Chapter 8 The Investor and Market Fluctuations

Chapter 20 "Margin of Safety" as the Central Concept of Investment

Great companies like Alphabet can trade at 5 times earnings and 100 times earnings. Pay zero attention to the value the market places on a business. The stock market is wild. Anything can happen in both directions. It is probably worth 20 to 25 times earnings.

1929/32, 1973/74, 2007/08.

Early 1970's can happen again. It probably won't, but it can. Therefore, avoid leverage and mentally prepare for long winters of tedious falling share prices where years go by, few are interested in stocks, doubt sets in. People exit at the worst time.

Great investors like Buffett and Munger can't possibly predict with 100% accuracy future cash flows. There are simply too many variables. To protect them against this fact they only pay when there is an obvious discount.

Buffett has said he is not interested in real estate, because it tends to be closer to reasonably priced most of the time. He loves the stock market, because prices can and do get dramatically detached from a reasonable intrinsic value estimate, from time to time. Buffett makes his decisions from the perspective, that the market could move 50% in either direction over the next one, two or three years. Grantham maybe thinks negative 50%.

Buffett knows, or at least believes it is a reasonable outlook, that 5 to 10 years, or 20 years from now, the economy will be bigger and the market will be higher.

If he pays 10x for Apple and his reasoning suggests it's worth 30x, he will live with the long term result and experience little anxiety in the interim decades. Neither celebrating market exuberance or despairing over irrational declines in prices.

Grantham was spot a year or so ago when he predicted the bubble would deflate. Starting with the junk and then the quality names.

Buffett probably considered Alphabet reasonably priced a year ago. Today he probably considers it a little undervalued. In both cases he doesn't buy. He doesn't know how it will be priced a year from now but if it's demonstrably cheap and he believes it's in his circle, he might buy some. If not he won't.

A year from now Grantham will still be making predictions about the market. Buffett will still be making decisions based on chapters 8 and 20 of the Intelligent Investor.

Eat less, exercise more. It's simple to understand but devilishly difficult to execute as per 'Buffett like' investing.

In times of market fear, I personally, find it useful to remember Munger's comment, that people generally get too pessimistic. Anticipate the potential 50% drawdowns, but remember the long term tailwind. If you own businesses with good long term prospects at reasonable valuations and it doesn't work out, well so be it. It was still a rational approach.

I don't anticipate great returns from here after inflation. Higher interest rates just make equities less attractive.

Some of Berkshire's 2022 purchases look interesting and I have copied a couple on a limited basis and am enjoying learning about them and will continue to buy as I generate cash. Paramount Global I like. It's just so cheap.

The consensus currently for the market appears to be: inflation falls, interest rates stop rising, markets go higher. But whatever happens, none of that matters much in 2030.

trying to lose weight. The simple truism: eat less and exercise more.

Above is technically true in that if you eat less than what you are currently eating AND you exercise more than you are currently exercising AND you can sustain this for some period of time, you will lose weight.

It works

I respectfully disagree. It doesn't work, because it's not sustainable. If you exercise more, you will burn more energy, feel more hungry and ending up eating more. If you don't eat more, you will soon exercise less than your previous level or stop altogether. Any weight loss will be temporary.

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If the objective is to achieve permanent weight loss, what you eat has an outsized effect and completely dwarfs how much you eat and whether you exercise or not.

IF you eat right, you can eat till you are full, feel satiated and still lose weight. Portion control and exercise matter much less than most people think, at least when it comes to permanent weight loss.

60 Minutes did a feature segment on the weight issue for those with an interest. https://www.cbsnews.com/news/weight-loss-obesity-d...

And if we saw another couple of years of ~10% inflation, even if equity prices remained flat/stagnant from over that time period without significant further deterioration, the real losses in terms of purchasing power would be approaching 50%.
This train of thought leads me to think that if anyone intends to use past drawdowns as a guidepost for when to re-enter, it'll be important to account for the effect of inflation in doing so.
I welcome any thoughts on the above.

7% is not 'around 10%'. Inflation has been high, but let's not get too far out over our skis.

And from some indications, much of it is already in the past.

What if Inflation Suddenly Dropped and No One Noticed?
The high year-over-year rate masks progress in the past five months. But we're not out of the woods.

Over the past five months (June to November 2022), in­fla­tion has slowed to a crawl. Whether mea­sured by the con­sumer-price in­dex, or CPI, which most peo­ple watch, or the price in­dex for per­sonal con­sump­tion ex­pen­di­tures, or PCE, which the Fed­eral Re­serve prefers, the an­nu­al­ized in­fla­tion rate has been around 2.5% over these five months.

Yes, you read that right. Yet hardly any­one has no­ticed this stun­ning de­vel­op­ment be­cause of the near-uni­ver­sal con­cen-tra­tion on price changes mea­sured over 12-month pe­ri­ods, which are still 7.1% for CPI in­fla­tion and 5.5% for PCE Inflation
https://www.wsj.com/articles/inflation-sudden-drop...

This is from Alan Binder, head of the Fed in the 90's. 'Team Transitory' has taken much ribbing over the prediction that inflation would flare up but then quickly go away. I was one of them. It appears that the optimism was a bit much, but that perhaps the general thesis was correct.

I'm willing to posit that inflation will last a bit longer, given the rebound effect of rents and wages that is sure to follow such a quick but short term spike, but overall the underlying causes have, for the moment at least, abated. The overheated housing market has cooled. Lumber prices have come down 75% and are now below 2018 levels. Gas prices (adjusted for that inflation) are also stasis.

Personally, I'm more worried about a Fed over-reactive tightening than under. (I do think they should continue to hike, just as smaller increments, 50bps followed by 25, depending on trends.) We'll see, but I'm not terribly worried at this point. My far bigger concern is the debt ceiling and the performance caucus, which could throw the bond market and stocks into chaos. And probably will.

'My far bigger concern is the debt ceiling and the performance caucus, which could throw the bond market and stocks into chaos. And probably will.'

This is a good reason to keep some dry powder.

'My far bigger concern is the debt ceiling and the performance caucus, which could throw the bond market and stocks into chaos. And probably will.'

The reality is that the debt ceiling is more likely to cause a shortage of treasury new issuance, causing rates to be temporarily depressed. As the debt authorization approaches the ceiling, the Treasury is forced to run down their TGA "general account" while no new treasury debt can be sold. This has happened a few times before and the result is lower rates when it is happening.

Of all the things to worry about, the debt ceiling is not typically a useful one to worry on.

Of all the things to worry about, the debt ceiling is not typically a useful one to worry on.

We have not seen a political force strong enough or wanton enough to force a shutdown, and given the antics of the past week I would say we now have. Additionally I would just point out that the 'near miss' negotiations of 2011 and 2018 cause some pretty severe gyrations in the market - especially among certain sectors - although the one in 2013 did not.

I believe in valuing companies both on their own prospects but also in light of other factors outside their control. Warren tends not to. OK for him, but I've done nicely watching macroeconomics and politics as well, so OK for me ;)

Over the past five months (June to November 2022), in­fla­tion has slowed to a crawl. Whether mea­sured by the con­sumer-price in­dex, or CPI, which most peo­ple watch, or the price in­dex for per­sonal con­sump­tion ex­pen­di­tures, or PCE, which the Fed­eral Re­serve prefers, the an­nu­al­ized in­fla­tion rate has been around 2.5% over these five months.
...
Yes, you read that right. Yet hardly any­one has no­ticed this stun­ning de­vel­op­ment be­cause of the near-uni­ver­sal con­centra­tion on price changes mea­sured over 12-month pe­ri­ods...

By chance I was one who noticed it, and posted about it.
https://www.shrewdm.com/MB?pid=25988498

But I would not be *too* sanguine--as that post also notes, a lot of the slowdown is likely due to the recent pullback in energy prices.

Core inflation is still running pretty hot in the US.
Year on year has been around 6% for some time now, give or take, and the four month annualized rate is only down to 4.9%.

I do expect core inflation to pull back some more, the same way headline CPI has, though perhaps less so and more gradually.
For two reasons:
First, monetary tightening is no fun, but it tends to work--after a lag. 18 months is often cited.
And second, it's often helpful to keep an eye on the money supply.
Six month rate of growth of divisia M4 has actually been negative for six months now, now at -1.3%/year rate down from 4.9%/year in the six months ending March.
Year on year is only +0.2%.
Where broad money supply goes (measured in a meaningful way), big trends in inflation frequently follow.
The divisia M4 growth spike showed up in the April 2020 numbers, long before the headline CPI jumped.
Then the DM4 growth rate faded very rapidly, and has slowly drifted even lower.

Jim

First, monetary tightening is no fun, but it tends to work--after a lag.

Anecdotally from my day job, it does appear to be working. In the last two months of 2022 the consumer sales side of the large manufacturer I work for was off 30-40% year over year. This side of the business is highly correlated to new housing starts and the drop off was expected.

Our lending costs peaked in November and have come down slightly again going into January. Consumer purchases on revolving credit are holding up better than asset backed lending on the larger ticket items as rates rise. No real concerns yet on past due increases.

Our business lending side remains strong as customers there are still taking delivery of purchases committed to up to 18mo ago and delayed due to supply chain bottlenecks that continue to be persistent. Credit quality on the business side remains at all time highs. This side of the house will remain strong into 2024 due to back log alone.

One thing I will recommend, don't simply look at revenue growth as things are slowing, watch the unit volumes. I can only speak for what I see in our business but our price increases have been so dramatic that the top line increases are masking about half of the unit volume declines in some cases. Something to watch anyway.

Jeff

Bluehorsehoe -

Do we work for the same company?! Shockingly similar story for my line of work.

I also fly a lot. For the last couple of years it's been common to see lots of families with small children on the typical businessperson 'red eye' flights, much to my amazement, and far fewer people in company provided logowear. I always thought it was because it costs too much to fly anywhere during normal human times due to the airlines gouging the crap out of their customers.

I started seeing far fewer families and children in early-ish December and certainly into this year.

The TSA numbers don't really support my observations so I'm not sure what to think. It might just be my locale.

Overall, it seems like we are headed for or are in a slowdown. It might be like 2015/2016 when oil cratered which resulted in a localized depression for the O/G industry while the rest of the economy went chugging along.

The slowdown you have been seeing parallels the same for my former employer. We saw our value brands (consumer durables) slow down more than 60%. Now, the higher end brands are also seeing the slow down (since 10/22).

Our revenue is flat, but that is only because the higher margin (larger, higher optioned products) items are still selling enough to offset all of our volume value models.

Across our portfolio of 32 brands and 1000s of models, we are at cyclical lows from 2018. The revenue is still at late 2019 levels, however.

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