Listen To The Words That I Have Been Saying!

1.) Stocks are NOT in a secular bull market that has 10+ years to go...That is ridiculous.  Secular bulls and bears are based on VALUATIONS. 2.) This is not an expected fall in stocks. Two weeks ago, no one saw this event and now it's expected?  Good spin everyone. 3.) Valuations ALWAYS win in the long run.  Always.  That's what matters.  Valuations are currently at levels almost as high as 1999!!! In no way shape or form is the market going to be fun over the short long run (2-5 years).  Things will get ugly. They have to.  Valuations are crazy stupid high.  There is no way around it.  Every reliable valuation metric shows this. All earnings have been growing have been because of interest rates and cutting costs, not from revenue growth that everyone should be concerned with. Today, Friday, and Thursday have been glimpses into the future . When will it all go down? I have no idea...but this is not a healthy market.  Not in the least bit. I write these words now so that everyone can read them in a few years and realize I was "wrong" for some time, but I stuck to the fundamentals and what works, and this is where it has led us....
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Is Outsourcing Bad? What Does It Mean About Our Economy?

Donald Trump is making headlines talking about how he is going to bring jobs back from China, India, and Mexico.  Well, big surprise, Donald Trump is merely just trying to get attention like the attention-whore that he is.  To be fair, all politicians do this.  Hillary Clinton bragged about how voting Democrat in 2006 and 2008 would lower gas prices, mortgage defaults, and also end outsourcing....clearly that didn't happen.  But either way, people need to understand that outsourcing of jobs is actually a GOOD sign of an economy. So whenever I hear people talk about outsourcing, they discuss how it is taking away American's jobs.  Ok. Yes, technically, that's true.  But here is the circular problem with worrying about that.  Ok, so you want Americans to be paid $15 per hour to build a product that can be made by a worker at $1 per hour?  Ok. So that increases the cost of that item by how much?  A lot.  Then it has to be sold to the hard working families in the U.S. who can't afford to spend more on extra things.  Which then leads to less sales.  Which leads to decreased profits and revenues by the companies selling them, which leads to layoffs of the workers whose very jobs were being saved by forcing jobs to stay in the U.S..  Do you see where I am going with this? You can't have a booming economy with EVERYONE making more money and everyone living well AND have inexpensively made products for less financially advantaged people to buy.  You can't have your cake and eat it too. Of course, many people in certain political parties will want you to believe that you can have lots of high paying jobs and low cost items. This is why a higher minimum wage doesn't help people make more money.  All that happens is that cost of creating goods and services goes up, which causes the very people the minimum wage is helping to pay more for the products they need to survive. It's inflationary.  And the people making $500K per year don't care about paying $4 for something they were paying $2 for before but someone making $20K per year surely does. I know I have brought up politics but this isn't just about politics.  It's about common sense.  Even China will be losing jobs to other poorer countries soon. Their economy is growing like gang busters, which is awesome! But their economy will change a lot in the coming decades to adjust for higher factory worker costs.  I import products from China now and I am sure over the next few years, we will start to see increased costs.  And that's a good thing for China. So stop complaining and just realize that jobs being outsourced means that EVERYONE in this country is making more money. Yes, someone who loses their factory job is out of a job, but they aren't out of a job forever.  They will get new skills and adjust.  They may not make the money they made before, but that's how the world works.  Adjustments are made.  As I always tell my father when he worries about fewer and fewer factory jobs: When the car was invented, it didn't mean everyone who worked on a train lost their job forever....
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Should You Trust a Stock Analyst’s Opinion?

We have all heard the stories...An analyst gives a company a "buy" rating in exchange for their child being admitted into a prestigious private school where the company CEO sits on the board.  Or a heavy dose of "buy" ratings are given to companies by investment houses that also get a lot of investment banking and advisory fees.  This is commonplace and a lot more commonplace than many on Wall Street would like to admit. But here is the most OBVIOUS reason why an analyst's opinion shouldn't matter.  They don't know sh*t and even if they did know sh*t, it's too difficult to put a "sell" rating on something that everyone loves and is going up with momentum and equally as difficult to put a "buy" rating on something that has been beaten down because of investor discomfort, for whatever reason. The most difficult part of investing is finding value where others see garbage.  It's the way you are going to make above average returns.  You won't make above average returns, over the long haul, by investing in what everyone wants and avoiding what everyone else doesn't.  You have to look at companies and real estate in different ways.  I preach this non-stop and I won't stop preaching it. It is the HARDEST thing to do in investing. I am 100% honest when I say I don't even look at analyst opinions at all.  I used to. When I lacked confidence in investing.  Fifteen years ago.  In addition, evidence has shown how wrong analysts are on a routine basis.  And it's not just randomness...it's consistently true.  Why?  Because it's hard to keep your job when you say a company should be sold and it keeps going up, or vice versa. Have you ever noticed what % of companies are even rated with a "sell" rating? It's disturbingly low. Just think for yourself.  If you can't look at a company and analyze it's three major financials, then don't buy individual stocks.  Buy index funds that invest in sectors or major indexes.  Learn to understand whole sectors and indexes.  You can make a lot of money that way too. But don't think for one second that Billy Bob at Wells Fargo who is 23 years old and graduated from Wharton is suddenly an amazing analyst.  He is given models to follow and that's that.  Learn how to read financials...you don't need an MBA to do that.  In fact, I don't know many MBAs who even read financials (and by "don't know many" i mean "i know zero")...
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Why Do Fundamentals Matter?

With a booming market, everyone forgets fundamentals.  Someone, the other day, told me that "You don't need profits to pay bills" when talking about Amazon.  If that's not a sign of euphoria and not understanding how wealth is built, I don't know what is. The reason fundamentals matter in the long run is that wealth is built on cash flow, profit, and overall returns.  Yes, a company can profit but if you're paying too much for that profit, it's going to hurt you in the long run because there will be a time when your investment is out of style and everyone will revert back to to fundamentals.  It happens in every bear market.  People flee the exciting fast growing stocks that aren't doing as well financially to go to companies that generate cash flow and build their balance sheet. Not only in stocks.  Real estate as well.  The last 15 years have been a boom in real estate, even after a big bust.  Real estate is driven by income.  I randomly pulled 28 markets that I could think of in this country and looked at their median income growth and their real estate value growth since 1990.  The direct correlation from one city to another wasn't exactly there, but when you looked at all 28 cities as a whole, they were very much in line.  Median income growth was 2.32% per year on average and the average real estate growth was 2.6% per year.  Not exact, but close.  During the recent 15 years of booms in major markets (that were also in my 28 city analysis), we were seeing 15-20% growth per year even though income wasn't growing NEARLY as much.  Then we saw a massive drop in prices and another rebound, so everyone assumes that the past problems were past problems.  We shall see. The bottom line is that everything reverts to the mean.  We are never exactly fairly valued. We are either overvalued or undervalued in every investment asset.  You are either a buyer or seller of assets.  It's that simple. I choose to wait until asset prices get to the point where they are undervalued enough to make me feel that above average returns will be experienced based on historical averages.  Does it require A TON of patience?  Absolutely.  Is it frustrating at times?  100%.  To hear the so-called "experts" tell me that I'm missing it and I don't understand and "This time is different" has become annoying.  But I stick to fundamentals.  And at the end of the day, they win out. Fundamentals are the only true way to measure value.  You have to find out what truly defines the price of an asset and buy when the asset is selling for below that fundamental point.  Is it just one thing?  No.  But is it a ton of complicated points?  Absolutely not.  There are a few things that matter when looking at investments and it is the job of a true investor to understand what those are and where they have stood historically (not just over 25 years but over 60+ years)....
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Is the Stock Market Rigged?

I overhead someone today saying that no one can beat the market because the "whole system is controlled by the wealthiest people in the world and they'd never let it fail."  To be honest, that's probably one of the dumbest things I've ever heard.  Especially during a roaring bull market. I heard it a lot in 2009 when stocks were down a ton and everyone was saying that people who controlled money caused the crash so they could buy stocks very cheap and make a ton of money while the little guy lost everything.  <eye roll> The stock market is not rigged, in general.  Are there shady things happening within companies that cause certain things to appear rigged or may actually be rigged?  I'm sure there are.  There have been in the past and there's no reason that has ended today.  The entire 2009 financial crisis, if you read all about it, is a massive cluster f**k of a bunch of Harvard MBAs who thought they were smart and created financial instruments that were recipes for disaster when they forgot about fundamentals... If the market was rigged, it would never go down because there are only a handful of investors who WANT the market to go down so we can buy stocks cheaper.  The rest of the people (billionaires included) want to see stocks go up because when stocks are up, their brokerage accounts are up, and they are "richer." It's logical. In addition, the market goes into long (secular) bull and bear markets.  What is the logic behind a group of people conspiring to make the market go sideways (secular bear) for 15-20 years? Just think about that for a second.  You have SO much power to rig a $20 Trillion institution and your first order of business is to make it go sideways for 20 years...how is that helping you out?  And then one day, valuations are so low that the next 20 years sees 15% growth per year! The market isn't rigged.  Human beings are lemmings.  They don't stick to fundamentals and they just buy what their neighbor is buying or what they see on TV going up and up and up. Don't blame the ups and downs on a few guys conspiring in some back room to make their wallets bigger.  The best investors in the world were average people and are mostly average people who just happened to invest very well....
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How Do You Short a Stock? What Does Shorting a Stock Mean?

So I have done this strategy a few times...a couple of times it worked out well and the other two...I am still waiting for my payday. But when I tell people in my office or my friends that I have shorted a stock, they sometimes ask me what that means, and other times I can tell they don't know what it means...so here is what is being done: So first off, when I say I am shorting a stock, it means that I am betting that the stock's price will fall.  So how do I bet that a stock will fall when shorting? Well, I go to my broker and I say, “Hey Mr Broker, I want to short 100 shares of ABC Corporation because I think it will fall below the current price of $50 per share.”  So what Mr. Broker does is he first looks and makes sure that my account can afford to lose big money because in shorting, as the price of the stock goes up, I lose money, so theoretically, there is unlimited loss potential. Once he has realized I don’t bet more than I can lose (usually), he puts the trade in for me. But what happens behind the scenes? Well, the broker finds other clients who have 100 shares of ABC Corporation in their portfolios and they let me borrow those shares from those clients and sell it on the open market at $50 per share.  So I, technically, get $5000 in my account when shorting, but I also owe $5000 to those customers who I borrowed their shares from.  The shares could also be the broker’s own in house shares, by the way. So I have a net $0 change in my account because I borrowed $5000 and then sold $5000 so the net asset change is $0. So now, if the stock goes DOWN in price from $50 to $30, I can then buy those 100 shares back on the open market for $3000 and replace the 100 shares I borrowed at the lower cost of $3000, so my net is $2000. Did you follow that? So I borrowed shares at $5000 and then replaced them at $3000, so I net $2000 in profit! And if the stock goes up, that’s how I lose money.  I borrowed those shares at $50 and I had to buy them back on the open market at $80, which means I spent $3000 more than I borrowed them at, so I lost $3000. Someone asked me once if that’s legal.  Ha.  Yes, it’s legal.  The bank, theoretically, won’t let you short more than you can afford to lose or anywhere close to what they have in their inventory of stocks. This is a very risky strategy if done without hedges in place.  But it can yield some high returns if done with the right timing…Which I haven’t done as of late....
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Amazon (AMZN): Killing Me Softly

Well f**k.  Amazon (AMZN) just announced that they made $92MM last quarter versus a loss of $126MM in the same quarter last year.  So what did investors do?  They decided to reward Amazon with an $85 per share increase after hours.  That's an additional $40Billion or so in value added.  So now they are officially worth more than Wal-Mart.  And that is beyond stupid...and here is why: In the last twelve months (TTM - Trailing Twelve Months), Wal-Mart has $485Billion in revenue.  Amazon has $96Billion in the last 12 months.  So Wal-Mart, by sales, is 5 times larger.  But it is worth LESS?!?!?! Ok...maybe it's about profit... In the last twelve months, Wal-Mart has made $16Billion in net income.  Amazon has LOST $188MM.  Wait.  So Wal-Mart has MADE A PROFIT of $16Billion and Amazon has LOST $188,000,000....LOST....Oh but wait, everyone says it's about the growth... I know.  So Amazon's BEST argument is that they are investing in more and more things to make the experience for users better and grow their media collection and blah blah blah.  Ok. Fine.  Then why can't you make money off of $96B EVEN DOING THAT?!?! Their best margins ever were almost 4%...Wal-Mart, which is brick and mortar and supposed to cost more, is higher on average.  So let's assume that they hit 4% in profit margin in the long run because of their investments and they finally start to turn a profit...on $96Billion in sales, that's profit of $3.8Billion. So at a market cap of $265Billion, that's a price to earnings ratio of 70 still! Which is still 5 times more than historical averages especially for such a mature company because REMEMBER, Amazon is  a MATURE company. It isn't a start-up! It's been around for 20 years! Sure it is! They surprised everyone by growing 20% from last year's same quarter.  Ok. So let's assume they continue to grow 20% per year and let's assume Wal-Mart only grows at 3% per year...how long will it take for Amazon to catch up?  Remember, assuming 20% growth per year is HIGHLY unlikely...is it impossible? No.  But even Amazon's growth since 2007 has slowed significantly.  From 2007 to 2008, before the big recession, Amazon's revenue grew 30%.  So there is going to be a slow down.  Have they had better years since then?  Sure, but here is their year over year growth since 2007: 30%, 27.9%, 39.5%, 40.5%, 27%, 21.9%, 19.5%, and this last quarter they SURPRISED everyone with 20% growth. So back to my point: Let's assume 20% growth for Amazon every year and only 3% for Wal-Mart every year...In 10 years, Amazon's revenue will be $595Billion and Wal-Mart's revenue will be $651Billion! They still haven't caught up to Wal-Mart! And even at $595Billion in revenue and 4% profit margin, which I remind you they have never achieved, they will have profit of $24Billion which is still only 10 times earnings of TODAY'S MARKET VALUE!...which is about where stocks should sell for during a bad bear market.  So let's even assume that it should sell for the same multiple as Wal-Mart, which is around 15 or so historically. That's a valuation of $360Billion which is 35% higher than today. Soooooo...follow me here...Today's market value of Amazon is 35% lower than what it should be if it were to grow at 20% per year for 10 more years AND have profit margins it has never seen before.  Does it sound optimistic?  Absolutely.  Yes, Amazon is winning the popularity contest right now, but no companies does that for decades.  Microsoft didn't. Google didn't.  Dell didn't. IBM didn't.  No one does.  And sometime in there, it will massively correct.  And when it does, it will be ugly.  Until then, my bank account looks ugly. Good day....
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Why Does The Stock Market Keep Going up?

I have no f**king clue.  Well, I have an idea, but it's stupid and illogical.  Everyone says that they need returns because gov't debt for 10 years only pays 2.2%, so why not invest in the market and get a 2% dividend and see it grow 10% per year? #Stupidity So this means you should pay ANY price because it's better than making 2.2% with the US Gov't for 10 years?  Of course someone would say "Well, no not ANY price" but when we have valuations almost as high as 1999/2000, to me, it means almost any price. Today on Yahoo Finance, the front page had a picture of a woman throwing money in the air and the title was referencing how one trader thinks we have 2.5 more years of bull market.  Forget that we are in the second longest streak of days of stock market without a 10% correction (1340+), he is thinking we have over 900 more at least.  I'm not saying he is going to be wrong, because I have been wrong so far, but we have Europe really struggling, not a lot of corporate profit growth, massive amounts of U.S. debt, and profit margins sitting at DOUBLE the historical average....these things don't bode well for market tops, but then again, I have been wrong for over 2 years now. Also, back to Greece.  Jeeezzzzz.  We are happy because Greece may get a deal and avoid insolvency for a bit longer?  Why is that something to celebrate? I created an analogy today that my investing compadre thought was spot on.  This Greece situation is similar to committing murder, admitting to it, the police having video footage of it, your lawyer telling you that you will do time, and yet, everyone celebrating your freedom because your lawyer was able to push back sentencing for 3 days for whatever reason.  You're not free!! You're still going to go to jail! You just pushed it back 3 days! That's it! Greece WILL FAIL! Maybe not tomorrow...but it will fail.  The problems are fundamental...they don't have increasing revenue and they are in a severe depression with 27% reported unemployment and GDP per capita down 33% in the last 6 years. Yes, there are always things that can cause markets to go up and down and no, I don't just dwell on the bad ones.  I just look at history and see what the most fundamental drivers of wealth creation are, and we have none of them right now.  We don't have low asset prices relative to history, we don't have increasing earnings, we don't have increasing GDP and jobs, and we have barely had any income growth in this country that would drive the rest of this! How can we celebrate the stock market?! Onward and upward Mr Stock Market....
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Should I Tell My Kids How Much I Make?

I just saw a Yahoo Finance article that said that only 17% of people who make over $100,000 per year tell their children how much they make, with the most common reason being "it's none of their business."  I don't know how much I agree with this. My father was very open about money to us when we got into high school. We knew how much he made and how much he spent and he talked about frivolous spending frequently.  My mother is still a bit shy in discussing it, for some reason. So this can go both ways. If you make A LOT of money and you think it could cause problems with your kids knowing that much money due to ego/arrogance/being spoiled, I can understand that concern, but is that really because of how much money YOU make or because your kids may already be spoiled and there was an issue raising them?  I am not trying to throw stones, but there are plenty of good kids that come out of very wealthy families and plenty of bad kids that come out of lower income families. I am a BIG believer in being open about money at an early age so it can show your kids what it takes to live certain lifestyles. If you don't make a lot, it will show your kids the limitations of money and when you aren't able to provide certain things, it shouldn't be a cause for embarrassment but more of a reason to talk to them about why they may want to take more risks or go get an extra degree in school in order to achieve higher income. If you make a lot of money, your kids will see that it takes a lot to live a nice lifestyle and to get the things they will want later in life and the security of retiring at a younger age. The bottom line is that if you raise your kids the way you should by valuing a dollar no matter what your income is, they will learn to appreciate that income level.  I know that I am a big saver and conservative with investing because I never want to sacrifice the lifestyle I have grown accustomed too.  Has that inhibited my risk taking? ABSOLUTELY! Do I regret that? Absolutely not. I just have to find other ways to make above average returns other than taking undue risks that could sacrifice what I had the good fortune to be able to build on. Don't be scared to show your kids what you have. It's a great way to teach them.  Everything can be made into a good situation or a bad situation: take whatever situation you are in and use it as a learning tool for your kids.  The kids I know whose parents were very tight about their information grew up to resent the lack of trust their parents had with them....
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My Investing Ego Is Worried About Tomorrow More Than Today

As we progress down this road of massive overvaluation and incredible arrogance of not seeing what history has proven time and time again, I am, unfortunately, finding myself getting heated over what the future will hold...not because there will be massive decreases in stock prices and money will be lost...quite the contrary.  When that happens, I will do quite well.  What bothers me is that the same people who think that I am wrong today are the same ones who will say how obvious the overvaluation was...the same people who say that about 1999/2000 and the real estate bubbles in the mid 2000s. The reason this is causing me worry is that these are the same people who are ignoring the advice of today.  In the world of valuation, the levels we sit at today are so beyond obviously overpriced that it hurts to even think about how the justification can be made for current stock prices.  Financial memory, according to Galbraith, is 4 years and that is quite apparent today.  Everyone forgets 2000 and 2008, and everyone most certainly won't even look at data going back to the 1940s with 90%+ correlation.  Why?  It's not fun to see what the past has shown and what the future could very likely be. It is a matter of ego.  Part of the reason I started this blog was for ego purposes.  Yes, I have been wrong as of late, but when the markets start to do what is apparently obvious over the next 2-5 years, I will have the ability to say "not only did I think it, I said it."  Is that mature?  Absolutely not.  But it's no less mature than not looking at data and history to see what has been undeniable for decades. A man I write a lot about, John Hussman, quoted his works from 2000 when he wrote this about the NASDAQ and S&P 500..."

It’s instructive to look back on the comments that we published in 2000 as the bubble, in hindsight, was about to burst:

“The issue is no longer whether the current market resembles those preceding the 1929, 1969-70, 1973-74, and 1987 crashes. The issue is only – are conditions more like October of 1929, or more like April? Like October of 1987, or more like July? If the latter, then over the short term, arrogant imprudence will continue to be mistaken for enlightened genius, while studied restraint will be mistaken for stubborn foolishness. We can’t rule out further gains, but those gains will turn bitter… Let’s not be shy: regardless of short-term action, we ultimately expect the S&P 500 to fall by more than half, and the Nasdaq by two-thirds. Don’t scoff without reviewing history first.”

- Hussman Econometrics, February 9, 2000"

The NASDAQ ended up losing 78% by its low and the S&P lost about 50%, as he said they would.  Yes, it took some time to get to those points, but once it did, it was ugly and he called it.

Many don't realize that this kind of analysis does not take excessive time.  Keeping it as simple as possible is the best way to eliminate confusion and error.  Investing in equities is purely an analysis of what you believe your profit to be over a certain amount of time based on risk and potential reward.  Right now, the risk is too great for not enough reward on a time horizon of 5-10 years.  Will it go bad today or tomorrow? Who the heck knows?

As I told my Bloomberg sales rep the other day and I repeat very often to others "Bull markets make the Average Joe look like an investment genius."  It's easy to say things will continue going up because if they don't, everyone else lost too, so you're among a large company of bad investors.  If it continues to go up, it's easy to say "See, I told you." The question becomes not how well you do when everyone else is doing well but how well do you do when everyone is losing their shirt.

I will continue to look dumb and feel the bruising of my ego for a bit longer, but one day that will change...and I will talk about how great equities are and valuations are so good while others are saying "Stocks are the worst investment to be in." Trust me, that day will happen.  And when it does, you need to start buying because that is when fortunes and wealth is created.

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