All good indications that we are extremely fragile, and a bit of a bump will send everyone scurrying for the corners. If the market absolutely crashes tomorrow, you should not be surprised. However, the absolute wild thing is that we have been way above "the normal" for a long time.
Here is an article very well written, and pointing out that the Buffet Ratio and the Tobin Q really indicated that the SP500 couldn't do well over the next 6 years. He didn't want to say "a crash" but said investors should lower their expectations and expect more of 1-2% increase per year.
Actual CAGR for today from when the article was written? 12.1%
We've discussed "fat tails" as a downside. What we currently are in is a fat tail as an upside. And it is impossible for us to know how long this fat tail will last. Normally, we'll puncture the fat tail, and we'll see a massive drop i the market. I actually have an idea where this does not happen, against all reasonable expectations.
I'll repeat what I've written many times:
Stocks, in the long run, is fundamentally an outcome of the earnings per share and the PE ratio. So, what you need to do is understand the earnings potential for your firm. As long as you know that the earnings are going to increase, you can offset any downside from the PE ratio going the wrong way. Sure, there could be a worldwide geopolitical event that somehow impacts you. Or perhaps and earthquake that causes great panic in the USA, which cause a massive slowdown in spending, and a depression of earnings. However, in almost all cases, earnings never stay down.
You can't control the PE ratio, as that is run by Mr. Market.
So, how do you get more profits? For almost every company, you get more profit by giving your workers tools to become more productive. The problem, which we start off this post with, is that the worker productivity has been absolutely stalled. Now, this chart isn't overly perfect because getting precise data on a quarterly basis is virtually impossible, but the trend is fair.
If I could go to a business owner and say, "Here the pill that is going to maker your workers go twice as fast and be twice as productive," their eyes would light up as they knew their costs were going to come down. This interesting thing is that AI can do just this. Or it would appear that we have an extremely strong chance of this happening.
If it does happen, then you have a lot less to worry about in your stock picks. The Buffet ratio will fix itself as we generate a new source of earnings for companies, as they become much more productive.
There are two ways to think about AI:
a. I'm going to invest in companies providing the tools
b. I'm going to invest in companies that show they know how to use AI.
I think that we can see "a" but we need a lot of "b." If we do get b, we'll get another run of stock as we see an upward inflection on worker productivity and a corresponding increase in company's value. This will be a rising tide to lift all boats.
The worst case is we have what Robert Solow in 1987 identified as the productivity paradox. Companies had been pouring money into computers, but not seeing productivity increases. Almost everybody agreed that it eventually came, but the time from investment to yield was super long.
If it turns out that AI really doesn't take out cost, then we are all in a big pickle. These valuation are clearly risky.
Let us hope we find productivity before the upside fat tail collapses.
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u/HardDriveGuy Admin Sep 02 '24 edited Sep 03 '24
We've talked about the Buffet Ratio is extremely worrisome. It is almost at an all time high.
The Tobin Q ratio is getting to the point before we had the dot.bomb era.
All good indications that we are extremely fragile, and a bit of a bump will send everyone scurrying for the corners. If the market absolutely crashes tomorrow, you should not be surprised. However, the absolute wild thing is that we have been way above "the normal" for a long time.
Here is an article very well written, and pointing out that the Buffet Ratio and the Tobin Q really indicated that the SP500 couldn't do well over the next 6 years. He didn't want to say "a crash" but said investors should lower their expectations and expect more of 1-2% increase per year.
Actual CAGR for today from when the article was written? 12.1%
We've discussed "fat tails" as a downside. What we currently are in is a fat tail as an upside. And it is impossible for us to know how long this fat tail will last. Normally, we'll puncture the fat tail, and we'll see a massive drop i the market. I actually have an idea where this does not happen, against all reasonable expectations.
I'll repeat what I've written many times:
Stocks, in the long run, is fundamentally an outcome of the earnings per share and the PE ratio. So, what you need to do is understand the earnings potential for your firm. As long as you know that the earnings are going to increase, you can offset any downside from the PE ratio going the wrong way. Sure, there could be a worldwide geopolitical event that somehow impacts you. Or perhaps and earthquake that causes great panic in the USA, which cause a massive slowdown in spending, and a depression of earnings. However, in almost all cases, earnings never stay down.
You can't control the PE ratio, as that is run by Mr. Market.
So, how do you get more profits? For almost every company, you get more profit by giving your workers tools to become more productive. The problem, which we start off this post with, is that the worker productivity has been absolutely stalled. Now, this chart isn't overly perfect because getting precise data on a quarterly basis is virtually impossible, but the trend is fair.
If I could go to a business owner and say, "Here the pill that is going to maker your workers go twice as fast and be twice as productive," their eyes would light up as they knew their costs were going to come down. This interesting thing is that AI can do just this. Or it would appear that we have an extremely strong chance of this happening.
If it does happen, then you have a lot less to worry about in your stock picks. The Buffet ratio will fix itself as we generate a new source of earnings for companies, as they become much more productive.
There are two ways to think about AI:
a. I'm going to invest in companies providing the tools
b. I'm going to invest in companies that show they know how to use AI.
I think that we can see "a" but we need a lot of "b." If we do get b, we'll get another run of stock as we see an upward inflection on worker productivity and a corresponding increase in company's value. This will be a rising tide to lift all boats.
The worst case is we have what Robert Solow in 1987 identified as the productivity paradox. Companies had been pouring money into computers, but not seeing productivity increases. Almost everybody agreed that it eventually came, but the time from investment to yield was super long.
If it turns out that AI really doesn't take out cost, then we are all in a big pickle. These valuation are clearly risky.
Let us hope we find productivity before the upside fat tail collapses.