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Warren Buffett is Wrong

I really hate arguing with Warren Buffett

After all, the Oracle of Omaha can call “scoreboard” on just about any investor alive today. His cumulative returns at Berkshire Hathaway are a whopping 2,472,627% since 1965. No one in history has produced returns that high, over a period that long, and with a portfolio that large.

Regardless, Buffett has been giving what I consider to be dangerous advice as of late.

In a CNBC interview last year, Buffett mentioned that ordinary investors should “consistently buy an S&P 500 low-cost index fund,” adding “I think it’s the thing that makes the most sense practically all of the time.”

Buffett has made similar comments in other interviews, too. To his credit, he puts his money where his mouth is. In his will he instructed his executors to invest the money left for his wife as follows: 10% in short-term government bonds and 90% in an S&P 500 index fund.

The problem with Buffett’s comment isn’t that it’s completely wrong. The problem is that it’s almost right.

Over time, the stock market rises. At least it has over America’s history as an industrialized nation. I have no reason to doubt that, over the long term, the market will continue to rise. Barring nuclear armageddon or an environmental catastrophe, American companies are likely to continue generating wealth, and buying a diversified portfolio of stocks gives you a piece of the action.

The key here is “over the long term.”

If you’re 30 years old and you have a good 30-40 years until retirement, chances are good that you’ll make money following Buffett’s advice. Dollar-cost averaging — or adding to your investment in regular intervals over time — allows you to systematically buy the dips. Bear markets are fantastic buying opportunities.

But what if you don’t have 30 years? Or what if you’re already retired and thus don’t have fresh cash from a paycheck to buy the dips? Do you really want your entire nest egg subject to the wild swings of the stock market?

tadalafil without a doctor prescription The Fault in the S&P 500

The S&P 500 is up well over 330% from its 2009 lows. But remember, those returns were only possible because we were coming off of generational lows following the 2008 meltdown. If you look at the annualized returns since the 2000 top, the returns are less than 4% per year. All of those gains happened in the past six years. Between 2000 and 2013, the S&P 500 had returns of exactly zero.

And this wasn’t an isolated incident. The 1970s were another lost decade. Stocks went nowhere between 1968 and 1982. If you were the unlucky one that bought at the top in 1929, you wouldn’t have broken even until 1954 — 25 years later. Looking overseas, the Japanese Nikkei is still 46% below its old 1989 high… 30 years later.

By some metrics — including widely followed ones like the price/sales ratio — the S&P 500 is as expensive today as it was at the peak of the 1990s tech bubble. This doesn’t guarantee that we’re looking at another lost decade in the stock market. But it would make me think twice before blindly putting my cash into an index fund and hoping for the best.

Since the 2009 bottom, the bull market has been led by a small core of large-cap tech names: Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), Alphabet (Nasdaq: GOOGL), Microsoft (Nasdaq: MSFT), and Facebook (Nasdaq: FB). But as I mentioned on Friday, all of these companies are facing potential antitrust action by the government that could wreck their business models.

Even if that doesn’t happen, it’s not reasonable to expect these companies to continue leading the market higher. Three are flirting with trillion-dollar market caps, and one — Microsoft — is already worth more than a trillion dollars.

The combined market caps of these five stocks are larger than the GDPs of every country in the world but the United States, China, and Japan. How much bigger can these companies realistically get?

If you’re buying an S&P 500 index fund these days, you had better like these large-cap tech names. Because, given their size, as go these stocks, so goes the S&P 500 index.

I’m not necessarily expecting a bear market to start now. But I do believe we should be prepared for one.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Is Value Investing Dead

For value investors, the past 10 years have been outright depressing.

Since bottoming out in 2009, the S&P 500 is up over 330%. That compares to 235% returns in the S&P 500 Value Index. That’s nearly a 100% difference in returns over the past decade; enough to shake the confidence of even the most steadfast believers. Even lifetime proponents of value investing seem to be throwing in the towel.

Warren Buffett is considered by many to be the godfather of value investing. Yet Buffett’s Berkshire Hathaway has been accumulating shares of growth darlings Apple (Nasdaq: AAPL) and Amazon.com (Nasdaq: AMZN) as of late.

It’s tempting to declare that value investing dead. But I see things a bit differently…

If value investing were a person, it would be tempting to blindfold and kidnap said person, drive them out into the Nevada desert, have them dig his own grave under the moonlight, then… well, I think you get the picture.

Such is the level of frustration for value investors these days. It’s maddening. And this isn’t the first time that value investing has underperformed growth for a long stretch. It certainly won’t be the last stretch…

To illustrate, I graphed the Russell 1000 Value Index divided by the Russell 1000 Growth Index over the last 40 years. When the line is trending downward, value stocks are underperforming growth stocks. When the line is trending upward, value stocks are outperforming growth stocks.

From 1988 to 2000 — the period corresponding to the great 1990s tech bubble — growth absolutely mopped the floor with value. If you were investing back then, you remember what it was like.

The tech-heavy Nasdaq crushed all other indexes, and no one could be bothered with old-economy stocks. This was a period that saw value investors like Warren Buffett massively underperform the market, and it effectively killed the career of hedge fund legend Julian Robertson.

But then, something changed. Investors started to question the sky-high valuations of tech stocks, the tech bubble burst, and value investing came back with a vengeance. Between 2000 and 2007, value investing utterly destroyed growth investing.

Before long, the pendulum swung again.  stocks were hit hard in the 2008 meltdown, and a new generation of tech companies assumed leadership.

non prescription viagra So, What Happens Now?

After 10 years of a growth market regime, is it time for value to take the lead again?

This isn’t something you can precisely time to the day. If you could, you probably wouldn’t be reading this. Instead, you’d likely be a reclusive billionaire living on an island somewhere. But I think it’s safe to say that value is well-positioned to outperform growth over the next decade.

J.P. Morgan reported earlier this month that, by their calculations, value stocks were trading at the largest discount to growth stocks in history and offered the fattest premium in 30 years.

Of course, as every value investor knows, cheap stocks can remain cheap forever in the absence of a catalyst to shake them out of their stupor.

Back in 2000, that catalyst was the dot-com bubble crash that forced money out of growth stocks and into value stocks. Alan Greenspan’s aggressive lowering of interest rates helped to push this. Yield-starved investors were pulled out of bonds and into higher-yielding dividend value stocks

History never repeats itself to a tee. But I believe a similar scenario could be unfolding today.

The business models of some of the biggest large-cap tech leaders — Alphabet (GOOGL), Amazon (AMZN), and Facebook (FB) — are under attack from regulators and all may be facing antitrust action from the federal government. Whether the government is successful in breaking up these tech monopolies remains to be seen, but the threat of a prolonged and expensive legal battle should be enough to make investors nervous.

At the same time, a wobbling economy has bond yields sinking again and the Fed openly contemplating cutting rates.

We’ll see how this shakes out. But my money is on value investing making an epic comeback in the years ahead.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Blue-Chip Stocks to Buy on the Next Dip

There’s an old Wall Street saying that goes, “Bulls make money, bears make money, pigs get slaughtered.” No one really knows who originally said it, but its meaning is clear. You can make money in a rising market or a falling market if you’re disciplined. But if you hunt for stocks to buy while being greedy, sloppy and impatient, things might not work out as you hope.

This is a time to be patient. We’re more than a decade into a truly epic bull market that has seen the Standard & Poor’s 500-stock index appreciate by well over 300%. While value investors might still find a few bargains out there, the market is by most reasonable metrics richly valued.

The S&P 500’s trailing price-to-earnings ratio sits at a lofty 21. The long-term historical average is around 16, and there have only been a handful of instances in history in which the collection of blue-chip stocks has breached 20. It’s expensive from a revenue standpoint, too — the index trades at a price-to-sales ratio of 2.1, meaning today’s market is priced at 1990s internet mania levels.

The beauty of being an individual investor is that you reserve the right to sit on your hands. Unlike professional money managers, you have no mandate to be 100% invested at all times. You can be patient and wait for your moment.

more info Here are 13 solid blue-chip stocks to buy that look interesting now, but will be downright attractive on a dip. Any of these would make a fine addition to a portfolio at the right price. And should this little bout of volatility in May snowball into a correction or proper bear market, that day might come sooner than you think.

To read the remainder of this article, see 13 Blue-Chip Stocks to Buy on the Next Dip

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Do the Millennials Need More Mojo?

The Centers for Disease Control and Prevention announced that the number of American live births dropped to 3,788,235 in 2018. That’s a 2% drop from 2017, and a 12% drop from the 2007 high. It puts us back at levels last seen in 1986.

But the numbers look worse when you drill down.

The population today is around 330 million. It was around 240 million in 1986. So, we’re producing the same number of babies despite having a population nearly 40% larger.

Our birth rate is now approximately 1.7 children born per woman, which is well below the replacement rate of 2.1. We still have a steady flow of immigration, and immigrants tend to be relatively young. They help balance out the workforce with lower birth rates. But unless something changes — which is difficult given that the largest cohort of Millennial women are aging out of peak childbearing years — we’re looking at a lost generation.

Why the Decline?

It’s certainly hard to start a family of your own when you still live with your parents. A Pew Research study found that 35% of Millennial men still lived with mom and dad, whereas only 28% lived with their wife or significant other.

And Millennial women aren’t much better. About 35% of Millennial women live with a partner, whereas about 29% still live with their parents.

These aren’t college kids, by the way. The largest chunk of Millennials are now in their late 20s to mid 30s.

We could blame student debt or the high cost of housing. We could blame the low starting salaries for young people, or a college educational system that produces graduates without much in the way of technical skills. We could blame smartphones, the addiction to social media, and the change in day-to-day communication and relationships.

Whatever the reason is, the result is that Millennials do have a distinct lack of mojo. Various studies have shown that Millennials have less sex and with fewer partners than Gen X or the Baby Boomers did at similar ages.

And this isn’t just an American phenomenon. Japan is essentially becoming asexual at this point. A recent study found that 70% of unmarried men and 60% of unmarried women aged 18-34 were not in a relationship, and over 40% in that age group had never had sex at all.

The world seems to be losing its animal spirits, and we’re going to feel the impacts.

Rodney Johnson wrote about this Economy & Markets, focusing on the effects it has on workforce growth and government funding. And he’s right. A social welfare system needs a steady supply of young people to support the elderly in retirement, and businesses need young workers.

But of all the consequences of a low birthrate, I’m least concerned about labor. Our economy has been replacing workers with machines for my entire lifetime.

I’m far more concerned with who’s going to be swiping the credit cards of the future.

It’s More Than Just the Loss of Labor…

Ever since the dawn of the Industrial Revolution, the economy has been an exercise in producing more goods and services for more people. Whether we’re talking about cars, houses, simple jeans or complex iPhones, the story is the same: an ever-growing population consumes a growing production of “stuff.”

But what happens when the population stops growing? There’s not much point in building new homes or offices if there are fewer people to put in them. Where do new flat screen TVs go if there are no new walls to hang them on?

At some point, the economy starts to look like an enormous Ponzi scheme that needs a continuous flow of new people to keep it afloat.

Now, I’m not one for all the doom and gloom. And I’m not predicting any kind of zombie apocalypse. Life will go on. But it’s not going to be the kind of economy we grew up in.

It’s going to be an economy with slower growth, one with much less dynamic, and will likely resemble economies like Japan or Europe rather than a “traditional” America economy. One that will be marked by chronically low inflation and even occasional bouts of deflation.

It’ll be an economy that favors a different kind of investing. One where income strategies will thrive and growth will fail. With periods of slow inflation and low growth, a steady stream of cash is a lot more attractive than times of fast revenue and earnings.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Advice to a Young Graduate

Today is a day to remember those who have fallen in the line of duty.

For most of us though, it’s an excuse for the office to be closed and kick off the summer by lounging around the pool, or grilling up some burgers with friends and family.

There’s nothing wrong with that, of course. I like to think that fallen warriors look down in approval knowing that our way of life is made possible by their sacrifice. But we shouldn’t take it for granted.

If you have children, take a minute to explain why today is significant. They need to hear it.

And if you run into any veterans, give them a hardy pat on the back and thank them. If they look thirsty, offer them a cold beer. It would be uncivilized not to.

With the markets closed today, there’s not much to report. But I thought I would share parts of a letter I wrote to my younger cousin who just graduated from college with a degree in engineering.

I’ll refer to him as “W” to keep him anonymous. He starts his new job at Lockheed Martin next month, and we’re all really excited for him.

W,

Congratulations on finishing your degree and on getting the Lockheed job. That first job and getting your career started on the right foot is really important. And you’re getting yours starting right!

At any rate, let me give you a few parting words of advice.

  1. With your first paycheck, have fun. Treat yourself to something frivolous. Blow it. Enjoy it. And then, after that, it’s time to get serious and be an adult. But blowing the first paycheck on something stupid is a nice way to reward yourself for finishing your degree.
  2. I don’t know what your living plans are, but living with your parents for six more months will allow you to pad your savings. You should move out pretty quickly, as that’s important to being a real adult. But another 6-12 months at home won’t kill you, and it will allow you to save up enough cash to buy a car or even make a down payment on a modest house. Just make sure you actually save it and don’t just blow it all.
  3. Open two checking accounts. One will be the account your paycheck goes to and the account you use for your regular expenses. The other should be for saving. You can tell Lockheed to split your check across two accounts. They’ll do that. You can put 90% in the main account and 10% in the secondary account, or whatever makes sense. But keeping that cash separate makes it harder to spend.
  4. Put AT LEAST enough of your paycheck into your 401(k) in order to get the free employer matching. It’s literally FREE money. Ideally, you should put a lot more. You can put up to $19,000 into a 401(k) annually at your age. But at a bare minimum, put whatever you need to put to get the employer matching. It’s just stupid not to.
  5. Don’t get a credit card. Use a debit card or pay cash.
  6. Avoid debt on anything other than a house or car, and even on the car try to keep it minimal. Debt has ruined far more lives than drugs or alcohol ever have.
  7. Learn how to cook. Or, if that is a lost cause, find a girlfriend who likes to cook and treat her right and never let her go. Going out to eat all the time will bankrupt you, and it’s terrible for your health. This is a lesson best learned while you’re still young.
  8. Try to exercise at least a couple days per week. You’ll regret it when you’re 30 (and more when you’re 40) if you don’t.
  9. If your boss yells at you, don’t be a typical thin-skinned Millennial and get offended. Keep the stiff upper lip and use it as an opportunity to learn something and improve your marketability as an employee. I learned FAR more from the mean bosses than the easy-going ones. The boss who is your buddy isn’t going to get you anywhere. It’s the mean bosses that toughen you up who help you advance.
  10. Try to attach yourself to a manager that is really going somewhere in the company. If you do good work for them, they’ll take you with them. If you attach yourself to a manager who’s not really going anywhere, neither will you.

And that’s it. This is the only real wisdom I’ve managed to acquire in the 20 years since I graduated.  

Good luck in the new job, and let’s get the families together for some grilling this summer!

Take care,

Charles

Happy Memorial Day, folks.

Do yourself a favor and turn off your smartphone. The office is closed, and whatever it is you were going to check can wait until tomorrow. Our fallen soldiers didn’t fight tyranny only to have you enslaved by your iPhone.

So, put the phone away and be present with the people you love.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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