A few good reasons for higher stock market valuations

…and many more for lower valuations!

Surprised? No, I didn’t think so.

(this article has only 1275 words, so you’ll have to scroll down to the end for the executive summary)


Let’s put it this way, no matter what I promise you, never let me hitch a ride on your back over the water (The scorpion and the frog)

J’ACCUSE

Okay, let’s get serious. I’m not a perma bear. Actually, back in the 1990s, I was accused of being a naive perma bull regarding tech stocks. And back in 2004-2007 I was a die-hard bull on Swedish banks. I’m a realist, not an optimist or pessimist. Then again, everybody says that about themselves.


 

Higher valuations warranted

Well, why not? There is no law saying valuations should be this or that. If valuations are where they are now, they can always move upward yet some. Sure, it’s uncharted territory but so is all of the future anyway.

With rates approaching zero or even going negative, discount rates are approaching zero too, so valuations could in theory go to infinity. The least you could expect is that valuations go a little higher to start with. Forget about the risk of inflation or rates going higher anytime soon; nobody could afford such a development, least of all governments and central banks.

Increased debt equals (necessary) buying power. Lower rates carry a second order boon, in terms of higher willingness to borrow, as well as increased need to borrow to pay for more expensive assets.

Money printing means more money for the same amount of assets. Ergo: higher prices for all assets. And if growth stays low, and consumer prices continue to deflate, there will be even more money over for stocks and other assets.

Tech progress is accelerating, which promises much higher productivity and growth rates. More and more industries are becoming digital and thus subject to Moore’s law. We have only seen the beginning of that process. Higher future growth potential warrants higher valuation multiples today.

Increasing margins. In addition, digital industries means almost zero production cost and thus higher margins. We’ve already seen proof of that in terms of record high corporate profit margins, as well as a market response in terms of record high Price/Sales-type valuation metrics (see Hussman’s median non fin m.cap to GVA e.g.)

To summarize the case for higher valuations: It’s a new era, a new era of higher growth, higher margins, lower rates, more base money, more credit, and not least a new era in terms of simply a continuation of the already clear trend toward higher valuations (the “why not” argument)


 

Arguments against higher valuations…

Increased competitive pressure: The churn of companies among the Fortune 500, e.g., have increased steadily in parallel with the last 50 years of technological progress. The reason is that increased digitalization, open source culture and the proliferation of infrastructure companies (like Amazon Web Services) has lowered the barriers to entry in almost all industries to close to zero.

Increased risk of brand disasters: The share of companies suddenly losing 20% or more of their brand value has increased in much the same way as the churn of top tier companies.

The sharing economy: It’s a good thing for the environment to share resources, and it’s very good for the trail blazers such as Uber and AirBnB, but the competing companies lose more than Uber gains. So go ahead and give Uber and AirBnB a high valuation but you have to subtract so much more from other transportation and hospitality companies.

Automation: Oh, yeah, it’s great with robo-hamburger flippers, driverless cars, trucks, planes etc., with travel and banking/insurance chat bots and so on. Just remember that for every person losing their job to a machine, there is less purchasing power around. In time, competition will drive down margins again to whatever the toughest competitor is willing to swallow, so higher margins from automation are very temporary. Well, unless, we’ve seen the end of capitalism itself.

Uncertainty: Due to general monetary madness and political scrambling, the regulatory uncertainty is the highest in many decades. That leads to hoarding and lower investment which in turn causes lower growth. Lower potential growth of course means lower warranted valuation of near term sales and profits.

Currency and trade wars in the wake of slowing growth, higher debt burdens and increasingly imbalanced economies that have made beggar-thy-neighbor policies more or less the only alternative exacerbates the problems with regulatory uncertainty and low growth.

Exhausted resources: Unless you accept the pollyannaish notion of technology-driven productivity, perhaps it’s the other way round. It could be that the low hanging fruits of globalization, of urbanization, of emerging markets of on-line education, of population growth etc. have already been harvested. In that scenario, growth will continue to fall.

Pollution: Oh, I almost forgot the environment. There will always be islands of opportunity, not least for environmental plays (clean energy, pollution clean-up, carbon capture etc.). However, companies are increasingly burdened by demands on clean production, of emission compensation, of fair wages… It’s a good thing of course, just not for sales, profits, growth and valuations. At least not for the investment horizons I consider (years and a few decades).

Cycles. An last but not least, during all of investment history, margins, valuations, growth, rates and crises have exhibited more or less clear cycles of highs and lows. Right now, most gauges are at screaming extremes, and like coiled springs they are ready to both return to their means and show some inversion too while they’re at it (in order to preserve historical averages). That does not bode well for the buy and hold with leverage crowd.

Summary of the case for lower valuations: Time Tested Truths. If you accept the “old man’s view” of the world, we’ll continue to see cycles of high and low valuations, just as we’ll see highs and lows in rates, in growth, in greed, in margins, in debt. As a final nail in the proverbial coffin, we’ve already rehearsed what’s coming twice in the last 15 years.

As an optimist I think we’re headed downward (soon)

As a final word, please note that you’re a pessimist if you think we’re doomed to think the current high valuations (and thus low future returns) are permanent. And you’re an optimist, if you think some kind of natural pullback is imminent, leading to lower valuations and thus higher return prospects going forward:

Is 15% annual return over 10 years something you might be interested in?

 

Summary – New era or Old truths?

Are higher or lower valuations warranted? What will be the next step?

Money printing, negative interest rates, automation and productivity, new era growth, margins and thus new era valuations?

Or…

Will the world and the psychology of the people in it stay mostly the same, with cycles cycling back again from the current perverse levels?

-Make no mistake, authorities will fall over themselves in trying to prevent a re-set. The problem is that they’ve already done that and they are most likely soon about to be exposed for the frauds they are.

It’s all a confidence game, and right now confidence too is at an extreme high where even highly intelligent people consider the possibility that Yellen, Kuroda etc. can actually pull it off….

“What were they thinking” is the future’s most likely judgement of us all


PSST, liked the article? Why not do me a solid and share it with somebody? And take a look at my free e-book and newsletter too. I think you’ll enjoy them.

Coming to grips with productivity after travelling and partying

15 minutes: I would be very surprised if this article takes you more than 15 minutes to digest. What you’ll get in return is a new slant on productivity, boombastic jazz, and a kick in the butt regarding your stock market activities. Oh, and some of my pics from Ibiza the last few days.

 

Productivity can be illusive

My definition of a boombastic jazz style is this!

Productivity The Retarded Hedgefund Manager at Ibiza

Travelling with Ronja builds character

Okay, linking to a random YouTube clip from my youth might smack more of procrastination than productivity, but consider this advice:

Never put off (just) until tomorrow, what can safely be scheduled for the day after that.

Hmmm, am I getting my message across here? Perhaps not just yet, but believe me that both statements will be tied in very neatly with the main theme of productivity.

I came back yesterday from 10 days of travelling, during which I did exactly zero writing and not significantly more reading – not even fiction. I did alter* my state of consciousness a lot though – not least on Ibiza. How productive was that?

Well, how can this (pic of our Ibiza living room this year) not be productive (=worthwhile)?

Productivity The Retarded Hedgefund Manager at Ibiza

*meditating, schmeditating, medicating…

 

Why strive for being productive?

I constantly get bombarded by questions regarding my activities, now that I don’t have a job. I guess what they are really asking is how I can stand not being productive (which is one of the basic human driving forces, and used to be necessary for survival).

Today, I even found myself thinking in terms of not having been productive for ten days straight. Quite out of character for me to think that way. The second after, however, I immediately started pondering the word productive in itself.

My first thought had centered around not writing, not reading articles, not working out. So wrong.

My second, corrective, thought simply asked the most important question in the world: why?

Productivity The Retarded Hedgefund Manager at Ibiza

Busy doing nothing at Destino

 

Purpose is everything, Mr Andersson

It all boils down to the why of things, to the purpose.

It’s amazing, really, how profound Mr Smith’s monologue on purpose was in the Matrix trilogy.

Being productive means being both effective and efficient. That, however, does not mean doing what others expect you to do as quickly as possible. It means doing whatever brings you closer to your desired state, in the best way possible (which sometimes is a slower [preparing, meditating] or more roundabout [education, or whoring out] manner).

I read and write because I like it in the present, as well as because it makes me evolve and grow, because it conditions my brain’s plasticity and prepares me for the future. I don’t do it to simply fill my days, or to keep on some arbitrary blog schedule.

Sure, I want to spread my ideas as widely as possible to make the world a better place, but I won’t do it at the cost of my own ultimate goals (don’t ask. No, I mean it; don’t ask).

Productivity The Retarded Hedgefund Manager at Ibiza

If you have a productive imagination

I urge you to reconsider the definition of “productive” in terms that apply to you specifically:

 

What is being productive to you?

Is it productive to go to the gym? Why? You want to get stronger? Why? You want to live longer? Why? Sometimes it’s simply more productive in many ways to not go (building motivation, resting strained tissues, prioritizing something else)

Is it productive to train your brain to understand feedback loops, or avoid biases, to know math and languages, to make it more plastic? Why? To get the highest paying job possible? Why? To get the most rewarding job? Why? Is it to never postpone what can be done do right away? Why not? [That’s one tie-in]

Is it productive for you to become smarter? Why? What pleasures will you reach for with your new super smarts?

You want to get richer? Why? Sure, money and time can resolve a lot of issues, just rarely the important ones. What are you going to do with the extra money? Invest to get even richer? D’oh!

You want to become more aware, more mindful? Do you feel behind schedule when you can’t make time for meditating or doing mindfulness exercises? Why? What will you do with your increased sense of unity with the physical world?

 

The cute path to hell

Oh, make no mistake, I am all for becoming stronger, wiser, smarter, plasticity-er, more aware and mindful. I am acutely aware of my own purpose and the ultimate answer to my own why:s. I just want you to question your own choices along the “cute” path society has made you believe is the only one (also known as Keeping Up With The Joneses = KUWTJ).

 

Question everything, trust no one

Lesson one is to question the meaning of being productive.

For me it’s sometimes about meeting people, hanging out with friends, kicking back, altering my state of consciousness with alcohol, coffee and other drugs.

At other times, it’s reading fiction, meditating etc.

At yet other times it’s challenging myself, my body, my brain, my fears and insecurities.

Once upon a time, it was about making a pile of money as quickly as possible. Before that, it was all about surviving as comfortably as possible from day to day; about not getting caught naked, not being put on the spot.

Lesson two is about questioning all your power words; realizing your relevant definition is somewhere along a spectrum of possible definitions.

What is being courageous? is it doing something dangerous, something you are afraid of? Not necessarily.

Decisive?  

Healthy? Healthy food, lifestyle, workout routine? Is it vegan food only, is it working out every day, is it never indulging in sweets, fat, salt, alcohol?

Discipline. Sometimes it’s about working out despite not feeling it. Sometimes it’s the opposite; being psychologically strong enough to rest the required time, even if you’re lagging

What is your definition of a boombastic jazz style? Mine is this! [Second neat tie-in, although my mind actually goes completely blank when asked what a boombastic jazz style really is]

Productivity The Retarded Hedgefund Manager at Ibiza

Destino Pacha – meditated in the pool, mouth below surface, for 90 minutes straight, while doing an epic split

 

Stock market implications

Oh, I know it’s all you guys really care about… Getting rich quick schemes, preferably on the stock exchange.

Then, consider this:

If you really want to make money on the stock exchange. If you want to go about it in a productive way. Then why do you assume following charts on your off hours, combined with luck, will make you beat experienced and immensely more connected, rich and powerful individuals and firms?

Why do you take chances? Why do you treat the stock market as a casino with way over 100% payout ratio. Why don’t you heed my advice and invest rather than speculate?

Being productive in investing means investing for the long term. Invest systematically. Invest productively: either in cheap stocks, in your own skills or in a business of your own. See previous articles on investing here on my START page if you haven’t read them already.

On the stock market: What is being productive? What is being courageous? What is being disciplined? What is a boombastic jazz style?

I can tell you what isn’t productive: following the herd, following the trend like a lemming, speculating blindly without putting in the work

I can tell you what isn’t courageous: doing exactly like everybody else

I can tell you what isn’t disciplined or decisive: buying the dips with no plan B, implicitly betting on selling to a bigger fool at just the right time 

I can tell you what isn’t boombastic: crying over your losses after the fact; crying that nobody knew what was coming, blaming your broker, blaming analysts, blaming media. No, boombastic is thinking for yourself and taking all the credit and all the losses on the same ego account.

Productivity The Retarded Hedgefund Manager at Ibiza

“Boombastic” is getting a pop bracelet at the pool for being a cool dude

Before leaving, remember to share this article or subscribe to my newsletter for more pure gold. You do know there is a free eBook in it for you? I hear it’s quite retarded albeit useful and highly recommended. 

P.S. Here you’ll find pics and stories from last year’s Ibiza trip in July:

retard productive under water

Retard thinking