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.

How To Influence People

Quick and dirty easy: The post is just 1423 words long

This is a re-posting of my review of D. Carnegie’s book on effective networking and sales… since I recommended that book in episode 17 (Monday, February 22, 2016) of my podcast in Swedish: “25 minuter”.

“25 minuter” on iTunes

“25 minuter” on Soundcloud

 

Greet with gusto

Hi friend! I’m glad you found this article. It means you are one of the smart ones, as well as ready to learn more. Right?

how to make friends by being retardedly enthusiastic

[don’t worry, unwarranted enthusiasm explained below]

Have it your way, without arguing

Do you disagree with your boss or teacher? Are you getting into arguments with your partner? Do you resent dealing with authorities, since it’s like talking to a wall?

Do you want to know how to “win” without causing bad blood?

[Probably a little differently than Bruce Wayne does right here – buying the entire restaurant when his girls want to swim in the restaurant pool]

How To Win Friends

Picture from http://obamapacman.com/

Then again, Bruce is more into How To Lose Friends And Alienate People

Better game

Do you desire “better game”? Are you looking to improve your sales numbers? Do you want to make people (including clients, employees or colleagues) do what you want and like you for it? You know that Wall Street Playboys tell you that sales is one of very few ways to get really rich. In short…

Win friends and influence people and make money

Do you want to win friends and influence people?

Then I recommend you read Dale Carnegie’s book with that title.

Make no mistake, however, it is a bit simplistic for the modern mind, and most of its advice is so widely dispersed that the book can come across as a mere summary of common knowledge. On top of it all, its entire premise is kind of cynical – only slightly mitigated by frequent use of the words “honestly” and “sincerely”.

So, last month, I finally came round to reading Dale Carnegie’s book about smooth handling of human relations. Despite dozens of recommendations spanning several decades, I just never got the right pitch to arouse my want to read it (meaning perhaps they never actually applied the lessons themselves).

How to win friends and influence people

Carnegie, Carnagey, Dale, David, tomato, potato… and Andrew

In the end, Dale Carnegie (who changed his name from Carnagey when he was 32, to “borrow” some of the unrelated and 50 years older epic steel magnate and philanthropist Andrew Carnegie‘s celebrity status) did it best himself:

The description in the foreword of how the book came about, from researching hundreds of books that touched upon the subject, thousands of lectures on public speaking and decades of real world feedback from his audiences, got me hooked in a minute.

I concluded Dale Carnegie and his book obviously were the real deal, albeit possibly a bit dated. I stick to that assessment.

Red herring

Swedish readers might find it interesting that the Swedish broker firm D. Carnegie & Co was founded 40 years before Andrew Carnegie was so much as a lewd thought in father William’s mind, and 90 years before Dale Carnagey was born. Swede David Carnegie (actually possibly distantly related to Andrew through their common Scottish heritage) bought the five year old herring start-up Erskine & Mitchell in 1803 and soon turned into a real estate company. More than 150 years later D(avid) Carnegie & Co became a stock brokerage.

red herringD Carnegie & Co

7-point summary of Carnegie’s best advice

Nota bene: this summary is not in the order Carnegie himself chose. I’ve instead grouped the various advice for winning friends, influencing people and so on in thematic categories, since I see it as universal advice for all human relations rather than specific for colleagues, authorities, spouses, friends etc.

Karl-Mikael Syding

  • Smile and greet enthusiastically by name (remember names) – I often react negatively though, as with used car sales men. What were your first feelings when you started reading this post?
  • Be interested, talk about them and their interests, listen, encourage, let them do the talking. Pretend they are you before you knew you, so give them the benefit of the doubt – This probably works, I however am often more interested in learning new things than repeating what I already know.
  • Begin friendly and with (sincere) praise – and trick a few YESes out of them early on
  • Avoid criticizing and quickly admit your own errors. Don’t argue or debate. Find common ground or change topic – At least save the debating and criticizing for last, if at all. Think in terms of first making the other your trusted friend, who then will be more open and accepting
  • Plant ideas subtly (inception style) through questions, as well as specific praise of wanted behavior – like with a pet.
  • Make the other want what you want, through (cheap) incentives, praise and appeal to nobler motives or a challenge (“I guess not even you can eat a full pound of butter”). This is exactly what every red cross fund raiser and other street peddlers do all the time.
  • Dramatize: show pictures of starving children, drowning polar bears, happy users of investment systems. Play sounds, move around, gesture.

The Retarded Hedge Fund Manager at Skandia 1994 adj

Do my dollar sign suspenders and currency cuff links spark your lust for a Bloomberg terminal? (from Skandia’s annual report 1994 [I was 22])

The true value of the book does not lie in these simple bullet points, but in the many real life stories of how the rules have been and can be applied. This is one of few classics I can recommend, however still with the warning that it can feel cynical, simplistic and dated. With a little imagination, I think the suggestions nevertheless can be useful in the 21st century.

Ask yourself what you really want to get out of a social interaction, rather than just speak your mind because it feels good in the moment to tell the other a thing or two. Forgive and forget and look forward, instead of holding a grudge just for the sake of it.

Final remarks and appendix

There it is; buy the book or let the above summary suffice, but either way try embracing and applying at least a few of Carnegie’s suggestions. If nothing else, you’ll seem nicer, and probably accomplish more as well.

If you liked this review, stay tuned for more tips, tricks, advice, musings and reviews by signing up for my free newsletter. As a bonus you would join thousands other in gaining access to my recount of 15 years as a hedge fund manager at the European Hedge Fund Of The Decade.

Appendix – the full advice Monty

Smile (fully, like a dog, with your whole being), greet with gusto – people like feeling missed and welcome

Remember and use names (how does it feel when somebody else remembered your name)

Become interested in other people (pretend they are you, before you knew you and give them the benefit of the doubt)

Let the other do the talking

Listen, encourage, ask (people like to tell stories, but can have a little stage fright; encourage them and you’ll learn so much more)

Make the other feel important – talk to them about them

Talk in terms of the other’s interests

Think in terms of the other’s perspective. Sympathize with their ideas and desires

Begin with praise and appreciation (and when you’ve won them over get to the real order of business)

Give sincere appreciation (always sincere, honest, true, heartfelt)

Begin friendly, flattering, interested, talking their book. Get several YESes early on (Socratic method).

Don’t criticize

Call attention to mistakes indirectly instead of criticizing.

Talk about your own mistakes before suggesting a change (or criticizing)

Make any fault or error seem small and easy to correct – as if the solution was always there

Let the other person save face. Don’t rub errors in their face – in particular not publicly

Be diplomatic – never point out wrongs

Admit your own errors quickly and sincerely

Avoid argumentation (acknowledge and emphasize agreements, admit error, appreciate the time invested and interest shown, listen – don’t debate)

Inspire others subtly through specific praise of ever so small improvements (do not condemn errors and mistakes)

Use incentives, make the other glad to do your bidding (titles, praise, reputation)errors)

Let others believe your idea is theirs. Inception

Ask questions, suggesting subliminally, instead of giving orders

Appeal to nobler motives (“I trust you to do the right thing”, “I believe/know you are fair and honest“)

Challenge: (subtly) appeal to the dire to excel (“I wonder if anybody could succeed in doing that”)

Arouse a want (easier said…)

Dramatize: action, pictures, sounds speak louder than words (as do group activities and alcohol)

 

Now, friend, please share this article with your social network, to make as many as possible spread positivity (and sell!)

Lessons from Carnegie’s book on human relationships

Hi friend! I’m glad you found this article. It means you are one of the smart ones, as well as ready to learn more. Right?

how to make friends by being retardedly enthusiastic

[don’t worry, unwarranted enthusiasm explained below]

 

Have it your way, without arguing

Do you disagree with your boss or teacher? Are you getting into arguments with your partner? Do you resent dealing with authorities, since it’s like talking to a wall?

Do you want to know how to “win” without causing bad blood?

[Probably a little differently than Bruce Wayne does right here – buying the entire restaurant when his girls want to swim in the restaurant pool]

How To Win Friends

Picture from http://obamapacman.com/

Then again, Bruce is more into How To Lose Friends And Alienate People

 

Better game

Do you desire “better game”? Are you looking to improve your sales numbers? Do you want to make people (including clients, employees or colleagues) do what you want and like you for it? You know that Wall Street Playboys tell you that sales is one of very few ways to get really rich. In short…

Win friends and influence people and make money

 

Do you want to win friends and influence people?

Then I recommend you read Dale Carnegie’s book with that title.

Make no mistake, however, it is a bit simplistic for the modern mind, and most of its advice is so widely dispersed that the book can come across as a mere summary of common knowledge. On top of it all, its entire premise is kind of cynical – only slightly mitigated by frequent use of the words “honestly” and “sincerely”.

So, last month, I finally came round to reading Dale Carnegie’s book about smooth handling of human relations. Despite dozens of recommendations spanning several decades, I just never got the right pitch to arouse my want to read it (meaning perhaps they never actually applied the lessons themselves).

How to win friends and influence people

 

Carnegie, Carnagey, Dale, David, tomato, potato… and Andrew

In the end, Dale Carnegie (who changed his name from Carnagey when he was 32, to “borrow” some of the unrelated and 50 years older epic steel magnate and philanthropist Andrew Carnegie‘s celebrity status) did it best himself:

The description in the foreword of how the book came about, from researching hundreds of books that touched upon the subject, thousands of lectures on public speaking and decades of real world feedback from his audiences, got me hooked in a minute.

I concluded Dale Carnegie and his book obviously were the real deal, albeit possibly a bit dated. I stick to that assessment.

 

Red herring

Swedish readers might find it interesting that the Swedish broker firm D. Carnegie & Co was founded 40 years before Andrew Carnegie was so much as a lewd thought in father William’s mind, and 90 years before Dale Carnagey was born. Swede David Carnegie (actually possibly distantly related to Andrew through their common Scottish heritage) bought the five year old herring start-up Erskine & Mitchell in 1803 and soon turned into a real estate company. More than 150 years later D(avid) Carnegie & Co became a stock brokerage.

red herringD Carnegie & Co

 

7-point summary of Carnegie’s best advice

Nota bene: this summary is not in the order Carnegie himself chose. I’ve instead grouped the various advice for winning friends, influencing people and so on in thematic categories, since I see it as universal advice for all human relations rather than specific for colleagues, authorities, spouses, friends etc.

Karl-Mikael Syding

  • Smile and greet enthusiastically by name (remember names) – I often react negatively though, as with used car sales men. What were your first feelings when you started reading this post?
  • Be interested, talk about them and their interests, listen, encourage, let them do the talking. Pretend they are you before you knew you, so give them the benefit of the doubt – This probably works, I however am often more interested in learning new things than repeating what I already know.
  • Begin friendly and with (sincere) praise – and trick a few YESes out of them early on
  • Avoid criticizing and quickly admit your own errors. Don’t argue or debate. Find common ground or change topic – At least save the debating and criticizing for last, if at all. Think in terms of first making the other your trusted friend, who then will be more open and accepting
  • Plant ideas subtly (inception style) through questions, as well as specific praise of wanted behavior – like with a pet.
  • Make the other want what you want, through (cheap) incentives, praise and appeal to nobler motives or a challenge (“I guess not even you can eat a full pound of butter”). This is exactly what every red cross fund raiser and other street peddlers do all the time.
  • Dramatize: show pictures of starving children, drowning polar bears, happy users of investment systems. Play sounds, move around, gesture.

 

The Retarded Hedge Fund Manager at Skandia 1994 adj

Do my dollar sign suspenders and currency cuff links spark your lust for a Bloomberg terminal? (from Skandia’s annual report 1994 [I was 22])

The true value of the book does not lie in these simple bullet points, but in the many real life stories of how the rules have been and can be applied. This is one of few classics I can recommend, however still with the warning that it can feel cynical, simplistic and dated. With a little imagination, I think the suggestions nevertheless can be useful in the 21st century.

Ask yourself what you really want to get out of a social interaction, rather than just speak your mind because it feels good in the moment to tell the other a thing or two. Forgive and forget and look forward, instead of holding a grudge just for the sake of it.

 

Final remarks and appendix

There it is; buy the book or let the above summary suffice, but either way try embracing and applying at least a few of Carnegie’s suggestions. If nothing else, you’ll seem nicer, and probably accomplish more as well.

If you liked this review, stay tuned for more tips, tricks, advice, musings and reviews by signing up for my free newsletter. As a bonus you would join thousands other in gaining access to my recount of 15 years as a hedge fund manager at the European Hedge Fund Of The Decade.

 

Appendix – the full advice Monty

Smile (fully, like a dog, with your whole being), greet with gusto – people like feeling missed and welcome

Remember and use names (how does it feel when somebody else remembered your name)

 

Become interested in other people (pretend they are you, before you knew you and give them the benefit of the doubt)

Let the other do the talking

Listen, encourage, ask (people like to tell stories, but can have a little stage fright; encourage them and you’ll learn so much more)

Make the other feel important – talk to them about them

Talk in terms of the other’s interests

Think in terms of the other’s perspective. Sympathize with their ideas and desires

 

Begin with praise and appreciation (and when you’ve won them over get to the real order of business)

Give sincere appreciation (always sincere, honest, true, heartfelt)

Begin friendly, flattering, interested, talking their book. Get several YESes early on (Socratic method).

 

Don’t criticize

Call attention to mistakes indirectly instead of criticizing.

Talk about your own mistakes before suggesting a change (or criticizing)

Make any fault or error seem small and easy to correct – as if the solution was always there

Let the other person save face. Don’t rub errors in their face – in particular not publicly

Be diplomatic – never point out wrongs

Admit your own errors quickly and sincerely

Avoid argumentation (acknowledge and emphasize agreements, admit error, appreciate the time invested and interest shown, listen – don’t debate)

 

Inspire others subtly through specific praise of ever so small improvements (do not condemn errors and mistakes)

Use incentives, make the other glad to do your bidding (titles, praise, reputation)errors)

Let others believe your idea is theirs. Inception

Ask questions, suggesting subliminally, instead of giving orders

 

Appeal to nobler motives (“I trust you to do the right thing”, “I believe/know you are fair and honest“)

Challenge: (subtly) appeal to the dire to excel (“I wonder if anybody could succeed in doing that”)

Arouse a want (easier said…)

 

Dramatize: action, pictures, sounds speak louder than words (as do group activities and alcohol)