“The young man knows the rules, but the old man knows the exceptions.”
- Oliver Wendell Holmes
“The art of living lies not in eliminating but in growing with troubles”
- Bernard Baruch
“It is a preoccupation with possessions more than anything else that stops men from living freely and nobly”
- Bertrand Russell
A. Buying Growth Stocks While Waiting For The End Of the Cycle ?
Over the Memorial Day weekend, the “mood” in the US seemed to improve markedly.
There were multiple reasons for this relatively sudden change in psychology. On the health care front, a CDC report indicated overall mortality rates from the virus appear to be 0.26%, much lower than the forecast just three months ago.
Removing the elderly and nursing home fatalities from the calculation drives the death rate close to 0.10%, which essentially means that if you are not living in a care facility, are over 60-65 years of age and have no co-morbidities, your chances of recovering from the virus are about 99.7%-99.9%.
Once this becomes widely known, (this is real data and science, not projections from the WHO or the Imperial models, which drove the lockdown) consumer behavior may change and change quite quickly.
At the same time, when you look at the sentiment and flow of funds from institutional, retail and corporates, the overall answer, is that none of this crowd is especially bullish on equities and buying.
Which means that as the economy opens up and we start getting V-shaped economic data in June and July, investors on the side line may look around and wonder why they aren’t invested.
All this makes me bullish on the US economy in the next few months, but for reasons I’ll outline below, I am much more worried over the next twenty years.
This was well discussed by Dan McMurtrie (of Tyron Partners) in Venture Stories podcast - The Bull and the Bear Case for the American Economy.
In the mean time……the rising economic growth actually makes me less bullish on growth stocks in the near term.
Sounds strange right ?
One of the books that made me think deeper about the Growth vs Value charts being shared making the case for Growth stocks being expensive is - Style Investing by Richard Bernstein.
The book makes the case that when you buy equities, you are buying a share of future profits, but more specifically the stocks you want to own are where the future profits will be growing fast(er).
Growth stocks (tech & health care stocks) are the rarities that deliver nominal growth in a deflationary world. Or the opposite would be to say that value stocks outperform when growth is more readily available.
Which, when you step back makes a lot of sense.
If growth is scarce, of course you are going to bid up the few rare companies that have any of it. Also don’t forget that growth stocks have very long duration since most of their profits are ahead of them. So if rates go lower, growth stocks rally. Value suffers given its low duration.
While the recession continues and growth is scarce one shouldn’t own value. If the economy really bounces hard, and growth is prevalent - sell growth and buy value.
Going further down this rabbit hole, you find that contrary to popular belief, growth investing is risk averse because growth investors think the world is a bad place and only a few stocks can protect them.
The good news for value investors is that when the economy turns up and growth returns, the higher beta, riskier, low quality stocks will have more upside.
By the way this is what you have seen in the last two weeks. Small caps and low quality stocks have bounced hard.
At times like this, with horrible economic data, “bad” companies have been thrown out, but “bad” companies that don’t default can make great investments. But for most people buying “bad” companies at the bottom of a recession can be very uncomfortable.
So in the next few months value will probably outperform growth, but if we are going to have a real long-term U.S. bull market develop here I want to see:
Rates pinned down by FED buying
More Fiscal stimulus
Growth continuing to outperform (I think a repeat of Nifty 50) is entirely possible
Another thing to take into account is the valuation of tech / healthcare - according to GS data (below), the NASDAQ 100 is only trading a 35-40% P/E premium to the S&P.
What do you think is the growth pick up Nasdaq 100 can deliver versus the S&P?
Now if we start zooming out, apart from the economic & company specific data we discussed above, all of this is happening at a time, when US M2 has clearly gone vertical.
And the weight of government expenditure is over 35% in most major economies.
This growth in government intervention and monetary growth is very precarious and concerning. If you can create $2trn to bridge COVID-19, why not a little more for the pension crises, and then some more for the climate crises, and then some more to socialize healthcare……
This takes us deep into the debt and monetary cycle.
Ray Dalio has been writing a great set of articles, discussing what comes next. You can check them out here.
His view is that we are nearing the end of the long term debt cycle.
For thousands of years, there have always been three types of monetary systems, which we cycle through.
Hard Money (ex. metals coins)
Paper Money claims on hard money
Cycles look like this:
I think I know where we are on this curve, but I don’t know how fast we are moving. But I do see more and more people looking to add to their Gold, Silver and Bitcoin exposure.
What about you, where are we in the cycle ?
B. Stillness Is The Key
There are days when I feel anxious and restless.
It’s something about feeling stuck. About feeling out of control.
One of books that helped is “Stillness is the Key” by Ryan Holiday. He also wrote Obstacle Is the Way and Ego Is The Enemy.
As we pursue inner peace—this stillness— I found these 5 ideas that helped me keep steady, disciplined, focused, and at peace.
Slow Down — Look Deeper. Framed on the wall of Fred Rogers’s production studio was a snippet from one of his favorite quotes: L’essentiel est invisible pour les yeux. What’s essential is invisible to the eye. Appearances and first impressions are misleading—we are so often deceived by what’s on the surface. It is in Stoicism and Buddhism and countless other schools that we find the same analogy: The world is like muddy water. To see through it, we have to let things settle. We can’t be disturbed by initial appearances, and if we are patient and still, the truth will be revealed to us.
Take Walks. Nietzsche said that the ideas in Thus Spoke Zarathustra came to him on a long walk. Nikola Tesla discovered the rotating magnetic field, one of the most important scientific discoveries of all time, on a walk through a city park in Budapest in 1882. When he lived in Paris, Ernest Hemingway would take long walks along the quais whenever he was stuck in his writing and needed to clarify his thinking. The cantankerous philosopher Søren Kierkegaard walked the streets of Copenhagen nearly every afternoon, as he wrote to his sister-in-law: “Every day I walk myself into a state of well-being.” I take a two-to-three mile walk each morning with my son—ideas for this very post came to me there.
Get Rid Of Stuff. Xunzi said, “The gentleman makes things his servants. The petty man is servant to things.” Every month, we go through our house and fill up bags for Goodwill and the Salvation Army. If we aren’t using it, it doesn’t need to take up space in our house. If it is causing us anxiety or worry (“Be careful or you’ll break it!”), we get rid of it. The less you have, the less you have to be worked up about. The less you are precious about, the less that can be taken from you by swings of fate or bad luck.
Ask Questions. As in, do I need this? If I get what I want, what will actually change? Why do I care what they think? What am I working on in myself today? Will this matter in five years? What if I did nothing? Questions like these help us calm the anxieties in our head and help us slow down—allowing room for stillness. It’s important to question our beliefs and our instincts. Tim has some awesome “impossible questions” that will also lead to stillness: “What are the worst things that could happen?” “What’s the least crowded channel?” “Do I need to make it back the way I lost it?” “What if I could only subtract to solve problems?” “Could it be that everything is fine and complete as is?”
Realize You Have Plenty. Kurt Vonegut was once at a party with Joseph Heller, the author of Catch 22. Vonegut was teasing him about how a billionaire they both knew made more money that week than Catch 22 would make in a lifetime. “I have something he’ll never have,” Heller replied. “Enough.” Accomplishment. Money. Fame. Respect. No amount of them will ever make a person feel content. “When you realize there is nothing lacking,” Lao Tzu says, “the whole world belongs to you.” It’s not that you shouldn’t have goals and that you shouldn’t strive for more; it’s that you have to learn how to appreciate what you have right now. Remind yourself each morning, as I try to do, that you have enough.
C. A Few Things Worth Checking Out
1. The amazing Prof. Scott Galloway was on CNN discussing how higher education will be disrupted by COVID-19.
2. Two out of the 5 richest men in Europe are Luxury billionaires - Bernard Arnault ($70bn) and Francois Pinault ($30bn). I decided to read “The Luxury Strategy” by Kapferer and Bastien to understand how to build luxury brands and did a tweet storm sharing the main ideas.
3. Peter Zeihan (author of DisUnited Nations amongst others) did a zoom webinar last week discussing What Comes Next ? I found it great.
4. This is just plain cool and innovative and I’ve listened to it 15 times already….
5. A chart I discuss with my kids daily to drive home the power of compounding: “What are you guys getting a little bit better at every day?”