Charlie Munger - “even crazier” than the dotcom boom

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white belt
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by white belt »

Phew it had been 3 weeks since the last all time high close for the SP500, so good to see we are back on track. The "even crazier" boom continues.

WFJ
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by WFJ »

chenda wrote:
Thu Dec 09, 2021 3:54 am
Those are not exceptionally high compared to other first world societies in per capita terms.
Only has to be incrementally better for geometrically better returns. Assume there are three runners, where sprinter A has a top speed of 40m/second over 1000 races, sprinter B has a top speed of 39.9 m/s over 1000 races and sprinter C has a top speed of 39.9 m/s over 1000 races (with uniform variability). The top speed is not significantly different, but if for each race, first-place wins $10,000, second place wins is $1,000 and third place wins nothing for each race, sprinter A will have a positive and significant difference in earnings relative to the other sprinters despite not being significantly faster than either one.

Technology and communication advances have caused the world to accelerate into a winner takes all regime. It is not fair and right and not sure if any government can regulate this away, but the returns/wealth/performance/almost everything gap between the haves and haves-nots appears to be accelerating and due to this incremental advantage being easily exploited in today's advanced world.

Married2aSwabian
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by Married2aSwabian »

Everyone still feeling sanguine about the markets?

Dream of Freedom
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by Dream of Freedom »


WFJ
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by WFJ »

I hit the sell button this week. Took almost all the gains since March 2020 off the table. Took the free Fed money and will use this for FIRE. If market rips again, will still make money, if it tanks, have enough to enjoy FIRE for a very long time.

Don't think the stock market is as bad as dotcom, but crypto/NFT are where the dumb money has pooled. Impossible to know how much cross leverage is between crypto/NFT and stocks but will be revealed shortly.

I was 98/2 until this week and roughly 50/50 (will let the trades settle) but looks ugly and once the markets turn, can take years to return and why I stay high equities until it turns, I never try to tick the top, but know when the top is in the rearview mirror. NFLX down 20% in a day is the ringing of the bell at the top for me. NFLX is still expensive given the growth rate now.

white belt
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by white belt »

I'm hearing two narratives in the macro FinTwit/podcast sphere:

1. The economic data is strong and will remain strong for 2022, which means the Fed will have to continue with tightening and raising rates as they have announced. Inflation is here to stay and will also force the Fed to stay on the current trajectory. You may see a scenario where the economy performs well but markets correct to the downside, since the two are not always correlated. Darius Dale has talked about this on a couple of interviews.

2. Disinflation/deflation and low economic growth are here to stay due to the usual suspects like technology, debt, and demographics. This means that economic indicators and inflation will start to fall off through 2022, which will force the Fed to stop its tightening. Some even think the Fed will back off once they see a significant market correction like they did in 2018. Raoul Pal and other deflationists talk about this.


Where you fall on the spectrum between those two narratives will determine what actions you take.

Married2aSwabian
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by Married2aSwabian »

I’m concerned about a couple of things in the equities markets right now:

1. There is a great deal of leverage:

https://www.fool.com/investing/2021/12/ ... t-in-2022/

See point 4.
Dating back to the beginning of 1995, there have been only three instances where margin debt climbed at least 60% on a year-over-year basis, according to data from the Financial Industry Regulatory Authority (FINRA). It occurred shortly before the dot-com bubble burst, just months prior to the financial crisis, and again in 2021.
A couple of years ago, I read The Great Crash by John K Galbraith. In it, he describes how (a then unregulated) Wall St. rode leverage and mania all the way to 1929. When you read about the ponzi scheme that Goldman Sachs set up back then, it’s hard to believe they’re still in business. The GME / Bitcoin of the day was Radio (RCA).

2. The trillions of dollars invested in index funds is hugely Skewed and funneled disproportionately into a dozen or so big tech stocks:

https://www.investopedia.com/top-10-s-a ... ht-4843111

Over 28% of every dollar invested in an S & P index fund now goes into the top 10 - you know the names. With index funds having won the day over the past decade, trillions are flowing into these funds, with a sort of “Black Hole Effect” catapulting a half dozen of them to trillion dollar + market caps. The Nasdaq is even worse.

My concern is that as things start to unwind, margins get called. This accelerates the selling. Then, as companies like Netflix suffer large losses, the indices sinks, triggering more selling by trading algorithms. This could have a multiplier effect that causes a crash. Maybe the big tech boys are “Too Big to Fail” and they would be propped up in such a case.

At some point this year the tide is really going to go out … and then we’ll see who’s skinny dipping.

zbigi
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by zbigi »

Married2aSwabian wrote:
Sat Jan 22, 2022 5:55 pm

My concern is that as things start to unwind, margins get called. This accelerates the selling. Then, as companies like Netflix suffer large losses, the indices sinks, triggering more selling by trading algorithms. This could have a multiplier effect that causes a crash. Maybe the big tech boys are “Too Big to Fail” and they would be propped up in such a case.
Big tech companies are massively profitable, why would they need propping up if their stock prices drop? Unless they heavily borrow against their own stock or something, the stock prices should not have affect on their businesses (well maybe with the exception of hiring, as now the stock part of compensation will be worth less, so it will be harder to retain people).

Married2aSwabian
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by Married2aSwabian »

Yes, they’re profitable, just not always enough to justify the stratospheric prices.

P/E ratios like this are off the charts:

https://www.gurufocus.com/term/pettm/TS ... ottm/Tesla

AMZN is currently 55.

WFJ
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by WFJ »

Married2aSwabian wrote:
Sat Jan 22, 2022 5:55 pm
I’m concerned about a couple of things in the equities markets right now:

1. There is a great deal of leverage:

https://www.fool.com/investing/2021/12/ ... t-in-2022/

See point 4.
My past experience has biased me, but once retail margin calls start, is a freight train down. in 2000-2001, I was on the emergency margin call team as I could do all the calculations in my head without error and did thousands of margin call sells in the Spring of 2001 and there was no bottom. It is astounding how many people borrow all they can on the way up, have no buffer and will never sell until someone else does it for them in a margin call. Margin debt is highly regulated and this will still cause major issues with the market this year, but crypto/NFT borrowing is out of control, unregulated and going to cause some odd dislocations. I can see GBTC or other crypto derivatives going below zero as oil did a few years ago.

I see a total train wreck on the horizon in crypto/NFT/Farts in a jar market, but unknown how much crossover leverage is in the stock market. Are crypto zealots borrowing against their collectibles and buying ARK/ZM/PTON or just more farts in a jar?

ether
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by ether »

To me it boils down to the artificially low interest rates we have. Cheap money means sky high equity valuations since bonds just pay 2% while inflation is 7%. I've started to move more into the real estate sector simply because it's a real asset with very predicable cashflow and lets you get a lot of cash very cheap via fixed mortgages. I've decided it just makes more sense to just start your own business instead of investing in other ones at these high prices.

white belt
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by white belt »

ether wrote:
Sun Jan 23, 2022 7:29 pm
To me it boils down to the artificially low interest rates we have. Cheap money means sky high equity valuations since bonds just pay 2% while inflation is 7%. I've started to move more into the real estate sector simply because it's a real asset with very predicable cashflow and lets you get a lot of cash very cheap via fixed mortgages. I've decided it just makes more sense to just start your own business instead of investing in other ones at these high prices.
Cheap money also means inflated property values, no? I agree that mortgages enable an individual to leverage to the gills.

ether
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by ether »

white belt wrote:
Sun Jan 23, 2022 8:58 pm
Cheap money also means inflated property values, no? I agree that mortgages enable an individual to leverage to the gills.
True! I'm in C class property where rents are sticky. So as long as I can lock in a 15-30yr fixed mortgage then I don't really care about underlying price change in real estate since I only care about rent amount and how much my mortgage is. Any price appreciation or depreciation is a non cash expense!

WFJ
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by WFJ »

Depends on the lease. Commercial buildings can have 15-year leases (maybe longer) and inflation will crush the owners as expenses (taxes, maintenance, chemicals) can increase while rents are static. Apartments/storage units have 1-year renewals and allow the owners to crush it during inflation, loan payments are fixed but rental income can explode. RE with short duration leases are more likely to do well during inflation while CP can be mixed depending on lease structure. RE not as easy to hedge inflation as many assume.

steveo73
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by steveo73 »

ether wrote:
Sun Jan 23, 2022 7:29 pm
To me it boils down to the artificially low interest rates we have.
I agree with this premise but not the rest of what you stated. This to me is the issue and it has to swing back. At the same time I figure there is no need to change your action assuming you are investing wisely.

Pick a portfolio that suits your risk profile and stick with it. If you aren't retired then it's a great time to invest in stock indexes. If you are retired hopefully you aren't 100% stocks and you can ride this out.

ether
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by ether »

WFJ wrote:
Tue Jan 25, 2022 3:23 pm
Depends on the lease. Commercial buildings can have 15-year leases (maybe longer) and inflation will crush the owners as expenses (taxes, maintenance, chemicals) can increase while rents are static. Apartments/storage units have 1-year renewals and allow the owners to crush it during inflation, loan payments are fixed but rental income can explode. RE with short duration leases are more likely to do well during inflation while CP can be mixed depending on lease structure. RE not as easy to hedge inflation as many assume.
That's why I like c-class residential. Yearly leases so no long term lease risk and no headache of short term vacancies like with hotels or Airbnb.

ether
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by ether »

steveo73 wrote:
Tue Jan 25, 2022 8:43 pm
I agree with this premise but not the rest of what you stated. This to me is the issue and it has to swing back. At the same time I figure there is no need to change your action assuming you are investing wisely.

Pick a portfolio that suits your risk profile and stick with it. If you aren't retired then it's a great time to invest in stock indexes. If you are retired hopefully you aren't 100% stocks and you can ride this out.
Real estate is not passive investing, it is no different than starting your own business.
The main reason I like it because it's a nice middle ground between just being really FI and living off the dividend checks and the hustle of having a full time job. In real estate you can either be passive and take a lower ROI by subbing out all your maintenance and property management or you can make it a more active investment by directly hiring your team or just DIY. Right now i'm doing it all so I learn how to not get ripped off.

It's all about optimizing labor, material and capital costs of operating a home. The great thing about real estate is that it has very very slow depreciation, you can lock in rates for 30-20 years, and there is an ample cheap labor pool if you know where to find it. Plus there are TONS of inefficiencies in home pricing.

steveo73
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by steveo73 »

ether wrote:
Sat Jan 29, 2022 1:57 am
Real estate is not passive investing, it is no different than starting your own business.
I suppose it depends. I don't see it as starting your own business. You can also invest passively via an index fund.
ether wrote:
Sat Jan 29, 2022 1:57 am
The main reason I like it because it's a nice middle ground between just being really FI and living off the dividend checks and the hustle of having a full time job. In real estate you can either be passive and take a lower ROI by subbing out all your maintenance and property management or you can make it a more active investment by directly hiring your team or just DIY. Right now i'm doing it all so I learn how to not get ripped off.

It's all about optimizing labor, material and capital costs of operating a home. The great thing about real estate is that it has very very slow depreciation, you can lock in rates for 30-20 years, and there is an ample cheap labor pool if you know where to find it. Plus there are TONS of inefficiencies in home pricing.
I think this may be situational. I'm Australian. My house is my primary buffer. I don't see any inefficiencies in the market though. We also don't have the lock in rates for long term. In my opinion those lock in rates are a crazy example of government interference in markets. I'm not sure if any other country in the world has that interference.

I do understand a what you are stating in relation to maintenance and other costs. We spend a lot less on our house than I assume the average person does. We don't renovate or pay for services like gardening etc.

I suppose if it works for you though go for it. I think it's a much better option than investing in crypto.

ether
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by ether »

steveo73 wrote:
Sat Jan 29, 2022 5:20 pm
I think this may be situational. I'm Australian. My house is my primary buffer. I don't see any inefficiencies in the market though. We also don't have the lock in rates for long term. In my opinion those lock in rates are a crazy example of government interference in markets. I'm not sure if any other country in the world has that interference.
It's extremely situational. There are so many markets in the USA where rents won't even cover the cost of the debt which means you have to bank on appreciation which is a non cash income and prevents you from expanding since your cashflow will go to zero once you factor in maintenance cost.

Yes the 30 year fixed rates is a subsidy, and the union representing real estate agents is the 2nd largest lobby group in the USA. Coincidence I think not. Once you hit 10 units plus you have to go commercial and you get interest rate risk with only 5 years fixed.

The big inefficiency in my market is that homes that are identical in age, size and rent will go for 40% lower due to poor school districts or higher crime. But from an investor perspective I only care about the rent and price. So if I can buy a place for 40% lower that will get me the same rent why invest in the "nicer" area. I guess the only upside is appreciation but that's too speculative in my book.

Dream of Freedom
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Re: Charlie Munger - “even crazier” than the dotcom boom

Post by Dream of Freedom »

steveo73 wrote:
Sat Jan 29, 2022 5:20 pm
We also don't have the lock in rates for long term. In my opinion those lock in rates are a crazy example of government interference in markets. I'm not sure if any other country in the world has that interference.
In the early 1900s, homebuyers typically had to pay a 50% down payment with interest-only payments for a 5-year term. At the end of the 5 years, they would face a balloon payment with the entire principal of the loan. Then the Great Depression happened. Lots of people became homeless due to these lending practices and banks lost tons of money. So yes, the government stepped in to create a more stable system. It was not the only reform aimed at preventing the next depression and it is a more stable system.

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