Subject: Re: Howard Marks - It is 1997
What did Mr. Buffett say in his 22 November 1999 Fortune article? Look at that date. Just over three months before the NASDAQ began its 78% ride DOWN. 👀

He wrote about high expectations among young investors. He wrote about 17 year periods in history when GDP grew but stocks did ZERO (1964 to 1981), while GDP grew 370%. He wrote about investor Pavlov conditioning and rear view mirrors and windshields. He wrote about industries that previously transformed the world like: railroads, automobiles, airplanes, TV and radio and that it was hard to predict winners when new technologies are emerging. He famously quipped that it would have done capitalists a favour if someone had shot the Wright brothers out of the sky at Kitty Hawk.

Speculating on the returns and winners from the big (really big) investments currently going into AI chips and data centres is well, speculative. Equally we are all fully aware of how monumental (really monumental) AI is for humanity.

In 1999, Buffett said future returns would be a function of:

Interest rates (gravity)

Corporate profits as a percentage of GDP

Frictional cost (Fees charged by helpers)

He argued that for the high investor expectations at the time to be realised:

1. Interest rates would have to fall from the then 6% and

2. Corporate profits as a percentage of GDP would have to rise.

He mentioned that competition keeps profit margins down. He mentioned that for corporations to get a larger and larger slice of the pie, another group would have to accept a smaller slice. “That would justifiably raise political problems - and in my view a major re slicing of the pie just isn’t going to happen.”

Obviously there are parallels with today and differences.

Valuations are high.
New technology is changing the world.
Profit margins are higher today.
Corporations are taking a larger slice of the pie.
The Government deficit is a much bigger problem.
We have a tariff experiment.
Inflation and interest rates are important and hot topics.

My understanding of Mr Market’s view of the unknowable future, is that rates will be cut due to political will, inflation will not be a big problem and valuations will expand even further.

This situation will continue for a few more years. Which syncs with Howard Mark’s 1997 reference.

There are many risks to Mr Market’s outlook. Inflation being one. But we don’t really know.

Personally, I’m not comfortable without a significant cash allocation. This cash may well underperform, as the market moves higher in the medium term. I believe it’s hard to build a case for high long term returns from current levels. For a long term investor, the numbers just look uninteresting.

Better to wait for when it’s next raining gold and grab a large bucket. We are a long way from that. Certainly Berkshire has found itself in that position, whether through choice or lack of opportunity.

https://www.berkshirehathaway....