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https://theirrelevantinvestor.com/2023/08/25/the-c...

I thought this podcast was worthwhile. Guy shared some thoughtful commentary on time arbitrage may be one of the Few advantages of some individuals and certain money managers.

Guy focused his and Mohnish's GLIDE lunch with Buffett and further interactions. Guy reasoned when WEB, CTM & Ajit are no longer in their current roles, the portfolio managers and Greg will be true to themselves and will likely make more limited sized decisions than Buffett. Insurance manager may also limit the size of some individual risks/exposures without the brilliant experience and knowledge of Ajit. He has an optimistic view sees BRK being an enormous cash machine and he anticipates significant buybacks continuing for 50/75 years or beyond.

Some other good dialogue on what is value investing? nowadays, money management and some good humor as well.

I like Guy but I find the underperformance interesting. Not sure on Pabrai but the basic Booglehead outperforms for almost no cost.

I imagine many on this Board outperform the index

Re Pabrai.

There was a lecture I watched this year and it said his fund had performed 12% pa since inception.

I learned to my cost many years ago that there is only one Warren E. Buffett. One.

I learned to my cost many years ago that there is only one Warren E. Buffett. One.

Oh, I imagine there are others that are close enough.
The bigger insight is finally realizing that I am not one of them.
I'm still dumb enough to keep trying to beat the market, but I certainly don't plan my finances on the assumption that I will succeed.

So, if I'm not expecting to beat the market, what do I expect from the broad US market?

If things remain much as they have been since 1995 in terms of growth of S&P 500 smoothed earnings and valuation levels, I'd expect something like inflation + 2.8%/year real total return from the S&P 500 in the next 7 years.
(another similar model I have suggests only inflation + 1.26%/year, but let's be optimistic and stick with the 2.8%).
That prediction is for the average of the annualized rates of return across all holding periods of lengths 4-10 years starting today, on average a 7 year hold.
In case this post is around ten years from now, that's starting from S&P at 4,405.71 and CPI 305.7
The prediction will certainly be wrong, but being my best guess I figure it's a 50/50 shot whether it's too high or too low. And I think it probably won't be wrong by more than a couple/few percent.

Other random observations that fall out of that analysis:
Compared to the range of valuation levels since 1995, the S&P 500 has been more expensive than this 26% of the time and cheaper 74% of the time. So it's expensive, but far from record breaking.
If you graph the earnings yield (using smoothed earnings) since 1995, there is no overall trend of rising or falling valuation levels to speak of.
From 2004 to 2007 inclusive, the valuation level was almost spot on the 1995-2023 average the whole time. Same for the stretch 2014-2016 inclusive.
On my smoothing method, the average valuation level since '95 has been an earnings yield of 4.04%, equating to a P/E of 24.8 on smoothed real earnings.
The current level works out to a trend P/E of 28.9 measured the same way. By extension, a fall in the S&P by only -14.25% to 3778 would bring it down to the average valuation level since 1995. That 3778 number will rise with time and with inflation, so it has a "best before" date.
I would hesitate to call that number "fair value", but I suppose that's one possible interpretation.

The fly in the ointment: This exercise is done by looking at net profits in the last several years, not sales. Consequently the forecasts implicitly assume that the recent very high net margin profitability of US companies doesn't drop back to levels that used to be normal. In that case, returns would be a fair bit lower than the forecasts above.

Jim

If things remain much as they have been since 1995 in terms of growth of S&P 500 smoothed earnings and valuation levels, I'd expect something like inflation + 2.8%/year real total return from the S&P 500 in the next 7 years.

Just a PS on that thought---
Such forecasts are very error prone. You can guess, but nobody knows what the markets will really do. However this forecast real total return number is probably a very good number for input to a SWR calculation. For example, each year you could spend inflation-adjusted 2.8% of initial portfolio value starting today. If the forecast is right, and you own a portfolio that does as well as the S&P 500, the portfolio should be worth about the same amount around 7 years later in real terms, so you definitely won't run out of money.

Here's another way to calculate it, from the same data set.
Using my smoothing method, I estimate the on-trend real earnings of the S&P is $152.54 right now. This has risen at inflation + 3.85%/year since 1995. (I think it will definitely be slower in future, but let's use that figure since I can't justify any other specific number). Seven years from now, the on-trend real earnings trend level would then be $198.71 in today's dollars. The average earnings yield since 1995 using this same smoothed earnings figure has been 4.04%. Thus, if things remain about the same as they have been, you'd expect the S&P 500 to be at around 4918.62 seven years from now, in today's dollars. The current number is 4405.71, so that is a real rise of 11.64% or 1.59%/year in gains from the rise in the level of the index. Add the dividend yield, say 1.45%. This exercise suggests you could do a seven years SWR of 3.05%/year (percentage of starting value today, rising with inflation) and end up with a portfolio that's worth about the same amount. This is quite similar to the 2.8% from the return forecast above.

If you know how long you would live it would be more: you could run your portfolio down slowly. But trying to estimate how long you will live and running down your portfolio is not a calculation that can be done with reliability. The "tail" outcomes are too important, too dire, and too hard to predict for most of the usual methods to be prudent, so I recommend people avoid them like the plague. Ultimately the amount you can withdraw from any portfolio is a function of the increase in the real value of that portfolio. We just don't know exactly what the function is. My conclusion: Either plan for both you and your portfolio to live forever (portfolio intrinsic value never decreasing in real terms), or buy longevity insurance to handle "bonus" lifespan long past your actuarial expectation and spend the rest of your portfolio between now and then.

Jim

Since 2002 Pabrai has a 5% annual return. Go to the COBF board and you will find a very elaborate and accurate detailing of this.

wrt to the earnings yield (PE) being relatively flat...
decent article on SeekingAlpha recently about a bearish warning - that the earnings yield hasn't been this low compared to the treasury yield in over 20 years (since that ugly tech bubble 1.0 burst.)

https://seekingalpha.com/news/4005880-sp-500-flash...

FWIW,
FC

COBF board? Nothing listed on here.

If things remain much as they have been since 1995 in terms of growth of S&P 500 smoothed earnings and valuation levels, I'd expect something like inflation + 2.8%/year real total return from the S&P 500 in the next 7 years.

It may also be worth noting that, in the 25 years since 1998, both earnings growth and the P/E multiple are much higher than the historical average, so the condition that those 2 crucial factors both remain at their last-25-year levels is possibly a bit optimistic. If you used earnings growth rates and multiples from the previous 25 years, what would the annual return be, then? (I'm guessing it's negative')

dtv

I many times get the glazed over look when mentioning terms like % return , %/Yr outperformance and % relative comparisons when talking to my kids/grandkids about saving, investing, inflation, & spending "within your means" etc''but they sure know the differance between Chevy's & Ferrari's :)'.so converting these %'s to $$$ always gets the point across.

With that in mind & the previous comments on the Pabrai funds past long term performance, ( 5, !0, & 20 Yrs ) , I have compared the Pabrai Funds to the S&P 500 and Berkshire. The values assume an initial investment of $10,000 in each starting 5 , 10, 20 yrs ago ending June 30, 2023.

$10,000 Inv Period.
Ending Last 5 Yrs. 10 Yrs. 20 Yrs
6/30/23.

S&P 500. $17,885. $33,201. $66,170

BRK. $18,061. $30,603. $70,835

''''''''''''''''''''''''''''''''''''''''''''

PIF2 $8,944 $15,483. $44,793
PIF3. $10,693. $17,813. $52,873
PIF4 $6,660 $11,782. $26,440



ciao

Excuse the row/column copy-paste bad editing

Interesting I read comments on the COBF board (I figured it out from Google) and they were quite critical of Pabrai and Guy Spier for underperformance.

Also critical about (in their words) promoting the Turkish stocks.

I don't think many Superinvestors have outperformed the market though.

If things remain much as they have been since 1995 in terms of growth of S&P 500 smoothed earnings and valuation levels, I'd expect something like inflation + 2.8%/year real total return from the S&P 500 in the next 7 years.
...
It may also be worth noting that, in the 25 years since 1998, both earnings growth and the P/E multiple are much higher than the historical average, so the condition that those 2 crucial factors both remain at their last-25-year levels is possibly a bit optimistic. If you used earnings growth rates and multiples from the previous 25 years, what would the annual return be, then? (I'm guessing it's negative')

Absolutely true.

Whenever I do this exercise it usually sounds like a permabear saying the same old same old: the market is overvalued, look out below.
So what I say in such a post is generally the most optimistic/bullish possible view of the data, to forestall the inevitable "it's different this time, you just don't get it" ripostes.
I quote the average valuation levels since 1995 (the expensive era), not the average since 1980 or 1960 or 1930. I keep tabs on all of those, too.

Valuations have been extraordinarily high in the last ~25 years compared to deeper history. Three or four separate bubbles are included the sample, depending on how you look at things. So thinking that this range is the "normal" range is certainly a risk. Yet I don't have a great reason to assert that valuation levels before 1995 have even more to say about the likely future levels...who knows?

There has been a long run trend of rising valuations, which means that the returns in any "average" period were in fact getting a tail wind that can not be extrapolated. However, at least this specific problem doesn't exist in the time frame I looked at, as there is no up-trend since 1995. The old tech bubble was long enough ago that it cancels out the recent high multiples.

The bigger problem, which you also note, is the rising profitability. Net profit margins are very much higher than used to be the case, a mix of lower share of GNP going to labour and (perhaps) lower share to tax. Those trends also can not be extrapolated. Really, my analysis should be done a second time with price-to-sales metrics rather than price-to-earnings metrics, since earnings ultimately can't rise faster than sales over the long run. The two separate results would give a broader insight into what constitutes "normal".

For those interested in the change in profitability: it always varies with the business cycle, but it seems there was also a big change in the range in the US.
Net corporate margins in the US averaged 6.12%/year from 1951 to 2003. Standard deviation 1.01%.
Net corporate margins in the US averaged 9.94%/year from 2004 to 2012. Standard deviation 1.05%, pretty much unchanged.
We don't know how long this will last, but for the last ~20 years each dollar of sales has been worth 62% more to shareholders than it used to be in the prior ~50 years.
We do know that profitability won't keep rising forever, as profits can't exceed sales. Businesses will forever have some expenses. It would make sense to assume that future real profit growth will be close to future real GDP growth, not equal to the recent rate of profit growth.

Jim

$10,000 Inv Period.
Ending Last 5 Yrs. 10 Yrs. 20 Yrs
6/30/23.

S&P 500. $17,885. $33,201. $66,170

BRK. $18,061. $30,603. $70,835

''''''''''''''''''''''''''''''''''''''''''''

PIF2 $8,944 $15,483. $44,793
PIF3. $10,693. $17,813. $52,873
PIF4 $6,660 $11,782. $26,440

But but but - S&P 500 is just overvalued. I bet Pabrai funds' intrinsic values are so so so high. Just wait for a while - like a century - for mean reversion.

I bet Pabrai funds' intrinsic values are so so so high. Just wait for a while - like a century - for mean reversion.

I don't know whether those return calculations are accurate. They may very well be. But I do know that I learn a great deal by listening to or reading some investors, and not so much from others, no matter their historical performance. Pabrai is one whose words contain much wisdom, in my opinion. So I tend to watch his interviews and internalize the teachings, mostly disregarding the performance figures.

Reminds me of the fact that some of the best hitting coaches in baseball were themselves pedestrian hitters, at best. And some of the best hitters failed to make good hitting coaches. One does not need to be excellent at a craft to teach it well or to be worthy of watching.

He preaches long term buy and hold
but from what I've seen of his 13F he's in and out of positions every few quarters BABA and Brookfield being examples. He also said he would never own Berkshire in a portfolio as it's staid and easy to outperform. I imagine that most Superinvestors don't want to hold BRK as it leads to questions from investors about why they should be invested.

I imagine that most Superinvestors don't want to hold BRK as it leads to questions from investors about why they should be invested.

A lot of money managers don't want to hold Berkshire for their clients because, once the client is convinced that it's an excellent choice for a big core long term position, they ask...why can't I just do that myself? Why pay you? I have had a client say exactly this to me. Conversely, if the client isn't convinced it's a good pick, they will not want the manager to pick it for that reason. So, whether the client likes Berkshire as a pick or not, the manager won't be admired for holding much of it.

After all, money managers aren't in the business of managing money. They are in the business of collecting fees in return for managing money.

Fisherman to tackle salesman: Do these really fancy expensive lures work any better for catching fish?
Salesman: I don't sell lures to the fish.

Jim

How much say do clients usually have on where the money is invested, if any? Obs it depends on how much they have invested and the pedigree of the manager.

Interesting in the last update I noticed that Miller funds have dropped from several billion invested down to 150m! This just following his decision to step back and the reigns taken over by his new pick.

A little more levity to break up the "Prof $$$ Mgt" flogging ,
----------------
"Fisherman to tackle salesman: Do these really fancy expensive lures work any better for catching fish?
Salesman: I don't sell lures to the fish."
------------------------------


Ah...one good fishing joke deserves another...

https://www.ebaumsworld.com/jokes/new-salesman/751...

ciao

How much say do clients usually have on where the money is invested, if any?

Unless it's a closed end fund, they can vote with their feet.

Usually they can't tell you specifically what to do and what not to do, except for some managed-account style managers.
But like most businesses, unhappy clients do not lead to good outcomes.

Jim

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