Posted by mooreds 3 hours ago
> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122
This is more of a mathematical axiom than a financial effect, because you're defining "underperform/overperform" with respect to an average that contains them.
Most stocks suck:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
And this certainly can have a financial effect on your finances: having the "wrong" stocks in your portfolio (i.e., most of them) and not have the "correct" ones will mean a (e.g.) comfortable retirement or not.
>because you're defining "underperform/overperform" with respect to an average that contains them.
Why is this true? For instance, if you're comparing the GDP growth of countries in the G7, why is it that one country (eg. US) can't consistently overperform year after year?
https://ourworldindata.org/grapher/gdp-per-capita-worldbank?...
Or if you want make it even more clear, you can construct a index consisting of two countries: a normal country (eg. US) and a basketcase (eg. DRC):
https://ourworldindata.org/grapher/gdp-per-capita-worldbank?...
This might work for the G7 case, but not the US vs DRC case, where it's an obvious case of sloping up vs sloping down. Granted, the case is contrived, but the original claim was that it was an "mathematical axiom", so it should still hold.
And Japan performed ridiculously well for over decades and then stagnated for decades after that, but it averaged out between the two periods:
> Ben Carlson: It's just a really long mean reversion. You got like 22% per year from 1970 to 1989 in Japan. Small caps in Japan did 30% per year for two decades.
> It's insane. The returns almost had to be poor after that. If you put them together, the boom with the bust, it's like almost 9% per year.
> It's kind of crazy. Over 50 years, the long-term worked. It's just that over that 20 or 30-year period, it didn't work so well.
* https://rationalreminder.ca/podcast/412 (~4m20s)
Annualized 9% per year is pretty good: the S&P 500 has average 10% since 1957 (70 years). Is there anything preventing US equities from doing the same thing: great performance from 2010 until now, and then 10+ years of stagnation starting (theoretically) tomorrow. If you look at 2000s S&P 500 you got zero returns, and the only thing that would have saved a US domestic (only) investor was having a bond allocation:
* https://www.forbes.com/sites/advisor/2010/09/13/its-not-real...
This is why diversification is important. People talk about "US stocks" doing well, but have US industrials done better than non-US industrials? US finances or energy done better than non-US? Or are "US stocks" doing better simply because tech stocks specifically have done better? Perhaps a US allocation is really a tech sector play:
* https://ofdollarsanddata.com/should-your-portfolio-be-100-us...
Every time.
I look forward to your weather report too: "It's always sunny outside until one day it starts raining. Every time."
Years ago, My daughter's science teacher said that school should teach a love of learning.
I replied 'I thought the point of school was to make productive worker units in society'
And while he explained to me why I was wrong I was thinking to myself 'great, now he thinks I'm a terrible person'
It seems I deadpan too effectively.
I am really struggling to see what's the investment thesis behind Google valuation increasing 2x in response to AI, though. Assuming no magical AGI singularity, by the end of the day, they're still selling the same services, but the services have gotten more expensive for them to provide. Everyone was already using Google Search, but now, provisioning AI summaries on top of requires more compute. Everyone was already using Google Docs and Meet, but now, AI features cost Google more. Etc, etc.
The only place where they stand to make money is selling AI compute to enterprises. But with the current supply-chain challenges, the margins there are probably getting thinner.
Google is basically Nvdia (TPUs), Tesla (Waymo Self-Driving), Hyperscaler, Netflix (YouTube) and a massive VC (Anthropic, Databricks, SpaceX, etc.) all rolled into one.
Their valuation isn't really a 2x'ing so much as a reversion from halving.
Well, they're hoping to sell new services on expensive $200/month subscriptions.
The hope is that agents have more value than traditional software, because they do the work for you instead of just enabling you to do the work.
The market sets prices, and they are set based on multiple things. One of those is fundamentals. Consider the value of assets, whether tangible or intellectual property, human resources, binding contracts, etc. that add up to reasonable revenue forecasts and so forth.
And the other aspect of prices is based on conjecture, speculation, meme-joiners, believing hype, and in some cases, fraud.
The secret sauce is always going to be the one who can figure out, between the two factors going into price, what's right, and when.
BUT... just saying that all stock market pricing is based on unreliable factors? That's not a useful, actionable statement. You can certainly stay out of investing in that market, but is that going to be your best course of action?
Focus on cash/cashflow.
The market is both happy that Apple didn’t spend all its cash on AI build-out, but also at the same time angry that Apple is “missing AI”.
Not to mention the grumblings that Apple has peaked.
* Index investing raises in popularity, with index funds that automatically reinvest dividends being often preferred due to their tax efficiency.
* Large caps prefer to repurchase stocks, stock repurchases contribute fully towards a given company share price increase.
* Smaller caps still pay dividends, these dividends are then reinvested by index funds and the reinvestment is weighted by capitalization, so large caps share price benefits more from repurchases done with dividend cash paid by smaller caps. When dividend is paid, share price of a company that paid it is reduced, which further widens the performance gap between large and smaller caps.
That doesn't work because indices are typically market cap weighted. A stock buyback might increase nominal stock prices, but not the market cap, otherwise it'd be a free money machine.
Page 25 "The number of data centers in the US" gives an interesting insight as to the magnitude of the data center boom. 60% more data centers are being planned or are under construction. This might actually be underselling it in dollar amount, as I believe the average data center size under construction is larger than the average data center already constructed.
Page 27 "Cyclically adjusted P/E ratio near all-time highs" is certainly concerning and points to a near term correction.
I agree with the headline, but this really feels like analysis-slop. It's only remarkable in terms of who is publicizing it.
It makes sense to focus all effort into building a time machine.
Seems like we're seeing margin get eaten up by companies upstream of the buildout, and the costs have not been fully passed downstream yet. Eg most consumers still get free/cheap AI.
It'll take a few years to see what happens at scale when prices go up and purchasing behavior changes. Hardware, services etc all downstream of the buildout and supply constraints.
But what gives me pause is that a some of the mag 7 (think Meta) could change their mind on AI build-out tomorrow, and 1-year from now have the same amazing free cash flow they always did.