Podcast Summary
Adapting to Challenging Market Conditions: Value investor Stig suggests investing in a value and momentum ETF portfolio as a placeholder for cash to mitigate opportunity cost and risks during high valuations and excessive money printing.
Learning from this episode of The Investors Podcast is that despite the extraordinary market conditions in 2020, value investor Stig believes it's becoming increasingly challenging to find undervalued stocks due to high valuations. He proposes an alternative approach by investing in a value and momentum ETF portfolio as a placeholder for cash, allowing for dollar cost averaging and potential market outperformance. This strategy can help investors mitigate the opportunity cost of inflation and the risks of holding cash during excessive money printing. It's important to note that there is no strict definition for value or momentum ETFs, and their criteria are based on price performance rather than specific financial metrics. By focusing on large-cap stocks, this strategy offers lower volatility, which is attractive to many investors. Ultimately, this conversation highlights the importance of adaptability and creativity in investing during uncertain times.
Mixing Value and Momentum ETFs for Potential Higher Returns: Investing in a mix of Value and Momentum ETFs can lead to better returns than the S&P 500 index, but consider fees, inception dates, and individual investment goals before making a decision.
Investing in a mix of value and momentum Exchange-Traded Funds (ETFs) can potentially yield better returns compared to the S&P 500 index, especially in a bull market. For instance, the Vanguard Value 2F ETF (VTV) and iShares Edge MSCI USA Momentum Factor ETF (MTUM) have returned 11.23% and 14.87%, respectively, over the past 10 years, compared to the S&P 500's 13.8% return. However, it's important to note that these ETFs come with different fees and inception dates. The Vanguard Value 2F ETF has a lower expense ratio of 0.04%, while the iShares Edge MSCI USA Momentum Factor ETF has a higher expense ratio of 0.15%. Additionally, the momentum ETF is relatively newer, having been launched in 2013. Another option for a cash replacement could be holding a total market index fund, such as Vanguard Total Market Index Fund, which holds a diversified mix of stocks and has returned 13.8% over the past 10 years. However, some argue that diversifying across countries, such as with Vanguard FTSE All-World ex-US ETF, could also be a wise move given the high valuation of the US stock market. Ultimately, the choice between these strategies depends on individual investment goals and risk tolerance.
Market environment raising concerns for deep value investors: Deep value investing may become successful again if markets correct and normalize, but the current low-interest-rate environment raises doubts about the ability of central banks to let this happen.
Some investors believe the current market environment, characterized by large, expensive companies performing well, is unsustainable and may lead to a shift towards smaller value stocks in the future. This strategy, known as deep value investing, was successful in the late 1990s when large, overvalued companies experienced significant market corrections. However, the current low-interest-rate environment raises concerns about the ability of central banks to allow markets to normalize, as they did in the past. Additionally, some investors argue that the current mood towards getting out of cash and seeking alternatives, such as ETFs, is driven by the confidence that central banks will not raise interest rates. Despite this, some experts are not confident in this assumption and believe that the direction of interest rates, rather than their absolute level, is more important for stock markets. Ultimately, the success of deep value investing depends on the ability of markets to correct and normalize, which remains uncertain in the current low-interest-rate environment.
Direction of interest rates matters more than the rate itself: Stay informed about market trends and interest rate direction to navigate financial markets
While interest rates have been a topic of much discussion, the direction of interest rates might matter more than the actual rate itself. The speaker argues that central banks are incentivized to keep interest rates low, but at some point, they may have to raise them due to inflation caused by the increased amount of money in circulation. If they don't, the markets might follow the path of Japan or Europe, which have had lackluster stock market performance over the past few decades. The speaker also emphasizes the importance of staying informed about market trends and news through tools like Yahoo Finance. Overall, the key takeaway is that understanding the direction of interest rates and staying informed about market trends can help investors navigate the complexities of the financial markets.
Central Banks Keeping Interest Rates Low with Yield Curve Control and Unlimited QE: Central banks' efforts to keep interest rates low and prevent yields from rising significantly have led investors to consider equities as a better store of value than bonds. The NASDAQ's 37% return since the pre-crash peak highlights the potential for outperforming equities in this environment.
Central banks are using yield curve control and unlimited quantitative easing to keep interest rates low and prevent yields from rising significantly. This is due to the massive amount of debt being issued by governments and the potential for inflation if yields go up. As a result, investors may see equities as a better store of value than bonds, as the equity market is less likely to be impaired in a high yield environment. The NASDAQ has served as a benchmark for equity performance during this period of central bank manipulation, and some investors are looking for equities that can outpace the NASDAQ's 37% return from the pre-crash peak to the present.
Market volatility and potential liquidity shocks may impact value and momentum strategies: Consider a diversified approach, such as combining value and momentum ETFs or investing in large, established companies during uncertain market conditions. Small and micro cap value stocks or shorting overvalued companies are also potential options.
During times of market volatility and potential liquidity shocks, certain investment strategies like value and momentum may underperform compared to broader indices such as the NASDAQ. The speakers suggest that policy makers may intervene with increased stimulus, leading to potential inflation and uncertain market conditions. As a result, investors may consider a diversified approach, such as a combination of value and momentum ETFs, or even consider using a large, established company like Berkshire Hathaway as a placeholder for cash. Another approach proposed is investing in small and micro cap value stocks or shorting overvalued, indebted companies with potential earnings manipulation. Ultimately, the uncertainty of market conditions calls for a cautious and adaptive investment strategy.
Balancing investments during uncertain markets: Consider a mix of long-term value investments, short positions, and cash for a balanced approach during uncertain markets. Hold strong, cash-generating investments like Berkshire Hathaway for the long-term, but be aware of inflation risks and consider intermediate steps like short positions or undervalued assets to mitigate risks.
During uncertain market conditions, investors can consider a balanced approach that includes a mix of long-term value investments, short positions, and cash. This strategy can help protect against potential market downturns while still allowing for the opportunity to benefit from undervalued assets. The speaker specifically mentioned Berkshire Hathaway as an example of a long-term value investment that can be held for an extended period due to its strong management and cash generation abilities. However, it's important to note that this strategy is not for emergency funds and that cash should still be held for that purpose. Additionally, the speaker mentioned the importance of being aware of inflation and the potential loss of purchasing power when holding cash for an extended period. The idea of having an intermediate step between cash and long-term investments, such as short positions or other undervalued assets, can help mitigate the risks associated with holding too much cash during periods of inflation.
Patiently waiting for market downturns to buy stocks: Successful investors adopt a pig farmer strategy, buying stocks during market downturns and selling during upswings. Brookfield Asset Management, with its strong track record, access to capital, and diverse investments, is recommended as a holding of value.
Even in an optimistic market, there will be annual opportunities when stocks go on sale. Investors can adopt a patient approach, waiting for these selling points before buying. A successful investor is likened to a pig farmer who buys stocks during market downturns and sells during market upswings. The speaker recommends Brookfield Asset Management as a holding of value due to its strong track record, access to capital, and diverse investments in real estate, infrastructure, private equity, and renewable energy. Brookfield's fee-related earnings, carried interest, and asset under management have shown significant growth. Despite not being considered a REIT, Brookfield has consistently raised its dividend and is benefiting from infrastructure build-out trends, particularly in Asia and the US.
Institutions allocating funds to alternative assets like Brookfield Asset Management: Institutions seek places to put cash in low-interest-rate environment, Brookfield's undervalued assessment offers potential above-market returns, but investors require larger margins of safety due to complexity and lack of understanding.
The low-interest-rate environment is leading to an increase in the allocation of funds to alternative assets like Brookfield Asset Management. Many institutions are looking for places to put their cash, and Brookfield's valuation is believed to be undervalued by its own assessment. The company's downside protection and aggressive buying strategy, especially in real estate, give confidence to investors. However, some investors are hesitant due to the complexity of Brookfield's structure and their lack of understanding of its valuation. Despite the potential above-market returns, some investors require a larger margin of safety for companies they don't fully understand. The long-term assumption of returning to normal valuations in the stock market suggests a low expected return, making Brookfield's potential 5-7% return even more appealing in this market context. However, it's important to note that some listeners believe inflation is much higher than the assumed long-term average.
Assumptions and interest rates impact potential investment returns: Assuming low interest rates and high PE ratios could lead to discovering undervalued equities, but historical data suggests returns of 5-10%.
The potential returns from investments heavily depend on the assumptions and interest rate environment. If we assume low interest rates and high PE ratios becoming the new normal, there could be undervalued equities. However, if we consider historical data, returns could range from 5% to 10%. The choice between these returns depends on the current assumptions. Additionally, past performance is not always indicative of future results, as the discussion about Stig and Toby's picks illustrates. Stig's pick, BAM, underperformed significantly during the market contraction and rebounded relatively slowly compared to the NASDAQ. This highlights the importance of considering the specific circumstances and risks associated with each investment.
Market performance of specific large cap company vs NASDAQ during liquidity event: Despite underperformance in a recent liquidity event, large cap growth stocks are still favored in the market cycle, with value stocks expected to grow faster and trade at a discount. The speaker anticipates a market shift and potential upside for hard-hit stocks like Brookfield, influenced by inflationary monetary policy and technological advancements.
The recent market performance of a specific large cap company underperformed the NASDAQ significantly during a liquidity event, but this may not be indicative of future performance. The market cycle still favors large cap growth stocks, and value stocks are expected to grow faster and trade at a discount. The speaker believes the market is primed for a change, and the current market conditions have been manipulated by quantitative easing since 2008. The speaker also mentioned the potential for surprise upside in stocks like Brookfield, which have been hardest hit by the pandemic. Additionally, the speaker's investment thesis was influenced by the book "The Price of Tomorrow" by Jeff Booth, which outlines the impacts of inflationary monetary policy and the technology's growing ability to outstrip humanity's ability to handle its speed. Overall, the speaker's expectation is that the Nasdaq will continue to outperform the specific large cap company moving forward.
Fintech's Exceptional Performance Outpacing NASDAQ: Fintech investments have outperformed the NASDAQ by nearly 3 times during recent market manipulation cycles. With large financial institutions late to adopt Fintech innovations, investors should consider Fintech investments for exposure to the changing finance landscape.
The NASDAQ index has been a strong benchmark for equity performance, and outperforming it over a long period indicates success. The speaker also emphasizes the significance of the finance sector, particularly Fintech, which has shown exceptional growth and outperformed the NASDAQ by nearly 3 times during the recent market manipulation cycle. Cathie Wood's ARK Fintech ETF (ARKF) is a notable example, with a 99% increase since before the market crash. The speaker expects this trend to continue as large financial institutions are late to adopt Fintech innovations, such as blockchain technology and frictionless funding platforms. The OCC's recent approval of blockchain technology for clearing transactions further validates this trend. Overall, the speaker suggests that those seeking exposure to the changing finance landscape should consider Fintech investments.
Discussion on potential unrealized gains taxes and their impact on Fintech ETFs: Potential unrealized gains taxes could affect high-growth Fintech ETFs like ARK Fintech Innovation and ARK Innovation, but implementation may face challenges and opposition, especially for non-traditional assets like Bitcoin in self-custody wallets.
The Fintech ETFs mentioned, such as ARK Fintech Innovation ETF and Cathie Wood's ARK Innovation ETF, are strong investment options for those interested in the banking industry's ongoing changes. Notable holdings include Alibaba and Pinterest. However, there's a discussion about potential unrealized gains taxes and their impact on high-growth assets like these ETFs. The idea is that the U.S. government, through Janet Yellen, could attempt to tax unrealized gains to generate revenue. However, implementing such a tax on assets like Bitcoin in self-custody wallets or other non-traditional assets could be technically challenging and may face significant opposition. Ultimately, this is a complex issue with many nuances and potential implications for various sectors and investors.
ARK Innovation ETF's high valuation and heavy share-based compensation could lead to downside risk: The ARK Innovation ETF, with its high valuation and questionable growth benefits, could face significant downside risk if inflows reverse, amplified by its large size and the unsustainable monetary policy environment.
The ARK Innovation ETF, with its high price-to-earnings ratio and questionable growth benefits for shareholders due to heavy share-based compensation, could face significant downside risk if inflows into the ETF reverse. This risk is amplified by the fact that ARK is now one of the largest ETFs, making it a significant driver of stock prices for the companies it holds. Historically, this dynamic has led to violent market reversals when investor sentiment shifts. Additionally, some argue that the current monetary policy environment, which has fueled inflation for decades, is unsustainable and could lead to a more profound market correction when it eventually occurs. This could further pressure ARK and other high-valuation tech stocks.
Discussing Cathie Wood's investment strategies and potential market shifts: Experts express skepticism about current market trends, potential risks, and the sustainability of high valuations and growth stocks. A shift towards value investing could be driven by changes in policy or economic conditions.
The current market environment, with its focus on big growth stocks and high valuations, has some experts concerned about potential risks and the sustainability of current trends. During a recent conversation, Stig Brodersen and Tobi Shorinwa discussed Cathie Wood's investment strategies and the potential for a shift in the market. While they acknowledged Wood's success, they also expressed skepticism about the current market landscape and the potential for a change in policy or economic conditions that could lead to a shift towards value investing. Brodersen specifically raised concerns about the market's focus on big numbers, such as high valuations and impressive returns, and the potential for a correction. He pointed to the outperformance of an index for unprofitable tech stocks compared to the Nasdaq 100 as evidence that this trend may not continue indefinitely. Preston Pysh agreed with this assessment, noting that the current policy environment has encouraged risk and incentivized high valuations. He suggested that a change in policy or economic conditions, potentially driven by a shift towards sound money, could lead to a shift towards value investing. Overall, the conversation highlighted the potential risks and uncertainties in the current market environment and the importance of staying informed and adaptable as market conditions evolve.
Continuous Learning and Engagement in Various Fields: Seek knowledge through various sources, apply mental models and frameworks, engage in conversations, and subscribe to The Investors Podcast for financial insights and smart investments.
Key takeaway from this episode of The Investors Podcast is the importance of continuous learning and engagement in various fields, as discussed by Toby and Hari. They emphasized the value of seeking knowledge through various sources like books, podcasts, and mentors. Hari shared his experiences of applying mental models and frameworks to understand complex business concepts, while Toby highlighted the importance of mental flexibility and adaptability. They also encouraged listeners to engage in conversations and feedback, and to subscribe to their show for future episodes. Remember, financial independence can be achieved through knowledge and smart investments. To learn more, check out Millennial Investing by The Investors Podcast Network and visit theinvestorspodcast.com for show notes, transcripts, and courses. This podcast is for entertainment purposes only, and before making any financial decisions, consult a professional.
