It’s a pleasure to share this edition of The Manual of Ideas as 2019 draws to a close and we gear up for another great year. We continue to focus on building MOI Global into a special kind of membership community and delivering increasing value to you, our members. We look forward to new initiatives in 2020, including an opportunity for members to share ideas during the Berkshire Hathaway weekend in May; the launch of a new online conference, Industry Insights; and the buildout of local chapters in select cities around the world. Our enduring goal is to nurture an authentic global community of intelligent investors who come together in the pursuit of worldly wisdom.
On the investment side, in recent months I have been pondering the question of what to do in a market in which the prices of most assets appear inflated. “Inflated” is a loaded word, of course, because it implies “overvalued”. Many of us either disagree with this notion, or we are unwilling to accept it because it is an “inconvenient truth”. The steady rise in asset prices has lulled the vast majority of investors into complacency. One cannot deny the positive psychic impact of seeing one’s portfolio value march steadily higher. In addition to making us feel richer, it also makes us feel smarter.
Intuitively and theoretically, we know that the time to be cautious is when everyone is enthusiastic or complacent. When everyone has seemingly come around to the view that “compounders” are the “holy grail” of investing, maybe it’s time to reconsider. When everyone has come around to the view that central banks can manipulate interest rates into being low forever and that, as a result, equities are undervalued, maybe it’s time to be skeptical of the power of central banks to alter the laws of finance. Maybe it’s time to stop valuing equities as if future cash flows should be discounted at rates approaching zero.
We live in a world that would already explain significantly lower quotations of the S&P 500 and other major indices. First, protectionism is on the rise, as evidenced most prominently by the U.S.-China trade dispute. Second, the inexplicable weakening of transatlantic alliances, which had guaranteed post-World War II stability, has made the world less safe, providing a boost to autocratic regimes and encouraging them to become more assertive. Some have compared the current state of geopolitics to the pre-WWI or pre-WWII periods. Fourth, in purely economic terms, an environment in which trillions of dollars are “parked” in negative-yielding bonds, and well-performing countries like the U.S. are running record deficits, does not appear sustainable. “Inflation is dead” has become such a commonly held view that even raising inflation as a possibility casts one as behind the times. Finally, profit margins remain near all-time highs, in stark contrast to the real upending of entire industries due to technological innovation and creative destruction.
Put differently, if the S&P 500 were 20% lower, investors could point to numerous factors to justify such a level. If and when there is a market decline, there will be plenty of arguments for an even more pessimistic outlook. This suggests volatility ahead, something that is by no means a consensus view. In early 2009 the question du jour was, “How low can the market go?” Of course, it should have been, “How high can it go?” Now, the question du jour is “how high?”, with some pundits even arguing for a market “meltup”. Instead, it might be time to start asking, “How do we protect the downside?”
I hope you’ll join us at our flagship online conference, Best Ideas 2020, from January 8-11. In the meantime, I wish you and yours a wonderful holiday season and a great start to the new year.
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