Words of Wisdom from Charlie Munger. Reflecting on his substantial wealth, he half-jokingly remarked that he could have been much richer if he had only used more leverage. But, (in my view) for what purpose, he lived in the same modest house for 70 years?
Maximizing leverage is terrific if your timing is perfect. Luck will likely play a major part in getting the timing right. Perhaps not something one can count on.
I have always been more concerned with protecting what I have. I think my attitude towards money was based on a conversation in the spring of 1964. My father had moved the family (wife +5 young children) to a concrete bunker on the beach in Puerto Rico: with no air conditioning or telephone. I was 10 years old and it was my father's birthday. He remarked, in a stressed voice, that he had only $27 in the bank. He never saved for a rainy day. This conversation stayed with me. I have always looked at leverage and spending habits, with an eye to the past.
We are looking to the future. What a great time to benefit from changes in technology and medicine. The rate of change is speeding up the treadmill.
Continuing with last month's theme of possible surprises or issues that are worth reflecting.......
#6. Electric Vehicles / Investing in Auto Manufacturers. Perhaps Toyota has it right, what we need are hybrids. Ford and GM both are currently reducing the production of fully electric vehicles. From cottage goers to commercial operators, range anxiety remains a concern. Stellantis (owner of Chrysler) has a novel approach, making the drive fully electric and including an in-truck gas-powered electric generator to keep the batteries fully charged.
From an investment standpoint, I see no attraction in auto stocks. It appears to be a race to the bottom. Difficult labour demands, incredibly capital intensive and a consumer that has difficulty financing in this interest rate environment. You could look to invest in Tesla, but at 67 times earnings a lot of good news is baked into the stock (Ford trades at 5X earnings!).
Telsa, since being added to the S&P 500, has underperformed the S&P 500. Quite the wild ride for a 10% return.
#7. The 1920s revisited. Could this be the decade when society loosens up and the population becomes more optimistic? Will we be foot-loose and fancy-free by 2029? It could be that the COVID hangover created a despair that takes multiple years to lift. Investors have far more cash on the sidelines than they typically hold, a cautious reserve. Even with employment close to 100%, people despair over the “poor” economy.
Call me a rational optimist (I can take the heat). Equity markets have held in pretty well during a time of rapidly rising interest rates. Interest rates are likely at the high end of a new range, and owning stocks could increase in popularity by the decade's end.
#8. Perfectly Inefficient. Since the 1970s there has been a theory that markets are efficient, leaving no room for excess profits. Everything is fairly valued and it is impossible to outperform a broad-based index. The proof, espoused by the theorists, is that this must be true as 85% of investors underperform the index.
Common sense, in real life, would tell you that lots of items are overpriced and not priced at their real value. Cannabis stocks in Canada went to the moon when cannabis use was legalized. Now they struggle for survival.
My view is that stock pricing is “perfectly inefficient”. Great companies do well over the long term, but their price movements are random over the short to medium term. Anxious to make profits investors trade too frequently, resulting in less-than-ideal outcomes. Investors simply do not have the patience required to hold for the long term (the exception being Warren Buffet, whose average hold period for his top 5 holdings is 17 years).
#9. Inflation and Interest Rates. Progress is being made, but boy is it slow. Inflation is currently in the 3.0% to 4.0% range, with central banks targeting 2.0% to 2.5%. With this backdrop, interest rates are likely to descend rather slowly. U.S. 10-year Treasury bonds have dropped from a 5% yield to a more recent 4.3%. This has raised expectations of interest rate cuts to come. Caution will be required for those expecting a meaningful short-term drop in rates. Interest rates are currently in a range that historically has made sense. Savers earn a modest return on their funds and borrowers are not unfairly burdened.
#10. Medical Advances and Medicine 3.0. Want to slim down for a Christmas gala? Try Ozempic or Wegovy. These are two of the current fashionable drugs that send signals to the brain to suppress appetite. For USD 1,350 per month, you can look like your younger self. These drugs are so successful in weight loss that insurance companies may cover the cost for their seriously obese customers.
Wall Street's main concern is financial, will these drugs affect the long-term profits of the fast-food industry? So far, Sugar-laden Krispy Kreme has been taking it on the chin!
If you take a more old-fashioned view towards health and weight loss, Dr Attia’s new book on Longevity discusses the latest research on the prevention of cancer, heart disease and Alzheimer's. Dr. Attia describes his plan of action as Medicine 3.0 (Outlive). I found the reading very informative.
Best regards, Tim
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.
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