6 ms·

Fund manager: ‘Nightmare’ US stock valuations driven by ‘young, dumb’ investors

37 points by harambae 6y ago

gvhst 6y ago
Classic fund manager who can't make returns in a new market regime and decides to cope by complaining on CNBC
- draw_down 6y ago
  Yeah. If these new investors are so dumb then why aren't you making money off of them hand over fist?
- engineer_22 6y ago
  I think he's saying the long play has a lot of risk right now. Congress doesn't seem too eager to pump the market right before election either.
  - toomuchtodo 6y ago
    The market is already pumped, pricing in a stimulus policy that is highly unlikely to arrive, or if it does arrive, it won't be sufficient to support a robust recovery that would justify current valuations (outside of tech companies dragging SPY up). Entirely possible we're at "the top", but there currently is no alternative to equities if you're chasing yield.
    - AlchemistCamp 6y ago
      > there currently is no alternative to equities if you're chasing yield What about DeFi?
      - toomuchtodo 6y ago
        Has no intrinsic value. Might as well go to a casino.
    - engineer_22 6y ago
      What compels you to chase yield? How do you make the case that the risk (probability of loss multiplied by magnitude of loss) doesn't exceed the expected yield? I think hedge fund manager in original title is saying he's uncomfortable with the risk/yield equation right now.
      - toomuchtodo 6y ago
        In the case of institutional managers, they live and die by their returns. Take pension funds: if they do not meet their return targets, pensions get cut (or debt is issued to make up the gap, big yikes). I agree with your last statement: the amount of risk isn't realizing a corresponding risk premium in the returns available. Yet, you must invest somewhere. That's your job (as an institutional investor). A lot of structural financial heartache ahead.
    - swiley 6y ago
      Is GDP really that far down? (and will it stay down without a stimulus package?) I'm not convinced the market really needs a recovery. Sure the majority of people need it but I'm not sure that has much of an effect on production, especially if cost of living is going to go down due to the bottom dropping out of the real estate market.
      - harambae 6y ago
        >especially if cost of living is going to go down due to the bottom dropping out of the real estate market where's the evidence of this so far?
      - poulsbohemian 6y ago
        >especially if cost of living is going to go down due to the bottom dropping out of the real estate market. This sure as heck isn't happening in my market... all year long I've listened to a group of potential buyers tell me they are going to wait because the bottom is going to fall out any day now ... every piece of data I have shows that the opposite is happening - we have more buyers than physical homes here and prices have been on a steady upward trajectory for the past five years. With interest rates at historic lows, there's no reason to believe buyers aren't going to continue to acquire homes. Now - in other markets? Maybe there will be a correction, but that's actually bound to help my market and likely others too, as people move from expensive areas to less expensive areas. SFO / LA / PDX / SEA aren't going to collapse overnight.
      - hcknwscommenter 6y ago
        >Is GDP really that far down? GDP is down. Bigly. https://fred.stlouisfed.org/series/GDP https://fred.stlouisfed.org/series/GDP (click on the 1yr timeframe to see it better).
  - Accujack 6y ago
    The present administration has gone to great lengths to prop the stock market up through any means necessary because the President makes no distinction between the market and the economy as a whole. The present condition of the market is entirely artificial, and unrepresentative of the actual state of the economy. Thus, whenever the stock market is allowed to return to its natural level, it's going to take a bearish turn to surpass all others. Even a government can't manipulate the market forever.
- icedchai 6y ago
  This is a typical example of a mediocre active manager. All you need to do is take a look at one of his funds. It has high fees, and lower returns than the S&P over the past 10 years: https://smeadcap.com/smead-value-fund/ https://smeadcap.com/smead-value-fund/
- barumi 6y ago
  > Classic fund manager who can't make returns in a new market regime and decides to cope by complaining on CNBC I'm disappointed that the top comment at HN regarding such an interesting topic is nothing more than an ad hominem that sidesteps any of the points made in the article. If the fund manager quoted in the article is wrong then you should have no problem presenting a rational case on how and why he is wrong. Instead, all you did amounted to name calling. How does this elevate us?
jfengel 6y ago
My first question was where these Millennials got the money to drive the market. The answer appears to be "derivatives". Key quote: "There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders." When do these options expire? What happens when they do?
- swiley 6y ago
  These are usually written by hedgefunds right? So ITM: the retail investors make money off investment banks hedging bets, OTM: retail investors loose money gambling.
  - scsilver 6y ago
    Do these investment banks take out historically low rate loans to back these options that they send out.
mindvirus 6y ago
I don't understand how to read into P/E ratios. Wouldn't a low ratio imply both a lack of investment by the company in itself and a lack of confidence by investors in long term prospects?
- joshribakoff 6y ago
  It’s just the price to earnings ratio. Literally all it means is you divide the price and earnings. There is no canonical way to “read into” it, however typically higher P/E ratio means the market is pricing in growth or is (perhaps overly) optimistic, a lower p/e means the market does not anticipate as much growth and thus will only pay a price that is justified by the earnings (meaning people buying it intend to recoup the investment through dividends or because they thought the market sentiment about lack of growth was wrong)
dpc_pw 6y ago
Gov bonds yield below inflation levels. In such conditions anything that can give you any return is worth extra. Stock market valuations are extreme because the monetary conditions are extreme.
- csomar 6y ago
  It's interesting how many people seem to overlook this. It, over-proportionally, affects assets with a far pay-off date. A stock could be worth $1 and $10 depending on the interest rate and have the same yield over xx period of time. I have written about this in more details: https://omarabid.com/zero-rates-world https://omarabid.com/zero-rates-world
jdhn 6y ago
It couldn't be due to a decade of easy money trying to chase yield, no sir, couldn't be that at all.
morpheuskafka 6y ago
For those who agree that the market is massively overvalued--what is your advice for young investors (assume a high risk tolerance). I know you can short specific stocks if you think they will go down, but I don't want to do any margin trading. Where can we invest that is not overinflated/will benefit when the rest of the market crashes?
- quacked 6y ago
  I have exactly the same problem. Michael Burry (notable for profiting off of the 2008 housing crash) is predicting an enormous index fund bubble, or the "safe" investments that people are so fond of in 401ks and IRAs. Even the market indicators like the S&P 500 are somehow outperforming the prior year. High-risk investments and stock picking is high risk and a bad idea; index funds are a bad idea because they're overvalued; cash is a bad idea because of the inflation risk; where should a young person (<40) put their money? I wouldn't even mind hearing "there is no safe investment right now, buy real-world assets like land and weapons and wait for the crash", but I only hear that from gold-standard idealists, not from professional investors. What do the investors recommend?
  - mmmm2 6y ago
    I don't know how sophisticated of an answer your looking for, but I can tell you what I'm doing. 1. I have a standard portfolio of index funds split between stocks, bonds, real estate and cash, weighted more into bonds. The bonds and cash weight is because I think the market will tank at some point, the stocks are because I might be wrong. 2. I rebalance periodically to take profit from whatever is doing best. 3. I've tried to broaden my investments further by adding a "market neutral" fund from Vanguard, and an asset fund. That's the basic setup. As I said, I'm pessimistic about the stock market, but not out of it, so I've based my allocations on that. I'm not too worried about index funds being a bubble themselves. If the market goes down enough to trash index funds as a class, there won't be anywhere to hide... That's why I'm trying the market neutral fund. I'm hoping it won't correlate with the stock or bond market. That's my big concern, that everything will crash at once. I am somewhat concerned about the Fed's actions, so I have added an asset fund in case we end up with more inflation than people expect. Personally, I think we will have a crash, but I've been wrong so far. I just don't see how the market will go up rapidly for another 5 years, and if it doesn't, that doesn't justify the current prices, but who knows...
YoungWeb 6y ago
Call option 101: A call option is basically a right (not an obligation) to buy a specific stock at a specific price (strike price) some time in the future. Loss is limited to the premium paid for option and gains are basically unlimited. If for instance I buy a 2-week NFLX Call option at a $2 premium with a strike price of $545, and in two weeks the price of NFLX is trading at $560 then I would exercise my option to buy 100 NFLX stock at $545 and could immediately sell it for a profit at the market price $560. A lot of times also, speculators never exercise the option and just close the position by making the opposite bet. (i.e. sell the call option to another investor/speculator rather than buy 100 stock at the strike price) Thoughts: I think this guy is making a fight against times as well as believing a fallacy that the stock-market 100% correlates with fundamental analysis of the underlying company. Yes P/E is high for many companies, and I have heard of a current "tech-bubble" but who knows. How much is "too much"? No one really does. Bet on the total markets long term and you'll probably be ok. Also buy BTC
trident1000 6y ago
Its also because the fed has flooded the market with cash and at the same time reduced bond yields to near 0%. There's nowhere for cash to go. And if you sit in cash it slowly becomes worthless over time.

37 points by harambae 6y ago

gvhst 6y ago

Classic fund manager who can't make returns in a new market regime and decides to cope by complaining on CNBC

draw_down 6y ago
Yeah. If these new investors are so dumb then why aren't you making money off of them hand over fist?
engineer_22 6y ago
I think he's saying the long play has a lot of risk right now. Congress doesn't seem too eager to pump the market right before election either.
- toomuchtodo 6y ago
  The market is already pumped, pricing in a stimulus policy that is highly unlikely to arrive, or if it does arrive, it won't be sufficient to support a robust recovery that would justify current valuations (outside of tech companies dragging SPY up). Entirely possible we're at "the top", but there currently is no alternative to equities if you're chasing yield.
  - AlchemistCamp 6y ago
    > there currently is no alternative to equities if you're chasing yield What about DeFi?
    - toomuchtodo 6y ago
      Has no intrinsic value. Might as well go to a casino.
  - engineer_22 6y ago
    What compels you to chase yield? How do you make the case that the risk (probability of loss multiplied by magnitude of loss) doesn't exceed the expected yield? I think hedge fund manager in original title is saying he's uncomfortable with the risk/yield equation right now.
    - toomuchtodo 6y ago
      In the case of institutional managers, they live and die by their returns. Take pension funds: if they do not meet their return targets, pensions get cut (or debt is issued to make up the gap, big yikes). I agree with your last statement: the amount of risk isn't realizing a corresponding risk premium in the returns available. Yet, you must invest somewhere. That's your job (as an institutional investor). A lot of structural financial heartache ahead.
  - swiley 6y ago
    Is GDP really that far down? (and will it stay down without a stimulus package?) I'm not convinced the market really needs a recovery. Sure the majority of people need it but I'm not sure that has much of an effect on production, especially if cost of living is going to go down due to the bottom dropping out of the real estate market.
    - harambae 6y ago
      >especially if cost of living is going to go down due to the bottom dropping out of the real estate market where's the evidence of this so far?
    - poulsbohemian 6y ago
      >especially if cost of living is going to go down due to the bottom dropping out of the real estate market. This sure as heck isn't happening in my market... all year long I've listened to a group of potential buyers tell me they are going to wait because the bottom is going to fall out any day now ... every piece of data I have shows that the opposite is happening - we have more buyers than physical homes here and prices have been on a steady upward trajectory for the past five years. With interest rates at historic lows, there's no reason to believe buyers aren't going to continue to acquire homes. Now - in other markets? Maybe there will be a correction, but that's actually bound to help my market and likely others too, as people move from expensive areas to less expensive areas. SFO / LA / PDX / SEA aren't going to collapse overnight.
    - hcknwscommenter 6y ago
      >Is GDP really that far down? GDP is down. Bigly. https://fred.stlouisfed.org/series/GDP https://fred.stlouisfed.org/series/GDP (click on the 1yr timeframe to see it better).
- Accujack 6y ago
  The present administration has gone to great lengths to prop the stock market up through any means necessary because the President makes no distinction between the market and the economy as a whole. The present condition of the market is entirely artificial, and unrepresentative of the actual state of the economy. Thus, whenever the stock market is allowed to return to its natural level, it's going to take a bearish turn to surpass all others. Even a government can't manipulate the market forever.
icedchai 6y ago
This is a typical example of a mediocre active manager. All you need to do is take a look at one of his funds. It has high fees, and lower returns than the S&P over the past 10 years: https://smeadcap.com/smead-value-fund/ https://smeadcap.com/smead-value-fund/
barumi 6y ago
> Classic fund manager who can't make returns in a new market regime and decides to cope by complaining on CNBC I'm disappointed that the top comment at HN regarding such an interesting topic is nothing more than an ad hominem that sidesteps any of the points made in the article. If the fund manager quoted in the article is wrong then you should have no problem presenting a rational case on how and why he is wrong. Instead, all you did amounted to name calling. How does this elevate us?

jfengel 6y ago

My first question was where these Millennials got the money to drive the market. The answer appears to be "derivatives". Key quote: "There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders." When do these options expire? What happens when they do?

swiley 6y ago
These are usually written by hedgefunds right? So ITM: the retail investors make money off investment banks hedging bets, OTM: retail investors loose money gambling.
- scsilver 6y ago
  Do these investment banks take out historically low rate loans to back these options that they send out.

mindvirus 6y ago

I don't understand how to read into P/E ratios. Wouldn't a low ratio imply both a lack of investment by the company in itself and a lack of confidence by investors in long term prospects?

joshribakoff 6y ago
It’s just the price to earnings ratio. Literally all it means is you divide the price and earnings. There is no canonical way to “read into” it, however typically higher P/E ratio means the market is pricing in growth or is (perhaps overly) optimistic, a lower p/e means the market does not anticipate as much growth and thus will only pay a price that is justified by the earnings (meaning people buying it intend to recoup the investment through dividends or because they thought the market sentiment about lack of growth was wrong)

dpc_pw 6y ago

Gov bonds yield below inflation levels. In such conditions anything that can give you any return is worth extra. Stock market valuations are extreme because the monetary conditions are extreme.

csomar 6y ago
It's interesting how many people seem to overlook this. It, over-proportionally, affects assets with a far pay-off date. A stock could be worth $1 and $10 depending on the interest rate and have the same yield over xx period of time. I have written about this in more details: https://omarabid.com/zero-rates-world https://omarabid.com/zero-rates-world

jdhn 6y ago

It couldn't be due to a decade of easy money trying to chase yield, no sir, couldn't be that at all.

morpheuskafka 6y ago

For those who agree that the market is massively overvalued--what is your advice for young investors (assume a high risk tolerance). I know you can short specific stocks if you think they will go down, but I don't want to do any margin trading. Where can we invest that is not overinflated/will benefit when the rest of the market crashes?

quacked 6y ago
I have exactly the same problem. Michael Burry (notable for profiting off of the 2008 housing crash) is predicting an enormous index fund bubble, or the "safe" investments that people are so fond of in 401ks and IRAs. Even the market indicators like the S&P 500 are somehow outperforming the prior year. High-risk investments and stock picking is high risk and a bad idea; index funds are a bad idea because they're overvalued; cash is a bad idea because of the inflation risk; where should a young person (<40) put their money? I wouldn't even mind hearing "there is no safe investment right now, buy real-world assets like land and weapons and wait for the crash", but I only hear that from gold-standard idealists, not from professional investors. What do the investors recommend?
- mmmm2 6y ago
  I don't know how sophisticated of an answer your looking for, but I can tell you what I'm doing. 1. I have a standard portfolio of index funds split between stocks, bonds, real estate and cash, weighted more into bonds. The bonds and cash weight is because I think the market will tank at some point, the stocks are because I might be wrong. 2. I rebalance periodically to take profit from whatever is doing best. 3. I've tried to broaden my investments further by adding a "market neutral" fund from Vanguard, and an asset fund. That's the basic setup. As I said, I'm pessimistic about the stock market, but not out of it, so I've based my allocations on that. I'm not too worried about index funds being a bubble themselves. If the market goes down enough to trash index funds as a class, there won't be anywhere to hide... That's why I'm trying the market neutral fund. I'm hoping it won't correlate with the stock or bond market. That's my big concern, that everything will crash at once. I am somewhat concerned about the Fed's actions, so I have added an asset fund in case we end up with more inflation than people expect. Personally, I think we will have a crash, but I've been wrong so far. I just don't see how the market will go up rapidly for another 5 years, and if it doesn't, that doesn't justify the current prices, but who knows...

YoungWeb 6y ago

Call option 101: A call option is basically a right (not an obligation) to buy a specific stock at a specific price (strike price) some time in the future. Loss is limited to the premium paid for option and gains are basically unlimited. If for instance I buy a 2-week NFLX Call option at a $2 premium with a strike price of $545, and in two weeks the price of NFLX is trading at $560 then I would exercise my option to buy 100 NFLX stock at $545 and could immediately sell it for a profit at the market price $560. A lot of times also, speculators never exercise the option and just close the position by making the opposite bet. (i.e. sell the call option to another investor/speculator rather than buy 100 stock at the strike price) Thoughts: I think this guy is making a fight against times as well as believing a fallacy that the stock-market 100% correlates with fundamental analysis of the underlying company. Yes P/E is high for many companies, and I have heard of a current "tech-bubble" but who knows. How much is "too much"? No one really does. Bet on the total markets long term and you'll probably be ok. Also buy BTC

trident1000 6y ago

Its also because the fed has flooded the market with cash and at the same time reduced bond yields to near 0%. There's nowhere for cash to go. And if you sit in cash it slowly becomes worthless over time.