Charlie Munger once said “it is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent”. There’s a lot of wisdom to be gained in that quote. Now getting things wrong can be a good teacher if you’re willing to learn from the experience. However they can also be very expensive. With respect to investing – our primary goal should be to eliminate (or meaningfully reduce) the possibility of making large costly mistakes. A large mistake can reduce our investable capital – impacting our returns for years to come. So how do we try to make fewer mistakes? There are two ways….
"Investing Lessons"
What Could Possibly Go Wrong?
It would not surprise me to see 2025 repeat the drawdowns we saw in 2022. And we could see 10-15% lower in the first half. For example, during Q4 2021 – I warned of excessive valuations (specifically in tech). That was timely. However, it’s different this time. 10-year yields are now above 4.70%. And should they continue their march towards 5.0% – valuations (and earnings) will be challenged. That said, Wall St. “experts” are assuming significant earnings growth for next year (evidenced by the average 6,600 2025 target at an expected 25x forward multiple). They’re adopting a “lottery ticket” mentality – where the majority of investors naively expect extraordinary returns with little regard for downside risks.
2025 – Finding Quality at Reasonable Prices
The S&P 500 recorded a 23.3% gain for 2024. For the first time since 1998 – posted two consecutive years of gains above 20%. Not bad right? Well if we extend our time horizon to include 2022 – the market’s CAGR is just 7.2% (below its long-term average of ~8.0% exc dividends) Mmm. Not as good. And over 5 years – the S&P 500 CAGR is is 12.7%; and over 10 years its 12.4%. It’s important we measure results over a period of at least 5 years (preferably 10). 2-3 years is a very short amount of time… where all kinds of distortions will happen. But over time – these distortions are always corrected. My point? Things always mean revert… and one should never ‘cherry pick’ dates to fit a narrative.
Inflation x Rates = Uncertainty
The stock market could not be more optimistic. And perhaps not since the dot.com bubble of 1999 – have investors been so sure of the future. Excited by a business friendly government coming to power; lower inflation; consumers continuing to spend – what’s not to like? I can think of one thing…. valuations. If buying stocks today – you’re paying through the nose. And for me – that increases your risk.
For a full list of posts from 2017…