Happy Holidays from The Ignorant Investor

A gorgeous evening settles over Victoria Harbour in Hong Kong. [Image ©bennymarty/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Best wishes to you and your family for a very merry Christmas and a prosperous New Year! Christmasing in Hong Kong has some advantages- the weather is delightfully warm compared to cold New England, and the city has hands down the best dim sum restaurants in the world. That's what we call a win-win scenario (much like the Netflix-Paramount struggle has been for the average Warner Bros shareholder?). Meanwhile, the market is ending yet a tumultuous - and winning year - with some strong catch-up trade outperformance. The Ignorant Investor expects there are more good things yet to come in quality names, and is on-balance optimistic for 2026. As they say, new year, new opportunities!

Welcome to 2025: The Topsy Turvy World of AI Exuberance, Tariffs, and Politics

AI Exuberance | Trade and Tariffs | The Fed | Consumer Resilience | The Evolving Media Landscape | Stories of Note

Investing requires an optimistic vision that sets aside partiality to assess what the probable future holds. For those who climbed the mountain of uncertainties during the tariff war to identify value among the wreckage, 2025 has been a very profitable year [Image ©kieferpix/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Just look at the S&P 500 above 6,700 and the Nasdaq above 23,000! And wait- the Russell 2000 is also at all-time highs as it nears the 2,500 mark. Very few analysts (none that The Ignorant Investor can recall) predicted this just six short months ago. Then there was talk about how a quick recovery was unlikely. But to be fair, it is hard to forecast events which depend primarily on powerful people’s decisions. Thankfully, following the fierce pullback in April and the following V-shaped recovery, we are now sitting at all-time highs for the US equity market.

2025 has proved uniquely challenging for investors. Unknowable implications from shifting US tariff policies, lingering uncertainties about inflation and the financial health of the US consumer, and the single constant of staggering amounts of money being thrown at anything AI-related creates a dizzying investment backdrop. And the questions really don’t end. Will the Supreme Court determine that the current tariff policy is legal? How will the Fed balance its responsibilities as job market challenges increase while inflation threats remain elevated? And aren’t stock market valuations very stretched even as outperformance remains concentrated in AI names? 

Step back for a minute. Look around at the real world around us. The Ignorant Investor can appreciate brilliant rays of sunshine through the windows, the sound of bustling city traffic, the firm texture of hardwood flooring beneath his feat, and the fresh scent of spaghetti and baked garlic bread filling the air. This world really is a beautiful place. And yes, the markets have been incredibly turbulent in recent months, yet Warren Buffet’s famous adage held true yet again: “Be fearful when others are greedy, and greedy when others are fearful”. But has the pendulum now begun to swing too far to the other side? Let’s briefly unpack the drivers affecting the current investment environment and before moving on to other topics.

AI Exuberance

Hundreds of billions of dollars in AI-related investment projects have been announced this year [Original image ©miss irine/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com].

There is a seemingly endless supply of investment dollars ready to flow into everything AI. An enthusiasm which extends from the lowly New York startup scene all the way up the food chain to Silicon Valley tech giants like Meta, where Zuckerberg recently mentioned he’d rather misspend a “couple of hundred billion dollars” to then get left behind in the AI race. There also is a seemingly endless line of traditional businesses that can be disrupted by AI- with some software companies (SaaS, specifically) taking a big hit in recent weeks as Open AI entered the fray with new tools that will directly compete with them.

But what has given The Ignorant Investor pause this last month has been, well, the interlocking nature of some of these eye-watering AI investments. For example, Nvidia acts as both chip supplier to and investor in both Open AI and CoreWeave. Meanwhile, Open AI is a customer of and investor in CoreWeave (original deal worth about $10B). And Nvidia is committed to progressively invest up to $100B in Open AI to help build out datacenters, while Oracle (which skyrocketed higher last month on massive future revenue projections) will buy chips from Nvidia and use them as it builds infrastructure for Open AI (deal worth about $40B). Here it must be said that Open AI’s new partnership with AMD alleviates some “circular” investment concerns. Still, at what point do these interlocking arrangements potentially lead to fiduciary issues or increased investment risk?

Meta cited a fear of missing out as a basis for at least some portion of its massive spending. Every week we hear of some new tens or hundreds of billions of dollars in AI-spending going to this or that company over the next decade. Valuations are sky-high, but many AI-related and AI-adjacent companies have not yet reached profitability (and may never reach profitability). Perhaps we are reaching a point where investor exuberance may be becoming, well, irrational? The Ignorant Investor is treading cautiously in this space, avoiding speculative names and sticking with companies that have real products and quality customers.

Trade And Tariff Policy Uncertainty

The integrated, global economic order has endured some challenging months [Image ©main_asn/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com].

The Ignorant Investor was surprised by the breadth of tariffs announced for “Liberation Day” in April. Yet, in the months since, we haven’t seen the doomsday scenario many economists anticipated. Inflation remains relatively benign, treasury income has boomed (thanks to tariffs), and the most recent flood of earnings data showed that even retail companies have been able to mitigate much of the damage. We appear to be in a goldilocks scenario where we see limited impact if trade disruptions stabilize soon. Thankfully, China and the US appear to be close to reaching a trade deal. Yet US sanctions on Russian trade partners (let’s highlight India for example), enforced through tariffs, appears to throw some unpredictability into the longevity of potential deals. And legal challenges to existing tariff policies will also soon be decided by the Supreme Court. Plenty of jargon and “what if” scenarios here, to be sure, but what is certain is that companies with strong balance sheets and businesses that aren’t largely dependent on overseas trade are better insulated against potential tariff surprises. 

The Fed: Inflation, and Politics

The Fed has cautiously approached the idea of lowering interest rates, with Powell announcing a quarter-point cut last month, with up to two more rate cuts later this year. The central bank made this move in the face of mixed economic data that shows weakening employment coupled with elevated inflation. And the elected government continues to publicly pressure the Fed to cut rates even further. 

Very dry stuff, to be sure, but let’s talk about that for a minute. The US legislature has a serious problem. The US government spends far more money than it makes from tax collections each year (ie spends money it doesn’t have). Both sides of Congress always kick that can down the road by passing laws that allow the government to borrow even more money. And this increasingly staggering pile of debt needs to be serviced (interest paid for) each year by the American public. The Fed can save the Federal government money by lowering interest rates. But the Fed’s mandate is to maximize employment while minimizing inflation. Lowering interest rates at the whim of the Federal government could blow up that mandate by eventually allowing inflation to run rampant. Turkey serves as a great cautionary tale about how a dependent central bank can lead to catastrophe. Investors are watching this situation closely.

US Consumer Resilience

US consumers have shown resilience against a backdrop of elevated inflation and a weakening job market (ADP data showed job losses for September- a suitable proxy reading while we wait on the official jobs report due to the government shutdown). Unfortunately, this resilience has been slightly weakening in 2025. Digging deeper, the average US consumer is currently experiencing one of two very different worlds. On one side, there is a group enjoying the convenience of DoorDashing meals, shopping extensively online, and traveling the world. These people are not necessarily affluent; they likely work in an industry that is booming and are getting an extra boost from their stock market (or crypto?) investments. On the other side, consumers are cautious of a weakening labor market and cutting back on expenses. They are eating out less, trading down to cheaper brands at the grocery store, and delaying costly home renovation projects. For now, the US consumer remains resilient, but some cracks are emerging below the surface as various industries experience structural change and others explosive growth. 

The Evolving Media Landscape

The way people consume media has changed. Now the media industry is also changing [Image ©Gorodenkoff/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com].

We know he certainly wants to make the first move, but will he do it this time? We’re not talking about a dating show, but rather David Ellison’s (*cough* Paramount’s) highly anticipated pursuit of and upcoming bid for Warner Brothers. Will Netflix join the fray? What will happen now with Comcast? After all, the way people consume media has changed, and the companies providing that media must adapt. The collapse of traditional cable networks and the reimagining of media companies have been a focus of The Ignorant Investor since perhaps late 2022 (always searching for diamonds in the rough!). 

There are huge opportunities here for those with the capital and vision to craft a media giant with an eye to the future. Recent trends show that younger demographics are growing increasingly dependent on online media (and on-demand media) as a normal part of daily life. The structural implications from this evolution affect everything from local news to sports, from television shows to storied movie studios. As far as news goes, nearly half of all under 34-year-olds say they never use cable TV news, while a similar percentage use social media as a credible news source.

Let's follow that rabbit trail for a minute (warning: only opinion, not fact, up ahead!). Traditional news was expected to provide viewers with a balanced, general awareness of the surrounding world. It helped enrich and challenge us as we formed our worldview, our opinions, and our perspectives. Traditionally, this was expected to be curated for accuracy with limited bias or personal agenda (granted, there has always been room for improvement in this area). The Ignorant Investor wonders whether, as news becomes more crowdsourced (from social media newsfeeds and podcasters) and on-demand, we all may begin to form echo-chambers of personal opinions that reflect our existing personal views. 

Stories of Note

The Hottest New Financial Advisor on the Street

No, that isn’t a pop-up ad, nor does it refer to Wall Street. In recent weeks, the story has been making the rounds that more people are now using Chat GPT to help them pick stocks and form investment strategies. The cost is basically free, and the chatbot can quickly pull up and present financial data in a way the average retail investor could only dream about even a few short years ago. Of course, the potential downsides are also significant, since the AI doesn’t understand a user’s personalized financial situation and sometimes generates inaccurate commentary. For now, The Ignorant Investor continues to strongly recommend consulting with a human financial advisor before crafting an investment strategy- but coming soon, an AI assistant or agent may be able to offer a credible low-cost alternative.

Read the real stories of some young people who are using Chat GPT to help with their investment decisions at Vice.

GLP-1s Curb the Munchies

People are starting to say no to alcohol, potato chips, and junk food [Image ©Pixel-Shot/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com].

Occasionally, something comes up out of the blue and changes everything. Think of a meteor showing up while some dinosaurs eat breakfast under a blue sky. Or the Berlin Wall suddenly coming down in the waning years of what we now call the Cold War. Change is inevitable, and people and businesses must constantly evolve in response or risk being left behind. The rise of GLP-1s has been a phenomenal blessing for overweight Americans- a pill that can reliably help people lose weight? Why not? But an even bigger impact may be healthier living as patients see fewer cravings for bags of unhealthy junk food. This is nothing less than a huge win for society writ large, but GLP-1s are now a staple conversation point in earnings calls, and companies are starting to respond with healthier-appearing packaging and sometimes new (marketed-as-healthier) products. In any case, The Ignorant Investor found this story interesting enough to follow from a distance.

Read more about the effect of GLP-1s on observed consumer behavior in the era of higher tariffs in this article published by Forbes.

All hail Nvidia – but what about diversification?

Let’s look under the hood. The investment mantra for years has been that diversification is good. It helps market participants partake in broad rallies while protecting them from the higher risk (and reward) that accompanies ownership of individual stocks. And how many investment managers have been able to beat the S&P 500’s outperformance in recent years? The answer is very few. Yet in the era of Nvidia and trillion-dollar-plus companies, the top eight S&P 500 companies are situated around technology and carry a combined market capitalization that makes up around 35% of the S&P 500 itself (personally checked as of September). This means the index is quite closely linked with technology’s performance, and specifically AI-related outcomes. Upside can be found if AI adoption proves to be as transformative as the Industrial Revolution. Downside could be seen, for example, if companies are building out AI infrastructure too heavily and end up exceeding demand (unlikely, but hey, let’s throw that grey swan in there!). As investors, it’s important to look at what we own, know why we own it, and stay in close consultation with our investment advisor!

The "Brainiac" Dilemma

AI chatbots are getting smart. The Ignorant Investor occasionally tests Chat GPT with advanced questions regarding the stock market, and recent responses have become impressively accurate. Other users continue to experiment with AI in tasks like professional and creative writing for their LinkedIn profile. Still others use it to bolster their online dating conversations (although this does feel a bit disingenuous). But what happens when this increasingly useful AI gets put to nefarious purposes? We’re not talking about a chatbot writing graduate thesis papers, or mass submissions – aided by AI – overwhelming academic publishing. We’re talking about the potential for industrial-level fraud facing financial institutions as AI learns to bypass security measures. Chatbot guardrails are being put in place but now may be a good time to create some deep fake safe words that you only share with your friends, family, and financial institutions.

Traditional scams are getting smarter too. Read about how easy it is for phishing scams to be created and weaponized using the help of ordinary AI chatbots in this study by Reuters.

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*The Ignorant Investor began a draft post in March, edited and expanded it in late April, and finally threw out the whole thing and began again earlier this month. The amount of action in 2025 has been incredible and taken a considerable amount of focus. Thankfully, things appear to be ending the year on a positive (if highly valued) note.

Happy Holidays from The Ignorant Investor

A beautiful winter sun rising over Boston on a frosty December morning. [Image ©Robert/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Best wishes to you and yours for a very Merry Christmas and a Happy New Year! And yippee ki-yay! Such an incredible year. Who could have guessed that what looked like slippery ice on the slopes of 2024 would turn out to be powder snow? Sure, valuations are a bit stretched and some areas of the market have definitely seen too much of a good thing, but let's save those thoughts for January. As this beautiful winter morning photograph indicates, The Ignorant Investor will be celebrating a traditional New England Christmas in Beantown this year.

Happy days are here again! The S&P 500 is at record highs- but best keep a wary eye on those grey swans.

The soft-landing thesis has gained traction among investors. Fittingly, this future is seen above through the crystal ball of an AI-generated image. The pitfall of AI image generation is for now always in the details- something is slightly off on close examination. [Image © Grayson/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

The year is 2024. After some initial weakness, stocks experienced an inflow of optimism and cash in just a few short weeks, with the “smart money” crowd moving some of their investments from one set of sectors into another during the month of January. The so-called Magnificent Seven – as a group – have performed just fine (and more than fine) despite some expectations that those companies would sell off as investors booked profits during that pivot. The major stock indexes now hover at or near historic, all-time highs. But we’re getting ahead of ourselves. Let’s take a brief moment to review the last year before we begin looking ahead!

The year is 2023. The month is January. Sky-high inflation and an aggressive Fed mean that recession is as unavoidable as a white dwarf star headed for a black hole in space. A few months later, the sky is falling. Between the broader market selling off and banks collapsing, AI-related companies seem to be the only bright spot for investors. Yet the stock market proves resilient, with a monster November and December rally finishing off a winning year. The Ignorant Investor is highlighting the shifting sentiment to emphasize the wisdom of Warren Buffet's words: “Be fearful when others are greedy and greedy when others are fearful”. From the end of 2022 to the end of 2023, the S&P 500 saw 24% gains; the Nasdaq composite rose an astounding 43%; and the broad-market Russell 2000 moved 15% higher. Those are some incredible numbers! Congratulations to all who stayed invested – and even more so to those who put fresh money to work – during 2023.

Now back to the present. Recession fears have mostly faded. Many market participants expect 2024 to be a decent year for stocks. True, we have a complicated presidential election coming up, but that’s hardly relevant (see below). After all, the economy has been humming along. Employment is strong. The consumer has proven resilient and current sentiment is optimistic. Inflation numbers appear to be moving downwards and the Fed is widely expected to begin lowering interest rates. To top it all off, domestic energy production is booming, meaning external geopolitics are not as impactful as several years ago. Some potential things to keep an eye on in 2024 are listed further on in this article, as well as some market-related stories. Of a plethora of interesting topics to discuss, The Ignorant Investor was forced to leave a dozen or so on the cutting-room floor. For now, real-life responsibilities must take precedence!

2024: Some Players, Themes, and Grey Swans

The Fed

The twelve members of the Federal Open Market Committee will be meeting as usual to discuss interest rates among other things, but analysts widely anticipate at least several rate cuts in 2024 as inflation numbers likely improve, employment runs a little less hot, and consumers begin to show some signs of financial strain (more on that below). Are they going to cut rates at the next meeting? Will they make three cuts this year? The Ignorant Investor doesn’t know and honestly doesn’t really care about these specifics. After all, they are smart people who continually state they will remain data dependent. With the worst of inflation likely in the rearview mirror, the Fed’s role in the stability and performance of financial markets should melt further from the spotlight as 2024 progresses. Better to focus attention on identifying well-run, quality companies that are expected to grow revenue and – more importantly – profit this year!

Inflation, credit headwinds, and the consumer

The US consumer has a myriad of varying intentions, motivations, and preferences [Image © Alexander Ozerov/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

The US consumer is an amalgamation of a varied group of hundreds of millions of people, each with their own preferences, motivations, and financial situations. In 2023, the consumer readily overcame obstacles that included incredibly high inflation and a continuing housing shortage to the surprise of many analysts. The most widely telegraphed recession in history disappeared with a whimper. Yet interest rates remain elevated even as credit card debt (and total household debt) has increased to historic levels. Shopping trends reflect that many consumers are reacting to the higher cost of, well, everything. Keep in mind that in the US, the consumer is basically the economy, and the economy is the consumer. And while inflation is expected to abate this year, what happens if it doesn’t fall as quickly as expected (say should geopolitics push energy prices higher again)? This simply points out that while the soft-landing thesis is now in vogue (and does look likely based on economic data), the average US consumer continues to face some daunting headwinds in 2024.

Game time! Political football is BACK!

Election year is back again! And this time, it’s another big one. Whenever politicians hit the campaign trail, some companies and entire industries get dragged through the mud and kicked back and forth as a political football between the donkeys and the elephants (ie Democrats and Republicans). This year may be especially contentious (for some outside the USA, entertaining?) since the two contenders from the last election appear likely to face off again in 2024. Of course, some small level of political instability may be a possible grey swan event given the candidates. And there is always the potential for the current tariff regimen to shift with a changing of the guard. The good news here is that the stock market historically does well in an election year. And take campaign promises with a pinch of salt- seldom do these “promises” make it to regulation or law once a candidate takes office.

Geopolitical Tensions

Geopolitical tensions continue to remain relevant to investors worldwide and the number of active conflicts continue to expand (remember Myanmar circa 2020? That sad situation is still happening). Below are several areas to keep an eye on in 2024:

The late-2023 flare up in the Middle East. Ostensibly tied to the Hamas-Israel conflict, tensions are high and this area currently has the most direct impact on the global economy. With the Houthi militants lobbing missiles at cargo ships in the Red Sea and Iranian proxies launching attacks against civilians and militaries stationed across the Middle East, the situation could destabilize quickly (remember Iran and Pakistan exchanging cross-border fire a few weeks ago?). For now, the most direct impact on US companies is through energy prices and shipping complications.

The ongoing Russia-Ukraine conflict. This is arguably the most dangerous to the global order since potential missteps by either side could quickly lead down the rabbit hole to catastrophe. Stretching into its second year, the two opposing sides haven’t gained or lost much ground in 2023 and appear no closer to a ceasefire, let alone a potential peace agreement. While this conflict feels distant to the USA, it does impact energy prices. And as far as potential contagion effects go- didn’t suspected Russian hackers likely plant a proof-of-concept digital bomb in the Nasdaq stock exchange back in 2010?

Who’s in charge? Corporate control and financial stakeholders

How well stakeholders cooperate often determines the success the company [Image ©alotofpeople/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Stakeholder is a great catchall word for everyone that shares a common interest in a business’s success. This could include customers, employees, suppliers, and investors, or branch out more broadly to local communities and beyond. Within a corporation that has good synergy, all stakeholders are working to achieve a similar goal. Disunity or simmering animosity between the owners, leaders, and/or rank-and-file employees is bad for business- and generally bad for all stakeholders too. 

Disputes between financial stakeholders can have disastrous effects on the business. Typically, the CEO is accountable to an independent board of directors, and the board of directors accountable to the owners (in publicly traded companies, these are the stockholders). In an ideal case, the members of the board should also have a vested financial interest in the business. But what if the CEO is also the chairman of the board? Or a founder with the CEO title also owns a significant portion of the company’s stock? Or one party or organization is a minority economic partner but holds a majority of voting shares (ie controls the business yet has a relatively small vested economic interest in said business)? It’s important for investors to keep an eye out for intracompany complications that could derail what would otherwise seem like a decent investment. Let’s take a brief look at some recent examples of tricky financial stakeholder situations:

2024 Tesla’s CEO pay package. It’s the talk of the town right now, but basically a Delaware court voided the CEO’s $55.8 billion stock option pay package (negotiated in 2018 *gasp*) earlier this week. The judge suggested that the board was likely dominated by Elon Musk (the CEO) and did not act in the interest of shareholders when negotiating the CEO’s compensation. In typical cases, a company benefits from a strong, independent board. However, in Tesla’s unique position, Elon Musk IS Tesla, and Tesla is Elon Musk. Against the backdrop of a struggling EV market, the board will likely best fulfill their fiduciary duty to shareholders by keeping him engaged with Tesla- and avoid distraction by his many other companies. 

2024 Tesla’s CEO voting control. In mid-January, Elon Musk (the CEO of Tesla) openly mused that he wants greater voting control over the company. Granted, the desire was within reason: 25% of voting control, instead of the 13% or so his current stock holdings warrant (for comparison, Meta’s Zuckerberg owns a similar percentage of stock in the company he founded but retains an eyebrow-raising 50% control). But who exactly is expected to simply hand their voting rights over to Mr. Musk? And what, shudder to think, is the worst-case scenario if they don’t acquiesce to this request?

2023 OpenAI board’s abrupt firing of CEO. Everyone reading this blog knows about this story, but it IS relevant to the section, so we’ll briefly review. In November 2023, chaos reigned when the Open AI board confounded the world and shocked stakeholders of all shapes and sizes when they unexpectedly – abruptly – announced that they would remove the CEO from his position. This move led to mutiny across the entirety of Open AI’s staff and open displeasure from their investing partners, led by the giant Microsoft. In the end, a rogue board was brought to heel less than five days later as the CEO was reinstated and leadership stability restored. A happy ending after all.

2019 CBS acquisition of Viacom. We’ll gloss over the extensive tabloid details for simplicity, but in the heady prepandemic days of the late 2010s, the controlling shareholder of Viacom and CBS wanted to merge the two entities. The CEO of CBS litigated extensively against this before resigning. The controlling shareholder decided the following year to have CBS acquire Viacom. Here is where the details become juicy. In a lawsuit that was settled by the company for $122.5M in 2023, former Viacom shareholders (including the powerful CalPERS pension fund) alleged that the Viacom board did not act in the economic interests of all shareholders, but instead functioned as proxies dominated by the controlling shareholder.

Stories of Note

What’s it worth? The stock market doesn’t always know.

The stock market sometimes has a valuation problem. What IS it worth?!? [Image © Philip Steury/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

The Wild, Wild West of the stock market is undoubtedly the biotechnology sector. Fortunes are made or lost on the unfair coinflip of experiments and scientific advancement (the odds for success is around 10% for a drug to move from development to FDA approval. The average cost for bringing a new drug through development to market is billions of dollars. Failure is the norm). Therefore, we frequently see the stock market struggle to assign an accurate value for such companies. When a small biotech is acquired, the acquisition price is often multiples – sometimes many multiples – of where there the stock trades. Throughout 2023, The Ignorant Investor has observed some decidedly strange behavior in other corners of the stock market. 

Let’s look at banks. Bank stocks blew up in March but were suddenly bid up by huge percentages in November and December (hey, look no further than PNC Financial Services let alone some of the “riskier” banks which we will not name here).  Was there any fundamental change in the banks in November and December? No. Only consensus opinion (and fund flows) changed. And then boring industrials. US Steel was valued by Nippon Steel Corporation at a price more than double the value the stock market had assigned to it, shocking analysts who had been widely pushing a different thesis. And retail. For months, storied Macy’s shares traded very low. Then in December, Arkhouse Management and Brigade Capital Management offered to acquire the company at a near-80% premium to where those shares had been trading (hey, the real estate alone is incredibly valuable). And there are other prominent examples, some which are in play even now.

Let’s wrap this up. The Ignorant Investor does agree with the thesis that the stock market will over time value a company near where it should be valued. If it’s valued too high, the price will go lower. Too low, the price will go higher (or the company will be outright acquired). Recent M&A action appears to indicate that select public companies may be worth quite a bit more than the stock market gives them credit for. 

A cautionary tale: know the rules and how the game is played

Always, always, always take the time and effort to understand WHAT you are investing your hard-earned money in! For the average investor this means looking over public companies with a financial advisor, creating a strategy and buy list with said financial advisor, and then joining the average Jills and Joes placing their money to work in the stock market. As Warren Buffet has said, “risk comes from not knowing what you are doing”. Even the most sophisticated investor must be extremely careful (and expect some slipups) when navigating dimly lit, unfamiliar investment territory- yet much like digging for gold, sometimes great reward hides in such areas. 

The Ignorant Investor has followed at a distance and with some modest interest Carl Icahn’s bet against American malls, which began in 2019. That bet has seen some big wins (pandemic shutdown, anyone?) and some eye-watering losses (the Phoenix-like-rising-from-the-ashes by the US consumer and return to malls in subsequent years). Apparently, the voices loudly proclaiming an imminent demise of the American mall were a bit premature. Now, this is where it gets interesting. Icahn’s bet against the malls was indirect, placed using credit-default swaps (CDS; yes, those same things you learned about in 2015’s The Big Short. No, Margot Robbie talked about subprime mortgages, not this). CDS are complicated instruments that in this case have their basis in bonds but are directly tied to this and depend on that (bond insurance, loans, properties, and more, oh my). Nevertheless, monsters that specialize in these obtuse things (huge, sophisticated players) may have gotten the better of Mr. Icahn by actively protecting their long positions at crucial junctures. Opponents choosing to lose small battles to win the war? Makes sense. And thus, this is a cautionary tale. The Wall Street Journal has a good article with some of the spicy details from an interview with Carl Icahn using this link.

Work life balance in an industry of hustle

When The Ignorant Investor first started working after grad school, compensation was good – very good, in fact – but the regular work week usually included a full day on Saturday. Then the boss would call and ask for part of a Sunday too. The tradeoff was that prices and costs for, well, anything, didn’t really matter. After a good many months of this, the question The Ignorant Investor started to ask himself was “Am I working to live, or living to work?” (I did end up leaving that position soon afterwards). Yet professional success in the vast, ever-evolving world of finance generally requires such 24-7 dedication. While technology helps enhance the capability and accuracy of analyses, it also exacerbates the constant pressure to make quality decisions near real-time, which frequently leads to burnout. The Ignorant Investor read with interest that Peter Brown, known for running the hugely successful Renaissance Technologies hedge fund, slept for thousands of nights in his office to achieve his “70% average return” over the past twenty years. Read about Peter Brown in this article at Fortune.

Coming soon to the USA: preventative full-body MRI scans

The Ignorant Investor has been aware of several health-conscious individuals who travel to Asia (India and Thailand, specifically) every four or five years for full-body MRI scans. This appeared to be overkill since they don’t have any serious condition and are near the peak of health for their respective age groups. Yet this approach may very well become the norm for proactively identifying health issues. The startup Prenuvo, backed by prominent names from the business world like Eric Schmidt and Daniel Ek, can do full-body MRI scans as a preventative measure in the USA for about $2,500. So far, results have some spectacular testimonials from individuals who have had pancreatic or other forms of difficult-to-identify-early cancers found by the company’s scans. Insurance companies are taking a closer look too since the relatively modest cost may offset expensive efforts to treat more advanced issues at later dates. Does the money really matter? The Ignorant Investor would say no. But a win-win scenario is always best for everyone and makes that question irrelevant. Read about newly available full body MRI scans at The New Yorker using this link.

Happy Holidays from The Ignorant Investor

Stunning view of Victoria Harbor and Hong Kong at night. Highly recommend a visit! [Image ©leeyiutung/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Best wishes to you and yours for a safe and happy holiday season! While 2023 has been yet another wild ride, the Christmas rally has certainly meteoric enough to bring good cheer to all investors. And what comes in 2024? Ever optimistic, The Ignorant Investor has been reviewing economic data and forecasts to see what may shift in the fundamental underpinnings of closely-watched companies. But for now, it's time to pause, spend time with family and friends, and reflect on another full year. So time to put up the "Gone fishing" sign, because The Ignorant Investor will be Christmasing in Hong Kong!

Investing: 2023 Edition. Something for the bulls, something for the bears, and the Fed continues along its merry way!

Investing in 2023 | The Fed and the Economy | State of the Consumer | Stories of Note

With world economies now fully reopened (*cough* China *cough*), businesses are adjusting their strategies to better accommodate a less uncertain future- and a widespread return to the office [Original image ©BluePlanetStudio/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Let’s wax philosophical for a minute. The stock market is a place where fortunes are made, and fortunes are lost; a place where the achievers are separated from the dreamers*; a place where our built-in belief systems are tested by fire as they collide with harsh, unforgiving realities. But this doesn’t have to be a scary place. A balanced approach to investing is a successful approach to investing, and diversification across – and some informed knowledge about – various types of assets is usually a big part of that success (the Stroh family certainly is a cautionary tale in that respect!). Now, onto the state of the market! 

But what a difference a few short months make! In the late days of 2022, the stock market continued to march lower and lower. Analysts began making bleak assessments on the future of even quality names with solid businesses. Energy seemed to be the only safe place to hide. Yet, a few short weeks later, the market exploded higher- led by speculative, frothy stuff, it’s true – as beaten-up growth saw strong buying interest. This followed a few headline inflation readings and some resilient jobs numbers which showed that inflation may be tempering and the US economy was on solid footing. While technical indicators pointed towards potential for a market breakout, the fundamentals appeared to hint at some potential undercurrents which could derail the rally. 

Fast forward to Friday’s close, the S&P 500 has given up most of its gains for the year, now settling up 0.6% YTD at 3,862. The tech-heavy Nasdaq continues to lead the major averages in 2023, up 6.4% YTD at 11,139. The Dow Jones Industrial Average has underperformed, down 3.7% at 31,910 points over the same period. Energy stocks, the safe space for 2022, have also moved markedly downward in recent days as oil and gas supplies remain ample for the near term and the Russian-Ukraine war remains a regional conflict. Meanwhile, the stock market remains surprisingly resilient in the face of continuous rate hikes and economic uncertainty. This comes as the Fed increases hawkishness to combat sticky inflation [more on this topic in the section below]. Despite these headwinds, The Ignorant Investor has seen quality growth names across his coverage rise 30%, 40%, and even 60% in the last several months while the broader market has floundered in range-bound trade. Some companies he follows even sit at all-time highs. 

And talking about changes in sentiment, look at Tesla! Since the doomsday predictions of some analysts a mere three months ago, the stock has rebounded nearly 60% from recent lows. Competition with traditional automakers entering the space, oversupply of the EV market, and doubts about Mr. Musk’s business acumen – especially from TV pundits and online critics – led to sharply negative consensus around the stock. Then, suddenly, the story evaporated as the market decided that the consensus was in the wrong. As always, while The Ignorant Investor does not bet on Elon Musk, neither does he bet against him. 

There are still plenty of places to put money to work these days. Treasury notes are quite appealing as virtually risk-free instruments generating near-4% yield (this was near-5% just a week ago). Investment advisors are also increasingly looking away from domestic uncertainty towards cheaper investment vehicles across Europe and further abroad. But The Ignorant Investor still considers a cautious approach to investment to be prudent (circling around to the philosophical start to this section): make sure that your financial advisor and you yourself know what you are investing in. And the US stock market remains a forward-looking thing after all- opportunities are still hidden in various corners of the equity market. As always, be sure to coordinate with your financial advisor and prepare a game plan to take advantage of potential market moves ahead!

Sailing Through Uncharted Waters

We’ve come a long way from that unfortunate point in time where the Fed stuck with its “inflation is transitory” thesis. Now, with inflation striving to embed itself in the US economy (energy prices no longer drive inflation), realistic discussions of a Fed willing to raise the Funds rate above 6% have become commonplace. Fortunately for the Fed and their limited toolset, employment remains quite robust (companies likely remain wary of the traumatic post-pandemic days when they couldn’t find workers) and the economy remains generally healthy- theoretically ideal conditions for the Fed to weed out inflation with minimal collateral damage. The dirty truth is that recession is still necessary, but perhaps it doesn’t need to be a particularly damaging recession, ceteris paribus. 

The US economy is a confusing puzzle in and of itself these days. Are we in recession? The answer is a strong yes for various arenas. Other sectors are experiencing strong – and in certain cases, historic – demand. Inflation is rampant in some places while disinflation is demonstrably present in others. The job market in general is quite strong, while those Big Tech companies have been laying off people by the tens of thousands (granted, these same Big Tech companies largely overhired in the past, a practice that was aggravated in the immediate aftermath of the pandemic; see some great graphics in this article on the hiring pandemic hiring spree at CNN). Technical assessments of the economy also remain convoluted: the Treasury yield inversion sits at multi-decade highs (typically considered a reliable recession indicator), yet corporate yields generally sit somewhat near Treasury yields (ie recession not yet broadly anticipated). Most importantly, consumer spending – the primary driver of the US economy – remains strong. Yet there is also plenty of evidence that consumers are also spending beyond their means [more details further below in this article] and some are even shifting towards recessionary spending behavior.

And it’s through this haze of uncertainty that the Fed steers the US economy. The Fed has done a great job with its strong response to rampant inflation, yet this is the same Fed that failed to perceive growing inflation as a problem for quite some time in 2021. Small tremors hit the financial world in the last several days as regulators moved rapidly to seize and shut down Silicon Valley Bank and Signature Bank; sensible moves to protect depositors and stem potential contagion to the wider financial system. Considering these recent events, perhaps the best course of action may be for the Fed to hold near current levels of tightness until the real effects on the economy – and inflation – can be better understood. However, an argument can also be made that these are isolated incidents which demonstrate that the Fed rate hikes are working. In the meantime, The Ignorant Investor recommends coordinating closely with your financial advisor and focusing on quality companies with real businesses and strong balance sheets- companies that can afford to wait out the current uncertainty.

The State of the US Consumer

Ever-increasing prices of necessities (remember eggs in January, anyone?) have forced the average family to closely watch their budget and adjust day-to-day spending. Yet rampant travel and vacation expenditures continue unabated. Who can read this riddle? [Original image ©NinaLawrenson/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Worrisome cracks have formed in the investment thesis that drove much of early 2023’s short-fueled rally. As the Fed continues raising the funds rate and inflation remains stubbornly embedded in portions of the economy, attention has shifted beyond this institution, headline inflation, and the labor market to assess the bedrock of the US economy: the US consumer.** For example, in January, continued strong consumer spending surpassed income growth - indicating that consumers were dipping into savings or other resources to fund their lifestyles (this is, for now, somewhat offset by elevated levels of savings). Some of that spending was also fueled by credit card use. Credit card balances for the fourth quarter of 2022 rose 15% year-on-year. This happened even as interest rates on these credit balances skyrocketed because of the Fed raising interest rates (30% annual fees can also be a thing these days- rates that near extortion if this were a bank offering a personal loan!), resulting in a double whammy for consumers carrying credit card balances. All these words simply mean that while headline January consumer spending was strong, it is also unsustainable and must, ceteris paribus, trend lower. 

The most recent wave of earnings reports also showed another interesting trend: consumers are changing spending habits for essential goods and other items used on a day-to-day basis by switching to lower cost alternatives or waiting longer to replenish supplies. This can be an early indicator of economic difficulty for the average person and family. Walmart cautioned investors in their February earnings call that despite solid results, they expected considerable pressure on the consumer this year. It’s worth noting that strong results for Walmart’s grocery business may have been partially attributable to shoppers who moved away from pricier supermarkets. Yet the average consumer isn’t necessarily frugal- spending continues at a record pace on leisure travel as evidenced by hotel, cruise, and airline reports (take your pick of earning reports ranging from Delta to Booking Holdings of Priceline fame). This may be a carryover of that “revenge travel” mindset of 2021 and 2022, or it may be a larger shift in mentality towards “experiences instead of stuff."*** In the meantime, many companies have been able to raise prices with little pushback from these same consumers (hey, Disney theme park prices were just hiked to all-time highs, but the parks remain overcrowded!). 

One possible driver behind a portion of changing spending habits may be post-pandemic lifestyle changes. Let’s theorize for a moment. Yes, life is settling into a new normal, but the way the labor force participates in the economy has changed. Most workers are fielding calls for a return to the office, but work-from-home (WFH) and work-from-anywhere (WFA) remains an option for many employees (firsthand observation here!). Spending looks radically different for The Ignorant Investor in a WFH scenario versus a day in the office, with transportation and expensive restaurant costs evaporating. And if WFA is an option, then of course I would take full advantage of that flexibility- working from a seaside room at the Hotel Punta Regina is always preferable to a drab Manhattan office, for example. But enough of the speculation! This theory merely illustrates that we are still observing potential structural changes in the labor market that may reflect some aspects of changing consumer spending. As companies continue to recall workers to office environments, or in some cases go the opposite route and offer more flexible work from anywhere policies, we can get a better feel on exactly how this shakes out.

Stories of Note

Now that The Ignorant Investor isn’t posting as often, there remains a significant amount of ground to cover here! Some of these topics could easily been six-page articles in and of themselves.

Ghosts of 2008: When banks fail

Reverberations were felt throughout the financial world after Silicon Valley Bank (SVB), the bank for startups and venture capitalists in both the US and abroad, was taken over by regulators on Friday. The Ignorant Investor was caught somewhat offsides and surprised at the amount of exposure some companies had to the bank (hey, Roku had almost $500M parked in cash accounts?!?). Keep in mind that Silicon Valley Bank had at least some $400 billion in client funds and loans before collapse, and a huge percentage of those deposits were uninsured. This bank’s failure is just sad and apparently a consequence of an entirely avoidable series of missteps on the part of the executive team, with problems starting around the time the Fed began hiking rates (the seeds for the collapse were arguably sown during the heady cash-rich days of pandemic stimulus funding; read a quick run through on the SVB board’s potential risk management missteps creatively pieced together from dry proxy statements at Forbes). Yes, regulators could have asked more questions of SVB over the last several years too, but the takeaway point here is that banks can and do fail. Thankfully, the US government stepped in and backstopped deposits over the weekend (and decided to take over high-risk Signature Bank, cutting the crypto industry off from mainstream financial markets in the process), ensuring payrolls will be met this week and minimizing contagion effects. Companies shouldn’t need this type of massive government intervention, however. Hopefully they learn from this experience and put some financial planning behind their decisions for managing their cash stockpiles. In the meantime, the US government is in the odd position of appearing to back the entire banking industry (“not a bailout” appears to be a repeated mantra emphasized on the talking points for officials). Stricter regulations and oversight (and less profitability) are on the horizon for mid-size banks.

An era of efficiency

Meta Platforms, more widely known for “Facebook” and “Instagram”, set the firestorm trend for Big Tech, small tech, “non-tech” earning calls alike when Zuckerberg was proverbially brought to heel and used the term “efficiency” more than 30x in his company’s earnings call. This follows a brazenly dismissive earnings call in November of 2022 that briefly sent Meta’s stock down to lows last seen in July of 2015 (high $80/share range). Gone was the extensive discussions on the “Metaverse”. Gone was the surprisingly cold indifference to investor concerns about business focus and runaway spending. A new Zuckerberg had arrived, announcing a dedication to the business “core” and a dedication to trimming the fat to make the company leaner and more efficient. True, speculative Metaverse spending remains rampant, but this new commitment to efficiency was enough to allay investor concerns (for now). Since that time, company after company has made similar pronouncements, also met with similar investor enthusiasm. And yes, The Ignorant Investor had taken positions in Meta across the selloff and was very encouraged by this new Zuckerberg- and the new tech sector in general. Tech, it seems, has finally gotten religion. Now let’s see how well they all can execute on this commitment to efficiency.

AI and Chat GPT – the next big thing?

Artificial intelligence is here to stay- just not in its present over-hyped form. [Original image ©pinkeyes/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Briefly continuing with Meta’s earnings call, while Zuckerberg did emphasize “efficiency” more than 30x, he also made use of another key word about 30x: artificial intelligence (also interchangeably referred to as “AI”). AI has been on the scene in various industries for many years. It’s also the catchall phrase that board members like to throw around when trying to apply the next big thing to their business, even if it doesn’t simplify things or help with the process (first and secondhand observation here!). However, a small startup took the world by storm in November of last year by releasing their now-ubiquitous conversational AI ChatGPT to the public. General interest online was immediate. And since late November, The Ignorant Investor and his tech-savvy friends have been experimenting with this AI. ChatGPT is amazing- able to create literary works****, summarize and make logical conclusions from information sets, and help write computer code – when correctly prompted – with a surprising degree of accuracy (it’s also relatively easy to intentionally trip up, but we prefer to focus on the positive side of things). In fact, it was impressive enough that The Ignorant Investor even used it as a party trick to embellish a portion of his annual Christmas letter sent to family, friends, and colleagues across the globe.

The release of Chat GPT sparked early tremors even in such lofty places as the Google – erm, excuse me, I mean Alphabet – board room (you know, that company where employees go to retire?) and more recently formed a cornerstone of the Nvidia investor presentation, since the AI world (as the next big thing) largely runs on Nvidia chips. While Microsoft (now a champion of Chat GPT after incorporating the AI in Bing search) and Alphabet face off in the search world (following a hasty announcement and release of Bard, Google’s own conversational AI), other companies across industries are also closely looking at how their own products could benefit from AI. Of course, as investors, the big question is whether this is a temporary craze or meaningful advancement? After all, we had the “pot” stocks of 2018 (and portions of 2019). The crypto craze of 2021. The meta-everything of 2022. And is this now the AI frenzy of 2023? 

Stock buybacks and the “economically illiterate”

In Buffett’s most recent letter to shareholders, he states that only “an economic illiterate or a silver-tongued demagogue” would say that all share repurchases are damaging to shareholders or solely beneficial to company executives. The Oracle of Omaha certainly came out swinging! And he’s very right- share buybacks avoid the double-taxation (yes, in the broken tax code of the United States of America, double taxation is very much a thing) of dividends while providing value to all shareholders, retail trader and executive alike (read an older article by Harvard Business Review outlining the case for stock buybacks here). It should be stated that the Ignorant Investor holds Warren Buffett in very high regard. I mean, what’s not to like about someone who remains so down to earth that they stay in the same home they purchased before they became successful? Someone whose personality and character remains relatively humble and unaffected by their success (especially this level of success, as the world typically measures success)? An executive that fulfills his fiduciary duty to stakeholders with as much passion and dedication as this man? But we digress. Even the critics of share buybacks likely realize their benign nature. The message against stock buybacks may well be the language of politics: the soundbites play to the itching ears of the populace while politicians cement their (projected) positions ahead of reelection campaigns. That’s how the game is played, and we should expect more of such rhetoric as elections approach. 

The Russia-Ukraine Conflict and Elevated Geopolitical Risk

As the Russia-Ukraine conflict moves beyond the twelve-month mark, investors must sadly resign themselves to an elevated geopolitical risk that has the potential to spread into broader Europe (let’s continue to hope and pray for peace in the region). As the US and NATO continue to pour weapon systems into Ukraine and China seriously considers helping Russia, there is always the potential for a misstep in an arena that has already rewritten segments of global supply chains (wheat, anyone?) to say nothing of rewriting the entire energy market regime. Winners and losers are found across the global economy, with some nations benefiting more than others, some industries benefiting more than others. This trend will likely continue as long as the status quo remains. For now, Russia, the US and NATO have been navigating a remarkable balancing act. However, any misstep from either side could result in an escalation of violence and end in global catastrophe. There is no real way to prepare for this type of black swan event, but we can expect things to get more difficult before they get better in that region!

The X-Files: 2023 Edition

In late January, the US shot down a Chinese high-altitude balloon that it claims was surveilling sensitive sites across the North American continent. Shortly afterwards, as the US turned its attention skywards, the air force shot down a number of floating and flying objects across North America. For a few days there, the government remained silent about what exactly it had shot down, driving conspiracy theories on UFOs and flying objects that felt like a throwback to the 1990’s hit show The X-files. Fun times. Nothing much from an investor focus here, but it does demonstrate how elevated geopolitical tensions have spread to other geographical arenas (something of a continuation of the last paragraph).

* The beauty of the stock market is that the achievers and the dreamers can both win big. Buying quality names and holding them over time has historically been a certain way to grow wealth. This rule does not hold true for those who try to trade the market, especially without frequent consultation with financial advisors and at least a considerable investment of time and study.

** As a recap, the US economy remains largely insulated from international events since it is self-driven, with about a high sixty-something percentage rate composed of US consumer spending. In contrast, a mere forty percent of the Chinese economy is driven by Chinese consumer spending (and this following sustained decades-long efforts to transform into a more developed economy).

*** There are never enough hours in a day for all the wonderous things to experience and learn about in this short life, and therefore The Ignorant Investor gladly identifies with this lifestyle- a novel experience is nearly always preferable to more stuff.

**** The Life of an Investor, a somewhat bleak poem written by ChatGPT in November 2022. The content seems quite fitting for the average investor that year! Prompt: Write a poem that rhymes about the perils of life as an investor, in short sentences

“Life as an investor, oh so fraught

With risks and perils, never a thought

Of steady returns, no easy feat

Always a gamble, always a cheat

The market can crash, stocks can fall

Leaving us broke, no money at all

But still we invest, with hope and faith

Praying for success, no time to waste

So we take the plunge, into the fray

Hoping to win, but knowing the pay

Could be high or low, depending on luck

But still we try, no time to duck [?]

For the thrill of the game, the rush of the trade

Is something we crave, never to fade

So we persevere, through thick and thin,

Hoping for riches, but never to win.”

- OpenAI ChatGPT

Happy Holidays from The Ignorant Investor

The celebrated Glacier Express traversing a stone arch bridge on a wintery morning [Image ©youpi4.fc/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Best wishes to you and your family for a very Merry Christmas and a Happy New Year! This year we feature the Glacier Express, a beautiful, bright-red train that leisurely traverses the snow-covered hills and valleys of Switzerland. This particular route, from St Moritz to Zermatt in the dead of winter, is spectacular and ranks near the top of The Ignorant Investor's all-time favorite family adventures. 2022 has been a tough year for investors, but regardless of what is happening in financial markets, Christmas and New Year are two holidays The Ignorant Investor always looks forward to. It's a time for family. For friends. A time to pause, kick back, and remember with gratitude the past year's events while planning and preparing for the coming year.

The Year of the Bear: A deep breath before the plunge?

Reviewing 2022 | Market expectations for 2023 | Stories of Note

Investors are weary of riding the bear market and continue to dream of a bull market somewhere in an uncertain future [Original image ©freshidea/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Can you think of any better representation for the stock market near the end of 2022 than the above image? That really is the wonderful thing about abstract art- the viewer can make observations which seem most fitting to their current, transitory worldview. Is the bear swimming in the waters of recession; the bull a distant dream for the investor, who, incidentally, is precariously perched atop the bear for the ride? Is the bear running out of energy and sinking while wishful investors watch the bull rise in the distance? The near-uniform consensus expectation among experts for 2023 is recession. However, before we look ahead, let’s take a few minutes to appreciate what lies behind*. 2022 has upended the growth stories of the last several years, with the declines of post-pandemic kingpins (remember FANG? Facebook’s stock briefly pulled back to 2016 levels just last month, ouch!), paving the way for a rise in value and – dare I say it? – a return to fundamentals. Profitable companies with solid businesses are once again good companies in the eyes of investors! 

Inflation reaching levels last experienced in the 1980s (the Volcker years; surely a spectre that haunts the dreams of the current Fed). An S&P 500 that suffered its worst first-half performance since the 1970s. Recession indicators flashing red across the board. Total unemployment readings at lows last seen in 2000? What a topsy turvy roller coaster of emotions this last year has been! Initially eager to discuss steep market losses at the gym and on the golf course, businesspeople slowly started avoiding the conversations altogether as weeks of downturns turned into months (“Don’t talk to them, they’re stock people- you saw what the market did this week!”). Another major surprise was how the Fed – a dry (if vital!) cog in the machination of the financial markets – became a well-recognized institution among the general population. When a family member (in this case an artist, no less) in casual conversation randomly comments on potential Fed action at the next FOMC meeting, we know something strange is happening in the world.

The stock market’s struggles in 2022 revolve around the wrestling match between two gigantic opponents: collective price increases (inflation) on the one side, and the Federal Reserve on the other. Early in the year, the Fed realized too late that inflation was rapidly rising. And of course, inflation is an amorphous, obtuse thing: covering price increases in everything from rent to gas usage, basic grocery shopping to visiting the barbershop. The market has been largely in a wait-and-see pattern for many months: the Fed hikes rates, then all market participants examine various flavors of inflation reports to try to divine what happens next. The Ignorant Investor’s last post, which can be viewed using this link, effectively summarizes what has been happening over the past year.

The Crystal Ball: Managing 2023 Expectations

2023 fast approaches! [Image © Urupong/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

And what are the expectations for 2023? Inflation is likely to remain obstinate and drive market action, at least during the early months of the year. Global growth will slow, exacerbated by hawkish central bank policies and continued supply chain transformations. Valuation concerns will continue to loom as earnings appear set to deteriorate. Then of course, geopolitical concerns can always flair up. 

Let’s not sugarcoat it: the economic outlook for 2023 isn’t great. In the USA, you have a Fed doing all it can to alter consumer spending habits and reduce employment (i.e. the FOMC hiking Federal funds rate while anxiously perusing inflation readings). And the stock market has already stumbled, with many pandemic darlings down 90%, and in some cases even more, from their all-time highs. 

Banks and big money managers have invariably been pointing to recession next year and predicting downwards and upwards action in the stock market (in that order). These doom and gloom expectations make sense to The Ignorant Investor since the stock market – as a forward-looking instrument – usually bottoms out during a recession as opposed to before. This would indicate that if a recession is indeed imminent, some more pain may be necessary before the next bull market has a chance to begin. 

But hey- who accurately predicted what 2022 was going to be like a year ago (okay, yes, Mr. Burry of subprime mortgage fame made some prescient remarks in November 2021- but besides him)? Stocks have by now sold off severely, and we are seeing considerable areas of frothy speculation implode (a la cryptocurrency space; as Warren Buffet famously observed, “You only find out who has been swimming naked once the tide goes out!”). The strong labor market may also soften the landing for the upcoming economic slowdown inside the United States. 

This very low bar set for stocks in 2023 – in terms of pessimistic economic expectations, consensus negative stock market forecasts, and low stock market participation among money managers – may leave room for some pleasant, positive surprises. If the consensus always seems too far on one side of the boat, the contrarian in The Ignorant Investor is screaming to have some positions which benefit from an opposing occurrence (softer landing vs hard landing, to be clear). 

All these dry details boil down to the same mantra The Ignorant Investor has been repeating throughout 2022: In the face of rampant uncertainty, companies with strong fundamentals and businesses that are relatively impervious to economic uncertainty will remain the gold standard for investment. Profitable corporations with solid balance sheets and compelling stories are, well, compelling! Are you looking for places to put your money to reap gains in 2023, 2024, and beyond? Then you are an investor, and for investors, opportunities abound. Your financial advisor will be able to work with you to compile a quality buy list with desirable entry prices!

Stories of Note

Republicans gain control of the House in Midterm elections

Voters came out in strength on November 8th with several major issues on their minds (from polls, this appeared to largely boil down to high inflation and the recent overturning of Roe v. Wade). Surprisingly to some observers, there was no Republican “Red Wave”, although they did gain control of the House. Political gridlock in Washington is nothing new and is historically beneficial to the stock market. Besides this, the weary expectation that Congress won’t get much done anyway certainly won’t change with this result. USA Today has a summary of how a split Congress tends to affect the stock market in this article here.

Strong legislative support for renewable energy through the August passage of the Inflation Reduction Act

The dramatic reversal by Senator Manchin to suddenly bring life to the bill in late July – after persistently dismissing it over previous months – came as a surprise to observers. Many clean energy companies have seen their shares rise considerably since the bill’s passage, with one big solar beneficiary more than doubling since the bill’s revival. While some particulars concern Europe on a competitive advantage basis, the end result will be more dollars towards the renewable energy industry and (hopefully) their corresponding R&D departments. Reuters has a solid article outlining exactly what is in this bill and how it will benefit renewable energy development; you can read the article using this link.

California regulators seeks to curb compensation for solar power users

Solar power use in California is largely concentrated among the affluent, while disadvantaged families often have no choice but to rely on the regular electrical grid. Under the current system – which has largely driven solar panel growth in the state over the last several decades – solar customers have the option to send excess power to the electrical grid in exchange for compensation. California regulators seek to reduce this compensation (with their most recent November 2022 proposal an improvement on an earlier December 2021 draft, which had experienced massive political pushback). It will be interesting to see how this unfolds in the face of numerous State-backed climate initiatives to reduce carbon emissions (especially since the regulator missed their self-imposed deadline to announce their newest draft proposal; I mean, it’s not like they would purposely wait until after elections to make this change and thus sidestep voters, right?). The New York Times has an excellent summary article about the facts (and without the above speculation) which can be read using this link.

*Yes, the year is not yet finished, but this will likely be The Ignorant Investor’s last post of substance for the year!

Note that our updates have been less frequent this year as volatility has increased. It’s not that things aren’t happening- it’s that the actual commentary about what to do remains relatively consistent: look to quality names in specific business arenas to weather the downturn! 

A Midyear Crisis: The Harrowing Tale of Investors and Investments in the Year 2022

State of the Market | Take Refuge in Fundamentals | Stories of Note

Riding the roller coaster of the stock market in 2022 hasn’t been this much “fun” in fifty years (statistically-speaking, of course!)! Thrilling, scary, and gut-wrenching are good descriptors for this ride. [Image ©artisticco/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

The investment emotions of the last six months have certainly reflected the best and scariest roller coaster rides The Ignorant Investor has ever experienced! And did anyone truly expect that anything could rival the dark months of 2020 (from an investment perspective, that is)? Deep, terrifying selloffs that never seem to end. Breathtaking rallies (a la energy and certain “quality” growth names). Boring yet profitable range-bound trading. And yet more uncertainty ahead.  Or is there? The stock market is usually a forward-looking thing, after all, and while no person alive – whether investor, analyst, or economist –may be able to accurately predict what will happen by next week, let alone next month, the next year is slowly becoming clearer. But before we look ahead, let’s quickly summarize what is behind us.

The damage to the stock market - stemming from a plethora of concerns - has been quite substantial over the last six months. From the beginning of the year to the end of June, the S&P 500 fell almost 21%. The Russell 2000 fell nearly 24%. And the perennial outperformer, that champion of growth, the Nasdaq fell 30%. Peruse the stock market wreckage more closely, and we can find numerous lockdown darlings have been recently trading at 70%, 80%, and even 90% below their 52-week highs. This isn’t to say that other risk assets performed any better- after all, bitcoin is down about 55% over the same period.

Many of The Ignorant Investor’s stalwart indicators flashed buy signals for many months even as the market this time around ignored them and turned every lower. While not something we typically favor, stop-loss orders can be quite helpful in select situations! We now find ourselves in an unfamiliar environment for a large percentage of analysts and investors. After all, inflationary pressures have been almost nonexistent since the so-called dot-com selloff at the turn of the millennium. Anyone under the age of fifty will have limited experience of market volatility and tendencies in a rising interest rate environment like the one we are facing today. Still, as this last week’s market activity has shown, stocks are cheaper than they have been in years and great “diamonds in the rough” opportunities – perhaps even generational opportunities – abound. This doesn’t mean that this whole beaten-down market is a buy; merely that select companies in select industries look quite appealing to The Ignorant Investor. 

Per the usual, some (many?) analysts have been lagging the market quite broadly this year with their company assessments, downward-revising price targets following stock price declines as they adjust their core investment theses [“Oh, hey guys, you know that company that just sold off sixty percent from the level where we issued our buy recommendation? Yeah, we think you should sell that.”]. Perhaps some of those “sell” calls on quality companies may actually be a contrarian buy? Good investment advisors will be able to help identify some of these opportunities.

Inflation is Driving Fed Action: Take Refuge in Fundamentals

Fundamentals are key when uncertainty abounds! [Image ©Funtap/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Remember in the 2020 and 2021 boom times, The Ignorant Investor continually lauded the wartime level of Fed support as being a big driver of the stock market action? Well in 2022, we are seeing the results of the Fed unwind that same action- steadily hiking interest rates and reducing the balance sheet as it strives to shrink the money supply and slow economic activity. Thankfully, the USA has benefited from an extremely tight labor market – with some estimating that nearly two jobs exist for every unemployed American – which has allowed the Fed to directly tackle rampant inflation through interest rate hikes.

Inflation, then, is the driver of Fed action and the primary culprit behind US market declines. Inflation is a thief that benefits no one. High inflation pressures both consumers and companies: consumers by reducing their spending power and eating away at their savings; companies by forcing prices higher while pressuring margins and hence moving profitability lower. But the driver of inflation here is a combination of changing consumer spending behavior, supply chain pressures as well as high energy/food prices. Supply chains are very slowly sorting themselves out (remember the former chip shortages, anyone?) and high energy prices will eventually move lower should peace return to Europe or production increase meaningfully; these drivers of inflation are indeed transitory. This means that the dirty secret here is that the Fed is in the unhappy position of forcing changes to consumer demand by basically destroying excess consumer demand to better match current beleaguered supply. The Fed’s tightening policy is currently driving investors back down the risk curve (see the recent crypto market collapse, for example), but ultimately, this painful process will at least achieve in the desired effect of taming inflation.

For now, the Fed remains “behind the curve” and some market participants expect the Fed to overcorrect (raise interest rates too fast and too far) in its efforts to dampen inflationary pressures, which could result in recession. This raises questions. Are we in a recession since economic activity, as measured by GDP estimates, may well have fallen for the past two quarters? Is recession coming now that Treasury yields have once again inverted, with the 2-year hovering above the 10-year? How can we possibly be at the cusp of a “real” recession when the employment market remains incredibly tight and neither consumers nor businesses appear to be struggling to meet financial obligations? This is why authors of financial articles are divided: some arguing we are in a recession; some say a recession will come later this year; or others that a recession will arrive in 2023. And what if Putin were to shut off gas supplies to Europe as a byproduct of the Ukraine-Russia conflict? US markets surely would not be immune to contagion effects.

Uncertainty is outside of our control. But as investors in a forward-looking market (ie the stock market), we need to look beyond the uncertainty and try to identify companies that will be more valuable a year from now than they are today. And if our thesis is correct, then the company’s corresponding stock price should also increase in value as the next year approaches. Yes, earnings estimates may be close to peaking, but sectors of the market still appear to hide value relative to historic valuations by various mainstream metrics. Yes, a recession may indeed come. But the entire stock market has sold off, and there surely is value among the rubble. A year from now, when inflation is falling and the Fed is less hawkish, then The Ignorant Investor is willing to posit there may well be strong performance from these beaten-down names.

All this can be summarized by saying that life goes on, and companies with strong balance sheets, solid income, and a compelling story will likely still be around next year and the year after that. Finding quality names that will withstand potential downturns, while perhaps speculating on some of the quality “story” names with slightly shakier fundamentals, will likely pay off quite handsomely, if not in 2022, then in 2023 or 2024. We are investors after all, not traders! 

And again, as always, if you are interested in unlocking this value, be sure to coordinate closely with your financial advisor to come up with a buy list of quality companies that may be on sale today!

Stories of Note

More Acquisitions Ahead

Not so much a story as a potential theme. Elon Musk makes a tentative offer of $44 billion for Twitter before expressing a strong desire to renege on said deal (a messy lawsuit and court ruling will determine what happens next). Merck nears a purported $40 billion agreement to acquire Seattle Genetics- erm, excuse me, I mean Seagen. From way back in January, Microsoft bought up Activision Blizzard for nearly $70 billion. Each of these companies (and in the cases above, one person) are making these acquisitions for a variety of reasons, but at the core, the acquirer sees more value in the company than the stock market does- which is why they pay a premium to own said companies. These disconnects are more common than you might guess, but an acquirer is necessary for an acquisition to take place- cash rich companies are likely on the hunt in the rubble of the current stock market and will likely move quickly once uncertainty around inflation and the economy starts to clear up.

The Buffett Effect

Several years ago, The Ignorant Investor took note (in a previous article on this blog), of the highly favorable terms Warren Buffett received from Occidental Petroleum in return for staving off hostile bidders and shoring up the company’s financial position during crisis. There is no doubt that Berkshire profited handsomely from the deal. Now, since the beginning of 2022 (and even more so since energy pulled back from recent highs), Berkshire has again revisited the energy company. Berkshire this time is operating on the public equity side of things by buying up nearly 20% of the company through the first week of July. Speculation has been growing that as oil and gas producers spew out huge amounts cash – with a potential runway of many months to come – and continue to trade at relatively cheap (ie low) multiples, buyouts may be coming. And perhaps Warren Buffett through Berkshire Hathaway has his eye on Occidental Petroleum.