Equities

I cannot make sense of this right now. The fundamentals are SERIOUSLY BAD. Let’s put aside geo-political turmoil and the horrendous state of the global economy and have a closer look at what is going on in global equities.

Take NVIDIA for instance, the darling of the recent tech rally and one of the very few companies that is keeping the wider stock market afloat (for now). Sure, NVIDIA earnings have skyrocketed, but it’s PE RATIO has also blown out to 120.6x (as at 20 Nov 2023).

You cannot underestimate the significance of a three-figure PE RATIO!

If you want to sound really smart at parties, talk about PE RATIOs. Not only are they incredibly easy to understand but they will make you look like a stock market whizz.

PE RATIO is Price to Earnings Ratio. It is the company’s value as a multiple of it’s annual profit.

If a company has an annual profit of $100,000, and it has a PE RATIO of 100, that means its value is $10,000,000.

Now I ask you the following question: Would you pay TEN MILLION DOLLARS for a company that returns $100k per year?

Or, another way to put it: Would you buy a company that would take ONE HUNDRED YEARS to get your capital back?

The obvious answer is the smart one: ABSOLUTELY FREAKING NOT!

And neither does the market over the long term.

Since 1971 the average PE RATIO for S&P500 is 19.4x

Every single time, bar none, that PE RATIOs blow out, they come crashing back down in spectacular fashion.

Right now, the S&P500 PE RATIO is 25.07x. At a glance, this doesn’t sound so bad, but to me, this represents an overvaluation of at least 30%. But that’s not all, when corrections happen, they don’t just correct down to the average, they correct to far below the average as institutional traders all over the world dump stock hoping for a lower point to re-enter.

My case for equities right now is to stay defensive, and avoid temptation.

Australian Real Estate

I summed this up pretty comprehensively in my recent blog https://thevirtuouscollective.com/uncategorized/the-inescapable-reason-why-shares-outperform-property/

My case for property right now is to hold steady.

Crypto

‘Investing’ in cryptos, NFTs and derivatives thereof is like gambling, except less fun and with worse odds than roulette.

If you are heading to the crypto casino, have fun, but don’t bet more than you can afford to lose. Assume the money is gone the moment you ‘invest’.

Bonds

As I enter my 16th year in financial planning, I never would have imagined saying that bonds should be the backbone of your portfolio. With interest rates at a high point, the yields alone are spectacular, but the real return on long duration bonds is yet to be seen.

Unlike PE RATIOs, this next bit might be a bit harder to understand: When interest rates FALL, bond values RISE. Even though your coupon payments will fall, the underlying value of your bond will rise, often by much more than the loss of yield. This article explains it much better than I can: https://www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/

Furthermore, when stock prices FALL (which I think they will), bond values RISE as the investors de-risk their portfolios.

The potential for stock market correction combined with the likely peaking of interest rates means that boring old bonds are likely to achieve extraordinary performance in the short-term.

Debt Reduction

Great strategy but on one condition: Keep the money liquid i.e. in offset or redraw and be ready to pounce on opportunities in the next 3-18 months. With interest rates being as high as they are you might just find that your mortgage is a one-way street, and if you can’t get the money back out immediately, you might miss out on investment opportunities if the market does correct. Furthermore, with the likelihood of interest rates coming back down in the not too distant future, the medium to long-term outlook on debt reduction is not as attractive as the medium to long-term outlook on most investment markets.

Don’t be fooled into the permanence mindset.

In summary:

Equities = BE VERY CONCERNED

Aussie Property = HOLD STEADY

Crypto = NO COMMENT

Bonds = YES, but make sure you get the right advice. Not all bonds are created equal!

Debt Reduction = YES, but keep the money liquid

I maintain that the The VCo Tuna Salad Wrap ticks all the right boxes right now.