GMO: When The Ducks Are Quacking Feed Them

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Stock issuance highest ever, as firms and Wall Street know when it’s time to sell to eager buyers.

Yes, we are witnessing new price records for the S&P 500, NASDAQ, and a host of other markets. That, in isolation, should not be worrisome. What should worry you, though, is that records are being set on the valuation front. By almost any measure – forward or backward-looking – we are staring at some of the most expensive valuations in history, especially in growth stocks. But we’ve talked about that inconvenient truth many times before. Here’s a new worry: Stock issuance in 2021 is also setting a new record, blowing away the last high set in the run-up to the Tech Bubble. This is a dubious item to celebrate if history is any guide.

Would You Have Found Berkshire Hathaway in 1975?

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Probably not, from the performance charts, writes Rekenthaler in this article from the archives.

My July 25, 2018, column suggested that time travelers purchase $1,000 worth of Berkshire Hathaway (BRK.A) stock in 1975. That position would be worth $7.5 million today. Which got me thinking: How did BRK’s equity appear at that time?

Warren Buffett gained control of BRK in May 1965. The chart below depicts the value of a $10,000 investment in BRK over the next five calendar years, from 1966 through 1970. For comparison’s sake, I included the S&P 500 and the price change of a barrel of crude oil. (The latter two investments are theoretical: There were no index funds, and oil barrels came with storage costs.) All figures are adjusted for inflation.

Josh Young: Delta variant and China’s economy are 'short-term concerns' for oil

 

Josh Young, CIO of Bison Interests, joins BNN Bloomberg for his outlook on the sell-off in oil. Young sees rising COVID-19 cases and weakness in the Chinese economy as "short-term concerns" and is buying more oil stocks on pullback from names like Baytex to SandRidge.

Old West Investment Management Q2 2021 Investor Letter

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Our firm recognized an extraordinary opportunity in the nuclear energy/ uranium mining industry several years ago. Old West partner and portfolio manager Brian Laks offers this update on our investments in this area:

It’s been two and a half years since we first wrote about uranium in our 2018 year-end letter. We launched our Opportunity Fund that year to focus on the idea as we saw industry fundamentals improving and felt that we were nearing a turn in the cycle. The timing turned out to be excellent as we were able to steadily raise and deploy capital building positions in a declining price environment as the stocks bottomed.

In April 2020 we wrote that we believed the inflection point had arrived. Since that time, our positions have multiplied in value and the patience of our investors has been greatly rewarded. In an interview we gave last quarter, we talked about the need to become more selective as general valuation levels improved. We think we are still in the early stages of a long overdue industry rebalancing, and we maintain core positions in what we believe are the best assets to capture improving economics in the industry. 

Sean Iddings: We All Need Some Perspective

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The bull market makes us all look like geniuses, but we’re not.

It’s time for a good dose of perspective and honesty.

Follow along…

In 2013, Brian Scalabrine, a recently retired 11-year NBA player, had enough.

Scalabrine was sick and tired of hearing average Joes say they could beat him one-on-one on the court. The armchair professionals insisted that Scalabrine, a 3 point per game player, a poor player by NBA standards, would be an easy challenge. 

Scalabrine wanted to shut them up. Scalabrine took on four of Boston’s best amateur ballers, dubbed it the “Scallenge” and recorded it for all to see. Some had Division - 1 college experience. All had supreme confidence they would win.

Here is how it went.

Smead Capital Management: Quail Pricing in Oil Assets

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On the insistence from a friend and a colleague, I watched the movie There Will Be Blood over the weekend. I’m a Daniel Day Lewis fan from his prior works like Gangs of New York, so was excited to watch this odd story. Lewis’s character Daniel Plainview is a silver speculator turned oilman who comes across an oil opportunity in Little Boston, CA. He takes his son (HW) to a property, owned by the Sunday family, that they are told contains oil. He tells the owner that they are going quail hunting, which wasn’t true. While hunting, HW stumbles upon an oil seepage confirming the oil is present on the land. They are both excited and the following scene ensues with his son:

HW (son): How much we gonna pay them?

Daniel (father): Who’s that?

HW (son): The Sunday Family

Daniel (father): We’re not going to give them oil prices. We’ll give them quail prices.

While we are not claiming to be getting our oil companies for birdfeed, it brings up the idea of distraction for the Sunday family in the movie and investors now. The Sundays had strangers show up looking to hunt quail, not knowing they were looking for oil. Outside of one family member believing there was a ruse, they were willing parties when the sale price was negotiated at what looked like low prices in the movie. These people had never seen oil drilled on their land, thus didn’t understand the opportunity that lied ahead.

The Folly of Ruling Out a Collapse

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A remarkable feature of extended bull markets is that investors come to believe – even in the face of extreme valuations – that the world has changed in ways that make steep market losses and extended periods of poor returns impossible. Among all the bubbles in history, including the 1929 bubble, the late-1960’s Go-Go bubble, the early 1970’s Nifty-Fifty mania, the late-1990’s tech bubble, and the 2007 mortgage bubble that preceded the global financial crisis, none has so thoroughly nurtured the illusion that extended losses are impossible than the bubble we find ourselves in today.

Benjamin Graham understood that even when extreme valuations are not immediately corrected by market losses in the shorter-run, they are typically followed by disappointing investment returns and very long, interesting trips to nowhere. The fact is that most of the fluctuation in 10-12 year S&P 500 returns is driven not by changes in fundamental growth, but by changes in valuation multiples. When valuations are depressed, investors not only purchase expected future cash flows at an attractive price; they also avail themselves of the potential for valuations to increase in the future. At extreme valuations, investors not only purchase expected future cash flows at an elevated price; they also expose themselves to the potential for valuations to retreat in the future.