How much should macroeconomic data matter to investors? Do the prices of McDonald’s hamburgers tell us something about the state of the economy?
Badger badgers his friend with a 50% portfolio allocation to $NVDA pre-earnings — was he right to do so? Mentioned: risk management, resulting, Monkey’s own violations of risk principles and their consequences, the law of investing gravity.
What is passive investing? What are ETFs? How are they contributing to a potential massive investing bubble bursting? Mentioned: Andrew Lipstein’s essay in Harper’s Magazine — 401(k) Doomsday
https://harpers.org/archive/2024/06/
Chapters:
00:00:00 Intro
00:04:45 Nvidia Earnings
00:17:12 Does Macro Matter?
WSW 29
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Woo, woo, woo, woo.
Intro
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[00:00:02] luke_2_05-27-2024_151222: Hey, and welcome to Wall Street Wildlife. Today, we’re going to answer the question. Does macro matter?
[00:00:08] k_5_05-27-2024_091222: Does macro matter, Badger?
[00:00:09] luke_2_05-27-2024_151222: I don’t know. You’ve got some data points. Let’s, uh, we’ll dig into it in our discussion, but before we get there, I’m just back from my yoga retreat.
[00:00:18] k_5_05-27-2024_091222: Yes. I saw some, what is it? Instagram photos of you, uh, in your, wear all slicked and lubed up, lubed up
doing.
[00:00:30] luke_2_05-27-2024_151222: definitely, that’s definitely not on Instagram. It’s not
[00:00:33] k_5_05-27-2024_091222: Oh, no. Is that a different channel?
[00:00:37] luke_2_05-27-2024_151222: Yeah.
[00:00:43] k_5_05-27-2024_091222: recall from a couple weeks ago, I just recently came back from a Zen retreat in Hawaii, and I felt Refreshed and scrubbed in a nice spiritual way, but importantly for my investing career, I had the deep down intuition that I am over checking, borderline addicted to the number of times that I’m looking at charts and prices and all kinds of investing stuff and that I would be better off. really setting hard limits, much less frequent checking than I was doing before the retreat. And so, uh, in the kind of synchro synchronous In a kind of synchronicity. In a kind of synchronicity. Geez. Leave that in. Let our listeners know that I can’t speak English. You also signed up for a yoga retreat for a week and I dared you.
I challenged you. I said, Badger, you’re always signing up You know, doing the thing and you’re always replying very quickly to messages because you’re a professional in that way and you’ve, you’re organized and you are, uh, you just get things done. But is there a way in which you too, uh, could use a little, uh, technological scrubbing and so off you went.
[00:02:13] luke_2_05-27-2024_151222: Now, I’m going to, I’m going to say I did very badly, that tech detox, as you probably guessed. I did have a go. Uh, it was hampered by the fact that, so I probably billed this as a yoga retreat. Uh, it was sort of nothing of the sort really. I rented a, uh, beautiful beach house on an island and I took a buddy away and we both just thought we’d, uh, go hang, reconnect, and then just, you know, spend some time doing yoga.
And in the end, we bumped into one of his friends, uh, who was a singer on the island and, um, quite connected with, uh, the bars and the nightlife. So it turned into, uh, just, uh, fun. I’ll say, I’ll bridge it by saying on three of the seven nights I woke up, like the following morning, fully dressed with my contact lenses in like just barely half on the bed.
so the downward dog was basically me, like prostrate in the bedroom with a massive hangover as opposed to doing actual yoga. We did some yoga, but definitely not enough.
[00:03:10] k_5_05-27-2024_091222: about we put yoga, yoga in quotes,
[00:03:14] luke_2_05-27-2024_151222: Yoga, yoga. Yeah, exactly. We did some, we did meditate around some finance topics though, but, uh, but to, because you challenged me. So I did look at my screen time stats. I took a book, so actually I, I’m going to exclude my book reader app because I just do find it more. Convenient to read books on the phone.
So if I, if I back out the time spent looking at Google play books, actually, I probably cut my screen time in half, um, but that’s still from a very big number. So probably my half is still probably more than your, uh, regular day.
[00:03:50] k_5_05-27-2024_091222: So the takeaway is you’re an addict,
[00:03:53] luke_2_05-27-2024_151222: Yes.
[00:03:53] k_5_05-27-2024_091222: but you seem, you seem remarkably, remarkably at peace with this, which I mean,
[00:04:01] luke_2_05-27-2024_151222: it’s a core part of me. I try giving something up if I abandoned technology entirely.
[00:04:06] k_5_05-27-2024_091222: right, right. Okay, I’m sure there, you know, the, uh, the truth lies somewhere in between. That’s well, I mean, let me take that back. I’m not sure that’s the case. because between the extremes of, you know, always checking technology and not checking it at all. Right. That’s kind of where I was going with the truth, but somehow I’m, I’m at this moment, not convinced, but like, I have a strong, uh, suspicion. That my investing results will, in fact, get better when I stick to reducing, yeah, reducing my, uh, intake.
[00:04:45] luke_2_05-27-2024_151222: Yeah. Yeah. I guess you’ll be more focused with the time you spend looking at that sort of stuff. Yeah, that makes sense.
Nvidia Earnings
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[00:04:51] luke_2_05-27-2024_151222: Um, let’s talk about investing results though. And I did want to chat about, um, something I did actually put on Instagram, which wasn’t me. In like tidy whities covered in oil. It was, uh, myself and my buddy in one of the few yoga classes we did.
And, um, and he was, you know, sat in a, uh, sort of yoga position on the beach and I posted to say, uh, we are meditating and preparing ourselves for Nvidia earnings because, uh, Nvidia’s Q1 earnings was last Wednesday, I think. And, uh, that was, uh, The penultimate day of our vacation. And I hadn’t realized I knew my buddy had had an Nvidia position for quite a long time.
I hadn’t realized quite how exposed he was. Um, I’m not going to share any real dollar numbers. Uh, it’s a very significant dollar number, but essentially his Nvidia position had grown to 50 percent of his portfolio before earnings. And that’s a, that’s a material part of his net worth. Take my word for it.
I got told off by him because every morning I would remind him In video earnings coming up, it’s going to be a volatile day. I was trying to persuade him to, um, take some money off the table. Essentially. He’s got more than a hundred times return on his investment. and I felt the prudent thing to do knowing his wider life circumstances would be to de risk a little.
and, uh, you know, we had conversations along the lines of. How would you feel if the stock went down by half following earnings on Wednesday night? and we’ve had an interesting debate since. So the stock is the, so the company put out blowout earnings yet again. Uh, the stock is up. I think ballpark.
Maybe 10 percent since earnings, maybe at the time of recording that ballpark. and so my buddy has made a significant amount of money. So he’s telling me just, just now, in fact, on WhatsApp. Oh, I was wrong to tell him to divest because it went up.
And I don’t think I was, right? You’re shaking your head. Yeah. Good. I think you agree. Um, that is resulting. if I say to you, Oh, you know, Christophe, I’m going to flip a coin for You know, this bag of gold and I’m, if it comes in heads, like, great. I’ve like doubled my bag of gold. And if it comes in, tell her lost.
Well, like if it comes in heads, I was still wrong to make that bet. If it was going to significantly impact my life, even though I won the bet. And. I think you can take the line of, Oh, I will gamble on the bag of gold. If it’s not significant money that could literally change the trajectory of your life.
but when it’s serious though, and it really makes a difference to maybe the next few years and maybe, you know, brings, brings retirement forward or pushes it back out by, you know, years, then surely that’s taking too much risk to take those kinds of decisions. What do you think?
[00:07:29] k_5_05-27-2024_091222: I think you are exactly right in all kinds of ways. Listeners to our show, I guess, by now are sick and tired of me bellyaching about the biggest mistaken blunder I’ve made in, uh, in, in my career. well, there were many, many mistakes kind of compounded in, but, but the big picture is risk management essentially. And one of the fundamental principles that I followed for the majority of my career, as you do meticulously, is allocation, right? That you allocate or you diversify and you don’t exceed certain percentages because you never, never, ever know fully what’s happened, what’s going to happen. And if you oversize in any one position, It could be devastating.
So that, that was my story. So when I listened to somebody, there are two, there are a couple of mistakes here I’m hearing. One is the resulting that you already mentioned. Two is some version of the survivorship bias, right? That it’s only the people that. win through luck or whatever reasons, they tell the story.
I was like, look, I was right. And those are the stories you hear about. But few people, I think, have enough, uh, cojones to talk about their mistakes like we do on this podcast, right? Where The thing blows up in your face and it’s shameful and it’s painful. And so those people blow out their accounts and you never hear from them again. There is that bit, but what’s also interesting, Luke is here. Your buddy seems like he’s well off. So there’s another seemingly unnecessary error being made is if you’re already well off, why take risk beyond? What you need because my guess is his answer to you to your question. What happens if it dropped 50%?
How would you feel? I imagine his feeling would be not great.
[00:09:31] luke_2_05-27-2024_151222: He, uh, he articulated ambivalence and I didn’t believe him. He said, uh, yeah, you know, I’ll just hold it for longer and it will turn around and come back. And I’m cool with that.
But I don’t, I don’t think I believe him on that case on that point.
[00:09:47] k_5_05-27-2024_091222: I mean, I guess when you’re, when you’re already wealthy and you know, your, The, the quality of your life won’t be significantly impacted. I could buy that, but still losing massive amounts of money is just, there’s never a small thing. The other thing that’s interesting is this is NVIDIA we’re talking about. And if you know that NVIDIA as a company, you know, that’s nearly gone bankrupt several times and has had drops of massive drops. And despite it being, you know, an incredible business in this moment, we also know that. The semiconductor industry in general is cyclical. So there were so many reasons why, uh, it could have gone the other way against him.
And 50 percent in any one portfolio is it’s hubristic. And almost like poking at the gods. If you want to go the Greek route, right? Where, where the gods are there to put us pity pitiful humans right in place. Um, and, and, and I’ll say one more thing.
It’s so tempting, so tempting when like the mistake I made with Eos, when you know so much, or you believe the story. And because say you’ve done the work and because NVIDIA is this amazing company, you convince yourself that that takes care of the risk element.
[00:11:07] luke_2_05-27-2024_151222: I think there’s another interesting factor as well, because on a technology basis and many financial metrics, like Nvidia seem to be well ahead of the competition. Like they have very significant margins. I, one thing that caught my eye in their earnings release was their margins are up like another.
Two or 300 basis points year over year. and so there’s such clearly such an opportunity in this space and clearly so much demand and Nvidia are struggling, if anything, with supply, not with demand. Like that, just those two facts in themselves are massive spurs for competition. And, you know, there’s an AMD we know about, but there are other other competitors out there as well, developing, their own competing products and no one’s close to NVIDIA in terms of the capability of their whole software and hardware stack.
But when there is so much money to be made, literally hundreds of billions of dollars to be made. That’s going to motivate competition to come off them really fast, and I think there’s so much, there’s so much anticipation built into the numbers. I was trying to explain this to my buddy. And like when the narrative turns, and if they just miss expectations once, uh, what do they say? You either take the stairs up and you take the elevator down. Or in this case, you might just be like stepping off the ledge and plummeting to your death, like the stock is going to come cratering down as soon as the narrative turns, because at the moment, the numbers assume, what are they like?
85 times free cashflow, uh, is what it’s trading at. That’s rich. It has been higher. Um, I’m not a technical guy, I know you do the technicals, but if the momentum to switch on this and the sentiment around the stock, that’s the word I was looking for changes. Then I think we’re going to see the valuation multiple reverse quite hard and quite fast.
[00:12:51] k_5_05-27-2024_091222: so. I would add to that the law of gravity. We forget that, uh, what are they at now? 2. 5 trillion thereabouts.
Right. So just think about that for a second in order to, to obviously gain a hundred percent from here would become the world’s most valuable company by far at 5 trillion, right? But we’re not, I mean, it’s crazy. This is the first time in human history, right? Where there’s only a handful of companies in that trillion dollar mark. What is it? Microsoft, Apple. NVIDIA Tesla was there for a tiny little bit
before falling,
[00:13:27] luke_2_05-27-2024_151222: Yeah.
[00:13:28] k_5_05-27-2024_091222: right? Amazon. But basically these are the conglomerates of conglomerates. And when you start all of a sudden assuming that, Oh yeah, they’re going to gain another trillion dollars, trillion dollars, right? We’re not talking about billions anymore. Those kinds of expectations, right? Lead people to start confusing yet again. The fact that a great business and a great, uh, it doesn’t matter how great it is and how fast it’s going.
The stock price is its own thing. And that’s where the whole valuation stuff comes in. And that’s where so many mistakes are made, both selling too early, selling too late, all of that. But the things work together. So I’m sitting here, I’m, I mean, I feel. like egg on my face because I had in video, you know, but way back when, you know, I bought it at 110 a share. And after a run up to close to 300, looking at some of the valuation metrics, despite knowing the business so well, I cut my position because I’m like, for all the reasons I’m talking about now. And then it went up another 300%, right? So it feels bad. It’s like, is this guy bitching and moaning because he’s, you know, he, he’s not in it and he wants it to come down. I don’t think so. I think the principle is sound and the price could become rational longer than. like the market,
[00:14:50] luke_2_05-27-2024_151222: Same. Like I, I don’t like to do all in things, but I had a decent position. I’ve trimmed it twice. I’m now just going to kind of hold my nose on the valuation. but I’ve still only got like a 3 percent position. It’s not, it’s not material. If that halved, that wouldn’t really hurt me. If my buddy’s position halved, that would significantly set him back.
just to sort of land the plane on this one. Um, I don’t know if I can bring this back to yoga or not, but you know, the, the meditative approach to portfolio management being sensible, If you have massive concentration in your portfolio, then are going to be much more significant.
So when your stocks are doing well, like in video, your total portfolio value is going to grow really fast, but if the ass falls out of any of your stocks, like could happen within video, who knows when, then the move down is going to be very fast. And I just think, You step beyond investing into gambling.
so I would say to my buddy, and I did have done many times, maybe you’ll listen to this podcast and finally hear some sense, do some yogic breathing, meditate on this and, reset that exposure down to a more sensible 20, 25%.
Just take half of the money off the table. Stick it in. an S& P tracker if you can’t find another decent second or third best stock in your portfolio and breathe a little easier the next time Nvidia earnings come around.
[00:16:11] k_5_05-27-2024_091222: Yeah, right. That, that question, how, how well are you sleeping at night is a good one to ask. the principle I abandoned that worked extremely well for me for a long time was no more than 20 percent max in any position. I don’t care how in love you are with the story in stock. And even that is obviously incredibly aggressive.
If I want to be a little bit more bold, somewhere between 15 and 25 percent in your top top conviction seems like absolutely maximum level.
[00:16:42] luke_2_05-27-2024_151222: think that’s a good guideline on my own numbers, 20 percent and there’s no hard and fast rules. Like if you’re super young in your investing career and you’re still pulling in a, like a significant salary in relation to the value of your portfolio, then it’s easy to make up lost ground. So sure.
You don’t have a 50 percent position and take a swing for the fences, but if you’re well like me and my buddies in a similar life position and uh, yeah, you’re closer to retirement or in retirement, well. That’s when you probably want to dial that back. Yep.
[00:17:11] k_5_05-27-2024_091222: Okay,
[00:17:12] luke_2_05-27-2024_151222: Alright.
Does Macro Matter?
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[00:17:13] k_5_05-27-2024_091222: so while you were, uh, doing, uh, yoga in quotes, I was busy catching up on some macro economic thinking. And listeners will know that I’ve, serious dalliance with the bearish outlook. Uh, it’s been about what, six months now. Is that right? November, November, December, January, February, March, April. Yeah. May. So I’m, I’m rounding like about month seven. It’s been a really unpleasant experience. Because you start seeing, you know, all the fear and panic. It’s just not a, it’s, it’s much more enjoyable living life as an optimist that things are, things are going well, but I’m also, I try very hard to keep my own biases aside. Try to see things from as many directions as possible. And this past week I came across , a conversation and an essay in Harper’s magazine that talked about things not being as. rosy as they appear and that there is a potential massive bubble that that could. So I thought we would talk about some of the specifics of that and see what conclusions you and I take away from from these macro economic pontifications.
[00:18:39] luke_2_05-27-2024_151222: read the article this morning when you sent it over. and you’ve teed this up in an interesting way by talking about it as a bubble. So, you know, when I hear bubble, I might instinctively think Bitcoin. NVIDIA. AI, , but this is very different. So what, what’s the bubble you’re referring to here, Christoph, and what, what does the author, what’s his conjecture?
[00:18:59] k_5_05-27-2024_091222: Well, let me actually slow down and just say one more thing. Pick up what you said about bubble. Um, a bubble to me is a little different than say, massive enthusiasm for something or like a lot of momentum for something. So I’m not sure, for example, that would say Nvidia is a bubble.
I might say NVIDIA is overvalued or is set for correction, but the fact that NVIDIA is backed by what I would say is fundamental performance, making real things in the world that have this massive impact on the world and margin expansion and all that, right? A bubble, the classic cases, the guy mentions, uh, the author, Andrew Lipstein in this month’s Harper’s Magazine, the title of the essay being 401k Doomsday Will Passive Investing Spell Catastrophe. So check it out if you want. Anyway, um, the classic case is tulip mania where in, in the Netherlands and whatever year 16, whatever money became was represented by literal tulips. And people then eventually, after certain enough momentum happened, shifted from their former form of currency to tulips and were literally, tulips literally became the thing that everybody wanted and needed and the value kept going higher and higher until obviously, one day, seemingly out of nowhere, the bubble pops. And the reason it pops is because people realize there’s nothing but air underneath it. So it’s like a story that stops, mesmerizing people.
[00:20:44] luke_2_05-27-2024_151222: So go on, link us, link us to the article because he talks about the passive investing bubble. So what’s the guy actually on about? Why does he think that’s a lot of air, not substance?
[00:20:55] k_5_05-27-2024_091222: Right. So the core thesis of this essay is that with the advent of things like 401ks, in which employers and employees contribute money sort of automatically from their paychecks into these investment vehicles known as, uh, the, well, either mutual funds or ETFs, ETFs, ETF being an acronym for exchange traded fund. And so there’s this massive inflow to these investing vehicles that I think the article said they have 8. 2 trillion in assets under management. So massive, massive, massive amounts of money going into these things. The problem, as I understand it, is There is no, uh, discernment about the value of the companies that the money is going into.
There’s no call it fundamental research. It’s just money flowing in passively to these gigantic funds. Irregardless of all the other stuff that’s happening. So as you have more and more and more and more money flowing in by basically like recurring in the recurring cycle, then at some point, all that money, uh, is sitting there, right. and the price goes up and up and up and the larger the funds become, you realize at some point that just because it’s been going one direction does not mean it can’t go the other direction. And as soon as you reach a certain size, then the moment the tide turns and these large institutions want to sell some of this stuff, then it’s a self fulfilling prophecy the other way.
[00:22:47] luke_2_05-27-2024_151222: It’s not the, in this case, it’s not the institutions, right? Because these, I’m, I’m a big advocate for passive index trackers. So I mean, just to take one example, one, it might be say like an SMP tracker, like VOO, V O O, um, like that in essence, that’s like essentially the whole market in the U. S. So it’s not that these are. I, I would challenge the term bubble. Like these are real companies behind the scenes that the, you know, you invest in a fund and the fund is invested in the whole market. So you’re really buying like a tiny piece of every company out there that, let’s say, for it all intents and purposes.
Um, so, so what, what’s the effect that the author is putting out? What’s like, what’s the problem with that? ’cause this isn’t tulips, this is real stuff.
[00:23:30] k_5_05-27-2024_091222: right. So let me, let me correct something I said earlier. Um, I think the problem really is that by definition, the passive index has to match, uh, the allocation of the funds by percent, by percentage and size of the company. So what happens is to, to take an easy example, You buy, let’s say, the most popular index fund, let’s call it the SPI, the S& P 500, which allocates the most amount of money to, let’s use, uh, Apple, Apple or Microsoft as an example, right? So, that company gets 7 percent of everybody’s dollar. And, In other words, the largest companies get even larger and larger and larger by default. So it’s not that people are, it’s not that individual investors are investing in Microsoft and Apple. It’s that these passive funds are investing in them. And at some point there’s an overweight in just how big the biggest of the big have gotten via these passive funds. So what happens when, call it, For simplicity’s sake, let’s say Apple is now getting
10 times as much money because of these funds than it would be individual investors, and we get a year from now some report, uh, that says the iPhone is now on the way down because there’s been a massive over allocation.
There’s going to be a massive redistribution of those funds. And once a giant company goes down or reverse reverses, we know that affects the whole market. And then all companies start going down. So this is one of these instances. I mean, it fits with what we were talking about in video, right? Like the, the narrative that NVIDIA is single.
There’s some memes out there talking about NVIDIA is single handedly holding up the market. We know, we know as investors, right? Then if NVIDIA had a really bad report, next day, the whole tech sector would have been red. So I think that’s the danger, right? That now because of the volume in funds in the passive way, you have call it the magnificent seven carrying the majority of funds.
And it’s, it’s a matter of time,
[00:25:50] luke_2_05-27-2024_151222: Okay. So, and I agree, and I looked at a bunch of, , data points. So for example, Morningstar, um, had an article, December just gone a few months ago. So, uh, passive funds in aggregate have now overtaken. active funds in terms of like the total number of dollars in being passively invested is now greater than the total number of dollars actively invested.
And that they’ve sort of slowly come together and now they’ve just passed each other. So I think the data point is right. But my question is like, so what, what are you gonna do about it? Cause passive investing is still the right answer for the majority of people. You couldn’t say to some like working Joe, Oh, you know, here’s your employer match and here’s your like pension fund, your retirement fund.
Um, now go pick the companies you want to invest in. Like most people will underperform the market cause that’s a job, you know, we do that and uh, and we seek to beat the market, but we, we’ve turned it essentially into well, a full time job. I certainly have for myself.
and if you’re not doing that, you probably should hand over discretion over what’s chosen to a professional. But even the professionals can’t get it right. You know, if you look at the majority of active funds, they might beat the market in one year. But if you look at, say, over the 10 year view, the large majority of actively managed funds fail to beat the market as well.
So you’re just an individual, you know, one particular person, the best answer for you is to dollar cost average into a passive index tracker with the lowest possible fees, get your tax advantages, and just keep doing that for a lifetime. And you’re near as certain to have a, uh, a wholesome retirement when you get there.
[00:27:35] k_5_05-27-2024_091222: I agree with that take. So in that sense, I think you’re right. There’s nothing really to do. My take is coming from a completely different angle of the puzzle.
Which is in the context of my current bearish outlook about The global economy, all the job numbers appear good and growth appears good and GDP growth appears good. Well, the hosts at the all in podcast challenged this narrative. And this is what I’ve been saying for basically the last six months is there’s something weird going on because when you go to the supermarket and everything is more expensive, buy a lot. I think the example they talked about was the prices at McDonald’s of fries. two years ago or something like that versus now is like up 300%. So basically, McDonald’s is a stand in for average Americans buying food, right when prices have increased so fast, so high, when credit card debt is now climbing, and the default rates are approaching decade highs. Auto loans, the same thing, right?
There’s issues with banks, balance sheets, there’s the commercial real estate shadows lurking in the background. When I take all these things into consideration and I then read something about the way these passive funds have grown so large, And the outcome of that, which I’ve just talked about, then I don’t know if this is confirmation bias Luke, or if this is just, if this is another significant data point in my argument, that at some point in the near future, medium term future, the bubble will pop and with it, the systemic risk that will be the domino that gets the rest of the system crashing. And so what am I doing with that info as an investor? Well, I’ve been painfully sitting on my hands, mostly out of the market, outside of my, small cap bets to my great loss up to now. But then I’m thinking, okay, well, I’ve been wrong for the last six months. Is this the time to get back in? Right? And this kind of stuff me think, no, right now I’m going to exercise more patience and more restraints because I just can’t convince myself that. You know, now is a good time to, to, to get back in.
And that cuts both ways, right? Because it’s market timing and we know that often doesn’t work. And
[00:30:08] luke_2_05-27-2024_151222: And dear listeners, this is exactly Right now in this moment, this is exactly the demonstration of why, timing the market in the way Christoph has doesn’t work because you get out and you never know when to get back in. It’s like you sat and waited at the bus stop. For like 30 minutes, and you’ve got the sunk cost of like the last half an hour.
And, um, and, you know, maybe, maybe the road is closed or something. And that bus just is never coming. Who knows? It’s going to, maybe it’s going to come eventually, but you might still have another like multi hour wait on your hands. once you’ve taken, Once you’ve got your money out of the game, like, you’re then waiting for your doom to trigger, and then you’re like, oh, get back in now. But if you take that view, like, I would, I would argue with something Mr. Notadvice said a few months ago uh, on our podcast. Uh, it’s worse now than it ever has been. There are so many different overlaid dooms, things that could go wrong and blow up the markets, anything from essentially like world war three to all sorts of other like trade imbalances and real estate, like that’s all true.
And now you’ve added another one potentially, which is like inflows to passive index funds, which create this magnifying effect on top of everything else. I reckon you could take this look, you could take a look at the market really at any time in history and you could probably identify a good reason to take your money out of play.
and I think that will always be the case. Anyway, I’ve, I feel like, I feel like it’s a position I’ve taken many times in the past. and, sure as bananas are yellow, like the day you buy back in, it’s probably going to be the day that everything suddenly turns south and the ass falls out of the market.
Right. Who knows? That’s just like Murphy’s law for you. Um,
[00:31:44] k_5_05-27-2024_091222: right. I’ll let you know when I buy back in the one correction though. Cause I realized that because this is a principle I’ve lived by for my whole investing career, except for the last seven months. And I just want to, I just, I just want to add the nuance that I did not fully sell out of the market. One, I already mentioned, I kept my most undervalued assets that I thought were mostly, uh, outside of market forces.
So the biotech and a company like EOS, uh, but I kept all my crypto stuff, which. At this moment, right, is, was a good decision because the two, Chainlink and Bitcoin were, are up massively. So, in, in a technical sense. I didn’t fully time the market. I just switched the kind of assets I was comfortable holding.
But, but for the kinds of stuff you and I always talk about, you know, your point still stands. Like I want to own CrowdStrike. I want to own Nvidia. I want to own Axon. I want to own these best of the best companies. Those are the ones I sold out of. And now I’m stuck with this decision of, Well, I can’t, I can’t justify buying back in at this point and it sucks.
[00:33:05] luke_2_05-27-2024_151222: Let’s let’s because it’s a conversation we’ve had several times on the pod. Let’s come back to the core question here though, which is like, well, I don’t know. What is the question? Is it like, does macro matter? Is macro good or bad? Like your, um, your example about Like the cost of hamburgers. I haven’t quite got my head around it.
I heard an interesting comment, I think on the chitchat stocks podcast, which is very good if you don’t listen to, uh, Ryan and Brett, you should check out that pod. and I think a few weeks ago they talked about the cost of fast food. and how actually much higher cost of fast food might be reflective of a healthy economy.
Cause essentially. Um, like these are with respect, um, you know, some of the lowest paid jobs in, in the developed world, and the large majority of the cost there is actually just the human labor until like robots get stuck in flipping burgers. it’s the people to run those restaurants.
And so. Um, at least a contributor to the higher cost of burgers is the higher cost of labor. So if you’ve got the lowest paid workers, let’s say in America being paid more, that actually might be indicative of a healthy, not an unhealthy economy.
[00:34:15] k_5_05-27-2024_091222: Uh, boy, maybe, okay, let’s say I buy it on, on a, on a theoretical economic level. I’m going back to the main point, which is my own experience as a human living in Austin, Texas. I’m, I would say comfortably middle class. And there’s a point at which you start stressing about money because you’re like, holy cow, like, I can’t believe insurance is now this much.
And, you know, all of it. And that’s subjective shorts that it’s hard to quantify. My takeaway really is if if I’m feeling this much Stress for short, and my partner is, then what are all the people experiencing who, have nonprofessional jobs and have credit card debt And so I’m not going to go into, you know, Marxist screed here, but like capitalism really at the core continues to divide those who own things and those who don’t. And the majority of economy is, you know, like it’s the people, I don’t know what the exact percentage tier is, but certainly bottom third are, I don’t care what the bottom of third of, of the U S economy is in very bad shape.
[00:35:35] luke_2_05-27-2024_151222: Yeah, I think there’s a very important data point we talked about within seven investing, , on our recent, , subscriber call, I think. And I think a few of us had spotted. Something interesting in, consumer spending, in a high interest rate environment, you would expect people to spend less.
So then, you know, essentially it becomes like a self regulating force stuff is too expensive. People buy less. Therefore. Um, stuff has to end up costing less, you know, and, and, and then you, you go into like a full recessionary spiral and we don’t seem to be doing that. We’re in a high rate environment and people are still consuming as much or more.
And a data point I ran into was I think Bank of America, I think it was like savings savings have now dipped. Uh, they’ve, they’ve, they turned South several months ago. They say, say net savings started declining and now the majority of consumers, um, are now underwater. So they’re now sustaining their lifestyle on debt as opposed to the money they did.
Maybe they put some money away during the pandemic because you couldn’t go out and you couldn’t spend money. Plus in some countries you were getting paid. stimulus checks. So maybe, maybe some people managed to put some money away, uh, and invest it or save it.
And now it seems like the majority of people have burned through that. and as we get into this debt consumer debt spiral, I think that could be quite horrible. So a bit like your active passive index thing. When the ship flips on, certainly consumer discretionary spending, I think it’s going to turn hard and fast and hurt companies like, like Tesla, like Shopify, companies like that, that tend sell higher cost goods.
[00:37:15] k_5_05-27-2024_091222: And there’s the buy now pay later phenomenon, which is another data point that things can’t be great where even credit cards, you know, putting stuff on credit cards is not enough. So takeaway from this conversation feels to me like, An experienced investor has multiple tools in the toolkit. They know that there is no one right answer. That it’s always a balancing act, like it or not. Macroeconomic forces are like, I think of them as wins. You do not want to invest. against the wind. So wherever the wind is blowing, that’s how you should invest. At the moment, I’m continuing to be, very, very cautious. until I see something fundamental change.
[00:38:02] luke_2_05-27-2024_151222: Yeah. And I’m, I’m being made be a bit more moderate, moderate with my caution. I’ve, my version of caution is having a higher cash allocation. Um, and I’m slowly, steadily increasing that. As we go. so that’s one way to manage it, which is not an all in bet. If you’re 50 percent in some wild, crazy company that’s highly volatile, well, that’s the other end of the spectrum in terms of your exposure.
If things do go bad, maybe just to loop it back to our first half of the pod,
[00:38:29] k_5_05-27-2024_091222: This would be, I think, a good time to ask our gentle and esteemed reviewers, uh, listeners for a review. It really helps the show. Badger and Your Pal Monkey are still trying to scale. We’re still, uh, a badger monkey shop, just like a fruit, a banana stand. And I don’t know what badgers eat. Maybe some berries on the forest floor or whatever, but right where, uh, if you enjoy our banter, if you have learned something from this episode, It will be meaningful if you took the two minutes to go on Spotify, leave a review or go on Apple podcasts and leave a review for us,
[00:39:17] luke_2_05-27-2024_151222: that would certainly help. And, um, if you listen to the last couple of episodes, we did have a running topic on What do I look for in a good investment? we’ve got a ton more of those. So we’ve parked the topic for this week.
Cause we had some bigger things to talk about, but let us know on Twitter, if you’d like us to dig back into that and keep that as a running theme. Cause there’s a whole world of things we’ve talked about there.
Uh, you can find me on Twitter at seven Luke Hallard.
[00:39:42] k_5_05-27-2024_091222: I am at seven flying platypus. Also do check out wallstreetwildlife. com where we have a shiny PDF for you about the 10 laws of the investing jungle. And let us know what you think also on YouTube in the comments.
[00:39:59] luke_2_05-27-2024_151222: All right. Are you ready to become a beast of an investor? Your journey starts here.
