As we ramp up for another Sunday afternoon soccer tournament at home, it occurred to me that perhaps the only folks more excited than Alibaba Group Holding Ltd (NYSE:BABA) investors this weekend are the raging soccer moms on the sidelines.

Given all the excitement, both on the field and in the markets, the attached deck – which we presented at last week’s Kentucky YPO Forum in Linville Ridge – might help put today’s exuberance in perspective.

Please see the presentation below, for our most recent thinking on the current market cycle (we are concerned) as well as a few fertile hunting grounds for investment today (we are still finding opportunities)

Brohyll Asset Management Market Cycle

Brohyll Asset Management Market Cycle

Brohyll Asset Management Market Cycle

 

Howard Marks “Over-arching Comments” About Risk

  • Risk is counterintuitive. The riskiest thing in the world is the widespread belief that there’s no risk.
  • Fear that the market is risky can render it quite safe.
  • As an asset declines in price, making people view it as riskier, it becomes less risky.
  • As an asset appreciates, causing people to think more highly of it, it becomes riskier.
  • Holding only “safe” assets of one type can render a portfolio under-diversified and make it vulnerable to a single shock. Adding a few “risky” assets to a portfolio of safe assets can make it safer by increasing its diversification.

Average 10-year S&P 500 Real Return Based On Price/average 10-year Earnings

Brohyll Asset Management Market Cycle 1

There are two fundamental and very different ways in which equity markets can be measured.

  • One of these is q, by which the market value of companies is compared to the real value of their assets. This follows from the basic principle that, in any reasonably competitive economy, the value of anything depends on the cost of creating it.
  • The other way treats equities as financial assets and values them by discounting the expected future returns at an appropriate rate. Cape is based on this approach and depends for its validity on the data for any particular stock market being consistent with the theory behind it.

In any economy where sufficient data are available to value the market in terms of both q and Cape, the results must agree.

If different measures of value disagree; they can not all be valid and using demonstrably invalid measures must be absurd. -FT, Andrew Smithers

See full Brohyll Asset Management: The Current Market Cycle in PDF format here.

BAM YPO Presentation Sep 14