I wonder if there is a statistically demonstrable negative correlation between retail ownership of a stock and subsequent performance.
And just lol analyst expectations. “XYZ widget corp outperforms analyst estimates, the stock is down 4%…” GTFO that means that wasn’t actually the expectation!
So you’re saying that you think Buffett is a luckbox? And all the other successful value investors along with him?
That’s a good point that it might be better to compare the after hours pop to the previous close rather than factoring in the FB-driven pessimism. But I still think if they announced $4.85 or whatever, that they’d be up quite a bit less. Keep in mind the quarter dropping off the TTM was like $14 or something, so an EPS around $4.50 drops their annual EPS by about $10 and takes the P/E ratio quite a bit higher absent any price movement. I think a lot of retail investors, maybe the vast majority, just looked at that estimate and thought, “Meh, AMZN is going to beat, they always do.”
At some point, Amazon is going to stop growing substantially, simply by running out of room in a best case scenario. Bezos will weep, for there will be no market share left to conquer. At that point it will need to be valued as a value stock and not a growth stock, so you’d expect a P/E around 15 to 25. Maybe 30 on the high end.
It’s currently trading at a P/E between 70 and 80, which is pricing in an expectation for an immense amount of continued growth to end up eventually settling on a value-oriented valuation with a P/E in a normal range.
My point is that while it may be possible, it’s incredibly unlikely they will be able to get that big. Just like while it’s possible TSLA is someday going to have like 80% or 90% of the market share of the global automobile market, it’s absurdly unlikely and that’s why their valuation is absurd too. They’re not worth 17 Hondas or three Toyotas or 12 GM’s.
I don’t, that’s my point.
Perhaps, maybe the blood is done with in the tech growth sector. Maybe there will be no more -25% days for any of these “blue chip” stocks. I don’t think so, though.
I think the efficient market hypothesis folks would be well served to go sit at a 5/T or T/25 table and ask the whales what they bought recently, how much of it they bought, and how much research they did (1). Then watch a day of CNBC and just listen to the words coming out of the mouths of hedge fund managers and investment managers (2). Then go really in depth on a complicated stock for days/weeks, get a good understanding of its value, and then read all the analysts’ coverage of it (3).
My favorites:
A guy probably worth $1M to $3M put $20,000 into Moderna early in 2020. Obviously this worked out incredibly well for him. At the time, I was curious why he was so confident. I asked him why he bought it, “I dunno, I googled vaccine stocks and it was the first result.” Then I asked him about their track record, research, and trials - he knew absolutely nothing about it. He Googled vaccine stocks, and put $20K into it. This is not a lone example, most have a little more reason behind them, but they are almost always level one reasons that do not factor in the current price of the stock at all. I have a buddy who bought Amazon because they got Thursday Night Football and he thinks that’s going to cause the stock to go up about 10%. Granted the info was already public, and the impact on their bottom line is not at all substantial, but it didn’t stop him from moving a chunk into it.
A billionaire hedge fund manager in late March or early April of 2020 proclaimed the pandemic over, said it was just like the flu, it wouldn’t require any additional shutdowns, wouldn’t cause much death, and we’d be back to normal in a couple of weeks. He lived and worked in NYC at the time.
Moderna has put a lot of resources into treating cancer. Somewhere in the neighborhood of 25-40% of the reports that the usual companies (Morningstar, Zacks, etc) are putting out make zero mention of it when talking about their pipeline. Like this should be within the first 5-10 minutes of research on the company! Just look at their pipeline!
Now, there are like 5,500 stocks on the NASDAQ and NYSE, and obviously even more globally and OTC. Maybe 90% are efficiently priced, maybe it’s even higher. But there is definitely a healthy amount of inefficiency in there IMO.
Keep in mind as well that some stocks are too small for hedge funds and institutional investors to even consider. So there’s nobody raising in to correct an inefficiency if retail investors do stupid stuff.
What you’re missing about many growth stocks is they (especially Amazon and Google and even lol Facebook) could turn off their incomprehensibly high R&D spend and be (much bigger) gushers of cash. Also they have a ton of cash which is not reflected in P/E ratios.
I think this is actually, literally, the craziest thing that anyone has ever accused me of.
I think I see the math mistake you’re making and will reply later from my computer, not my phone.
The arguments you are making re: EMH seem like you don’t have basic familiarity with the standard rebuttals and responses (i.e. what about Buffett?, what about Gamestop?).
I thought it might be to pay for the bridge they have to disassemble so Bezos can take delivery of his megayacht.
btw, that yacht, which is estimated to have cost $500 million, will soon have its own support yacht that is big enough to have its own helipad.
That’s a good point I hadn’t put a lot of thought into.
I think FB does relative to its valuation, AMZN I don’t know if I’d say that (about $80 billion in cash and short term investments).
I mean it’s not really an accusation, I’m just not sure how you can square being a big Warren Buffett fan with believing the markets are efficient. He’s been beating them his whole life.
I don’t know what the standard response to what about Buffett is. I would assume the standard response to what about dumb people is that smart people and hedge funds and algorithms pounce almost instantly and there’s nothing left over for the little guy.
I would also add, “What about bubbles?” to the list. I would think the existence of bubbles would prove that there is a lack of efficiency in the market. In some cases you could argue that it’s the realization of a long-tail outcome, like with a pandemic. You could say that’s priced in at a risk of say 1% annually, but actually realizing that risk causes a significant change. Alright, and as for the tech bubble? The housing market bubble?
I recommend giving this a listen: Episode 183: Market Efficiency Myths and Misconceptions — Rational Reminder
I’ll check it out, thanks.
“You can’t behead him, that’s all just paper wealth!”
-Internet billionaire simps
GUI +1.01% today.
Guillemot Corporation SA
Markets are (mostly) efficient precisely because there are people like Warren Buffett, who are skilled and who do earn abnormal returns. There’s no paradox there.
Here’s the math mistake I think you’re making. You said this:
I think this is the argument you’re making:
Assuming I understand your argument correctly, you’re confusing earnings growth with market value growth. Amazon can easily grow into their P/E ratio as long as their earnings growth is greater than their market return. For example, suppose that earnings were to grow by 25% per year for the next 10 years, and the stock were to grow at 8% per year:
You’d have an 80% contraction of the P/E ratio, along with an 8% annual stock return. Maybe some investors would be disappointed by only an 8% annual return, but the key point is that the 80% contraction in the P/E ratio doesn’t imply an obviously negative stock return.
The real error, though, is confusing Amazon’s earnings with Amazon market value as a % of aggregate market value. Amazon’s market value is currently 3% of the overall market value. What happens if the above (very aggressive!) assumption is true and that Amazon actually does grow their net income by a factor of 9? Does that mean that their stock will represent 27% of the market index? No! That’s because the stock isn’t growing as quickly as earnings are (that’s why the P/E ratio is contracting.) If the stock just grows at 8% per year or something similar to the aggregate market rate, then Amazon will continue to represent exactly the same % of the US market cap as it does now.
To be clear, I’m not saying that:
What I’m saying is that if you want to build an argument based on numbers, those numbers have to be internally consistent.
OK, thanks for explaining that and breaking it down in detail! Working with the example you laid out, though, Amazon would still be growing as a percentage of the economy, right? So if market cap is not the right way to measure that, what is? Revenue or earnings as a percentage of GDP? Of course they’re international so maybe it’s even more complicated.
If I want to boil it down to:
Amazon is currently A big with B earnings and that can be looked at as a percentage of C, and their valuation implies that they will grow to X big with Y earnings and become Z percentage of C, which may or may not be realistic.
So if A is not market cap, is it revenue? Maybe it’s earnings and I have too many variables in the sentence?
If C is not total US market cap, is it GDP? Something else?
OK, so essentially our difference is that I see those inefficiencies in a given moment and say, “Inefficient market!” but you zoom out wider and say, “Nah, Warren and others like him will work it out in the long run!”
Fair enough, however I would posit that there are two exceptions where these inefficiencies can last for a while:
Stocks too small for those wizards to touch relative to their AUM. They are victims of their own success in this regard. I believe most of us ITT are smart enough to pick value stocks using the same methods of Graham, Buffett, etc, and beat the market for our lifetimes unless we become too successful to continue the strategy (which is probably close to impossible unless we’re starting from immense wealth or start managing other people’s money). Of course, discipline factors in, there’s a good amount of reading to do, and it takes a lot of time.
Inefficiencies can persist for quite some time. Like, you agree that Buffett almost certainly views the current markets as way overpriced, right? (Given that he’s sitting on a pile of cash and sat on it through the 2020 crash. I think it’s fair to say he views the fair price as below 2020 lows. Agree/disagree?)
On that last point you could argue that he could assist the market in finding some efficiency by taking a short position, but I think most long-term successful value investors very very rarely go short, for reasons you often bring up ITT.
efficient markets!
makes crypto look stable
for AMZN?
while some of it is the stupid rivian stock which is even more ridiculous
it’s going into a bunch of different sectors now, like it could be the thing for lots of different things for people, ie, welcome prime citizen for all your needs. Also have to imagine people shopping online more over time.
The others you listed that went down have either hit a wall or basically are at one or not growing fast enough for wall streets insatiable thirst.
(i’m talking long term, not short here, the rivian stock went down so their next earnings gonna take a hit and well people gonna freak out b/c people are morons)
