In broad economic terms, things are good right now, but if you’re like me, you find it extremely difficult to buy assets in an environment where almost everything worth owning has increased significantly. However, there are always both long-term multi-year or multi-decade bargains and short-term directional trades that, when strung together, can equate to better-than-market gains. Some may not be readily apparent to value investors (myself included), which is why many miss the Amazon (AMZN, Financial) or Priceline (BKNG, Financial) investment -- because the valuations were simply too hard.
At the same time, buying into obvious value trades at the wrong time and you end up with dead money for extended periods. Look at Coca-Cola for example. Berkshire Hathaway made its money on capital gains during the first 20 years of holding, and for the last 15 it’s been basically just a dividend producer that’s hard to get rid of in the portfolio. That’s not to say it won’t be around in another 20 years, but it’s not “undervalued” anymore. The same can be said of Microsoft, which after the dot com crash flatlined for over 10 years until the new CEO, Satya Nadella, decided to move into new directions of innovation, and then executed well.
The onus on innovation seems reminiscent of the dot-com Y2K era, and this makes me very nervous. Back then, I was in college and can vividly remember my friend Adam showing me a book by Harry Dent, published mere months before the crash, predicting that the Dow Jones Industrials would reach at least 21,500 by 2008. Of course, Dent was two-thirds right with the Dow north of 14,000 before the housing bubble collapse, and the rise was led by many technology companies. However, what I found entertaining was that in 2009, the same author spoke about the great depression ahead, with a debt crisis in 2010-2012. Clearly his timing is off, seeing that in the last nine years, from a market standpoint, we’ve had the longest bull run ever, and it continues into second quarter 2018. The point is that no one knows for sure, but when the correction comes it will probably be pretty severe.
A simple hedge would be to buy SPDR Gold Trust (GLD, Financial), the SPDR gold ETF. With it you would hedge the stock market as well as the cryptocurrency market, which is another massively overpriced asset. Gold is real money, and here’s something to think about. In 1990, the average new home price sold in the U.S. was $125,000 or 323 ounces of gold. As of January, it was $324,900 or 242 ounces of gold. The S&P 500 started 1990 at 353, just about one ounce of gold. It closed yesterday at $2,613, which is 1.95 ounces of gold. In other words, gold is a good store of value that can be used as a holding when the business cycle moves from boom to bust better than other assets.
Technology is getting smarter faster and that’s scary.
I agree with analysts who say times are different today. It’s true that many technology companies are actually profitable and that profit drives value -- unless you are Amazon. Many old, rather traditional, business models have even been enhanced by technology innovation and social connectivity. However, this has also been very disruptive to the workforce as a whole, and with the next wave on its way through artificial intelligence, the number of “self-employed” is set to increase to a point that makes freelancers the largest segment of the economy.
Companies like ManpowerGroup (MAN, Financial) could be in a position to turn these workers into valuable assets and with the stock at 12x forward earnings, this is one company trading at a bargain price fighting against the job taking robots. There are others. If you want to be on the side with AI, the best trade is in the underlying hardware making it possible.
Micron (MU, Financial) is the obvious choice from a value investing standpoint. Profitable and trading at just 5x forward earnings, anyone with $60 billion in cash could acquire the company and reap decades of profit. With memory and storage, AI wouldn’t be possible. More importantly, AI will be the internet very soon. Sure humans will still connect and consume, but many if not most of the functions will be performed by machines -- functions that span the entire economy. If machines are ever able to autonomously take over manufacturing processes, combined with the globally connected Internet, possibly building better and better iterations of themselves then, yes, humans will face a zero employment event. When technology innovation surpasses the necessity of work, thank robots and be very afraid.
When (not if) that time comes, I wonder if stock in any company will be worth anything? In other words, if machines run companies (from top to bottom), will equity mean anything at all? These are existential questions, but the larger point is under this worse case scenario, the game you and I have been playing for all these years would come to a halt. I plan on playing the game while I can and I hope you do too, because what else is there to do? I think markets will see a major correction driven by robo-traders, but if you’re not freaked out, there is still money to be made hand over fist.
Disclosure: I am long MU and may initiate a position in MAN this week.
