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Where To Invest During A Lost Decade
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Imagine you had an investment crystal ball – you could see the market’s future.
In 1969, you watched Warren Buffett shut down his investment partnership. He complained there were no attractive investments given his large (at the time) amount of capital ($100 million). But, because of your crystal ball, you knew he was completely wrong. You knew that the top 50 stocks in the S&P 500 – the so-called “Nifty Fifty” – were going to soar.
Total returns in these stocks during 1970, 1971, and 1972 were astounding. As a group they were up almost 30% annually. By the peak of the market (in 1972) their valuations had become “Tokyo-like” – McDonald’s (MCD) had a price-to-earnings (P/E) ratio of 86; Polaroid’s P/E was 91; and The Walt Disney Company’s (DIS) was 82. (Tokyo-like refers to the incredible Japanese stock mania of the 1980s, when the average P/E ratio on that market reached 70.)
When my children were younger, they’d do foolish things in the house. Like throw a football in the living room. Our family mantra is kindness always, no exceptions. So, rather than simply scold them, I’d ask them calmly: What happens next, boys? And they’d sheepishly answer, “Something is gonna get broken, and we will have to clean it up.” Sometimes they’d go outside with the ball. Sometimes something would get broken, and they had to clean it up.
When you participate in a market mania, I can tell you what happens next. Something will get broken, and you’ll have to clean it up. If you’d bought the Nifty Fifty in 1969, your portfolio was down almost 95% five years later – despite the incredible returns of the early ‘70s..
Today, we have the exact same scenario. Buffett has taken his chips off the table. If you look at the most recent Berkshire Hathaway quarterly report (3Q 2024) you can see that in his insurance subsidiaries, Buffett has increased his U.S. Treasury bill holdings (cash) by $150 billion in the last year. He now holds more T-bills than equities ($288 billion versus $271 billion). We know from press reports and other securities filings that he’s continued to sell stocks, and that his cash balances are now well over $300 billion.
But, meanwhile, the Nifty Fifty… whoops… I mean the Magnificent 7 (Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla) have continued to hit new highs. According to GAAP (Generally Accepted Accounting Principles), Tesla now trades at a P/E ratio of 197. We are well beyond Tokyo levels. As a group, the Magnificent 7 has been trading at around 50 times earnings.