The Long Term Investor

HERE was the housing news today.....as expected......no inventory....and.....a HOT market. Good news for just about anyone that owns a home. It will be interesting to see if people can avoid treating this like FREE money in a piggy bank.

Existing-home sales fall for fourth straight month

https://www.foxbusiness.com/economy/existing-home-sales-may-2021

(BOLD is my opinion OR what I consider important content)

"Existing-home sales fell for a fourth straight month in May as prices grew by the most on record.

The number of contracts closed slipped 0.9% in May to a seasonally adjusted annual rate of 5.8 million from 5.85 million in April, according to the National Association of Realtors. Analysts surveyed by Refintiv had expected 5.72 million contracts closed.

"Home sales fell moderately in May and are now approaching pre-pandemic activity," said Lawrence Yun, NAR's chief economist. "Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.

The decline in contracts in May closed came as the median existing-home price surged by a record 23.6% year over year to $350,300. Prices have posted 111 straight months of year-over-year gains since March 2011.

Total housing inventory at the end of May was 1.23 million units, 7% from April. Still, that was 20.6% below the 1.55 million homes available a year ago. Unsold inventory ticked up to 2.5 months, but remained far below the 4.6-month supply that was seen in May 2020.

Homes remained on the market for an average of 17 days in May, unchanged from April but down 34% year over year.

For the second straight month sales were only higher in the Midwest, where they rose 1.6%. They fell 4.1% in the West, 0.4% in the South and 1.4% in the Northeast. On an annual basis, sales increased 27.2% in the Midwest, 46.9% in the Northeast, 47.2% in the South and 61.6% in the West.

MY COMMENT

GOOD news for just about anyone that owns a home. The ULTRA-HOT sellers market continues in many, if not most, areas of the country.

 

HERE is another take on housing....especially.....the BONUS of ALL TIME LOW mortgage rates.

You can 'buy an awful lot of home' right now — if you can find one

https://finance.yahoo.com/news/expert-buy-home-mortgage-rates-154418081.html

(BOLD is my opinion OR what I consider important content)

"Historically-low mortgage rates are the primary driver of the red-hot housing market, according to one expert.

"The low mortgage rates basically drive what we refer to as house-buying power," Mark Fleming, chief economist of First American, told Yahoo Money. "How much home can you afford to buy? Well, a mortgage rate of 3% or 3.5% means you can buy an awful lot of home."

Before the global financial crisis, mortgage rates ranged from 4.5% to 6%, then near-record lows. But rates sank lower after the Great Recession, especially as the Federal Reserve kept its benchmark interest rate near zero to spur economic growth.

"We've had mortgage rates in this very low range for about a decade now, so we've been stimulating house-buying power and demand for a very long time since the global financial crisis," Fleming said.


Mortgage rates remain near historic lows. (Credit: Freddie Mac)

However, the low rates have exacerbated another problem in the housing market: a lack of homes for sale.

Many existing homeowners have been able to refinance their mortgages and lock in rates as low as 2.5% to 3%, a move that "discourages them from bringing to the market supply," Fleming said.

Existing home sales dropped in May for the fourth consecutive month, marking the slowest annual pace since June 2020. The market is weighed down by low inventory and high prices: The median sales price again hit a record high of $350,300, eroding much of the affordability that low mortgage rates provide.

And so while the Fed has signaled it won't increase its fed funds rate until 2023, which would put upward pressure on all interest rates, Fleming expects that mortgage rates will ultimately increase again from the lows that buyers now take for granted.

"We've gotten used to it, we've set our expectations around it," he said, noting that higher rates would help cool price appreciation as well. "That said, people will still buy homes. It's not purely a financial decision to sell or to buy.""

MY COMMENT

If you can find a house that you like.....this is the GOLDEN ERA of mortgage rates. Once the FED starts to raise rates in a few years the rates are going to go up. AND.....sooner or later.....they WILL go back to the "normal" 4.5% to 6.0% range.

 

Another....KILLER...day today in the markets. The NASDAQ hit a record high. A very nice day for the BIG CAP GROWTH stocks.

US STOCKS-Nasdaq ends at record high as Big Tech roars back

https://finance.yahoo.com/news/us-stocks-nasdaq-ends-record-202545571.html

(BOLD is my opinion OR what I consider important content)

"June 22 (Reuters) - The Nasdaq ended at a record high on Tuesday, lifted by Amazon, Microsoft and other top-shelf tech companies as investors shifted their focus to growth stocks.

Microsoft rose 1.1% and its stock market value briefly breached $2 trillion for the first time, while Apple , Facebook and Amazon also rallied more than 1% each.

Amazon had over $5.6 billion in total online sales in the United States on the first day of its Prime promotional event, according to Adobe Digital Economy Index.

In a congressional hearing, meanwhile, Federal Reserve Chair Jerome Powell reaffirmed the U.S. central bank's intent to encourage a "broad and inclusive" recovery of the job market and not to raise interest rates too quickly based only on the fear of coming inflation.

So-called value stocks, expected to benefit from the economic recovery, have outperformed in 2021, while growth stocks, including major tech names like Apple and Nvidia, have rallied since the Fed last week took a stance on future rate hikes viewed by many as more aggressive than expected.

The S&P growth index has added almost 2% since before the Fed last Wednesday projected an accelerated timetable for interest rate increases, compared with a drop of almost 2% in the value index.

"The market was caught off guard regarding the Fed’s hawkish commentary, and that’s 100% of what is happening," said Andrew Mies, chief investment officer of 6 Meridian. "All the smart people were surprised about how hawkish the Fed was, and now they are adjusting their portfolios."

Nine of the 11 major S&P sector indexes rose, with consumer discretionary and tech the biggest gainers, each up about 1%.

The Dow Jones Industrial Average rose 0.2% to end at 33,945.58, while the S&P 500 gained 0.51% to 4,246.44.

The Nasdaq Composite climbed 0.79% to 14,253.27.

GameStop jumped 10% after the videogame retailer said it raised over $1 billion in its latest share offering, cashing in further on this year's Reddit-driven surge in its stock price.

Sanderson Farms rallied about 10% to a record high after J.P. Morgan raised its price target on the stock after a source told Reuters that the poultry producer was exploring a sale.

Twitter ended almost 3% higher after it said it will seek applications from users to test new content subscription and ticketing features, as the social platform works to build more ways for users to earn money.

Moderna Inc rose 6.3% after the European Union decided to take up an option under a supply contract with the drugmaker that allows the bloc to order 150 million additional COVID-19 vaccines.

Splunk Inc surged over 11% after the data analytics software maker said private equity firm Silver Lake invested $1 billion in the company's convertible senior notes.

Advancing issues outnumbered declining ones on the NYSE by a 1.26-to-1 ratio; on Nasdaq, a 1.08-to-1 ratio favored advancers.

The S&P 500 posted 28 new 52-week highs and 1 new low; the Nasdaq Composite recorded 78 new highs and 56 new lows.

Volume on U.S. exchanges was 9.5 billion shares, compared with the 11.1 billion average over the last 20 trading days."

MY COMMENT

A GREAT ....but.....very shallow, low volume day. The summer doldrums when movement is AMPLIFIED by the lack of volume. I like the description above of the BIG CAP monster stocks as......"top shelf".....yes, they are.

AND.....how about AMAZON....5.6 BILLION in sales in ONE DAY. Amazing.

We need to continue this little...two day....trend for the rest of the week and JUMP up to a record in ALL the averages. I am at a personal ALL TIME HIGH today. Not that it is my doing.....since I simply dont do anything at all.....short term. In fact other than looking at quarterly earnings......I dont even look for any news items or anything else on any of my holdings over the short term. I just let the stocks......RUN AS THEY WISH.

I continue to be fully invested for the long term as usual.

 

GLAD to see that Bitcoin managed to make a nice come-back today and end up well over $32,000. I hate to see people lose money. It is an ULTRA RISKY trading vehicle for many people....but....like many types of investments....I would guess that those that are very long term will do OK.

 

Value investing is a proven WINNER.....as a strategy. BUT...one weakness that I see with PURE value investing is the difficulty incorporating.....future growth potential....into the evaluation of companies.

Value Investors Don’t
Need to Avoid Growth
Companies. In Fact, Doing
So Can Hurt Returns.

https://www.institutionalinvestor.c...h-Companies-In-Fact-Doing-So-Can-Hurt-Returns

(BOLD is my opinion OR what I consider important content)

"Think growth and value can’t coexist? Think again.

Traditional value investors pick stocks that are trading below their fundamentals based on a wide variety of measures. As a result and by definition, many dismiss growth companies altogether. But one manager believes that ignoring growth stocks out of hand is “fundamentally flawed.”

Value investor Applied Finance, with $1.25 billion in assets under management, argues that traditional metrics — such as low price-to-book and price-to-earnings multiples — don't provide investors with a comprehensive framework and are inadequate in identifying stocks that are trading below their intrinsic value; in fact, companies that are trading on apparently high multiples may actually be undervalued in terms of their overall valuation, thus creating opportunities for large returns.

“We’re redefining what value is. The term has been tortured and confused with cheapness,” said Rafael Resendes, co-founder of Applied Finance, who initially started the firm as a consultancy for corporations.

The argument comes as investors have debated for years the reasons behind the long underperformance of value strategies, even though these stocks have recently staged a comeback. In fact, academics and practitioners have regularly debated the definition of value investing itself. Warren Buffett, the most famous value investor, has evolved from looking for so-called Cigar Butts to higher quality stocks. Bill Miller, the former portfolio manager of Legg Mason Value Trust and now CIO of Miller Value Partners, famously owned high-flying technology stocks in his value portfolio.

Launched in 1995 from a basement in Chicago, Applied Finance's unconventional approach includes performing weekly valuations on 20,000 stocks and selecting companies not based on the “cheapness” factor employed by many value diehards, but through a valuation-based discipline comprised of R&D, growth potential, competition, and risk.

“One of the things we’ve been doing since 1995 is capitalizing on research and development costs,” said Resendes. “This is something that is just now being viewed as transformational in the value investing universe.”

Applied Finance focuses on a company’s allocation to R&D, but weighs them differently between companies. For example, a dollar allocated to R&D for Alphabet (Google's parent), will be worth more than a dollar of that for IBM, owing to the difference in growth potential, explained Resendes. The firm then makes projections based on the return of those investments —generated cash flows — before figuring out a company’s economic profit horizon. “It’s understanding the economics of a firm, not just its accounting.” Economic profit in this context is defined as, “the cash remaining after a firm has provided investors the minimum return they require for providing the company capital.”

The firm’s models then extract how much a company will reinvest in the future by looking at its history, the competition facing a particular company, and the risks associated with the investment — that is, how much the firm is willing to pay until a company performs well marketwise or vice versa. This matters especially for value stocks since investments are made for the long haul. “...a primary goal of value-based metrics is to eliminate the numerous distortions in accounting data to provide comparability across time, firms, and industries,” stated Applied Finance in a 2000 report.

According to Applied Finance, the strategy has generated returns that have outperformed the S&P 500 over the past five to ten years, despite having invested in what were considered growth stocks. Some of these companies include Monster, Mastercard, Apple, and Nvidia. One of its best bets was buying Nvidia for $13 per share in 2011 and selling it for $525 apiece this past August.

The firm, which invests in 50 companies at any given time, doesn’t commit to a particular sector precisely because of its valuation approach, Resendes said.

The question is why value is still tied primarily to “cheapness.” Part of the reason, according to Resendes, has to do with financial academia and research widely used by investors. “The academic literature is rigorous but financial analysis is very poor.”

The findings, he explained, fail to focus on valuation and are concentrated in statistical properties of stock prices rather than the fundamental properties of a company. “They’re always using backward-looking data,” said Resendes. “What’s missing is live and out-of-sample data.” Other academics have recently echoed similar sentiments, expressing that the old ways have “outlived their usefulness.”

Applied Finance’s position comes less than a week after the Federal Reserve signaled raising interest rates sooner than investors had expected —twice by 2023 — sending tech stocks soaring and value stocks such as cyclicals — finance, industrials, energy and commodities — to retreat (though some of these stocks have since rallied from last week’s decline).

The shift in the Fed's stance and thus the performance of certain stocks may, of course, be overstated. Research by Acadian Asset Management last week challenged the simplified narrative on the relationship between rates and value, arguing that it depends on the confluence of many factors, and, more importantly, the need for a nuanced approach — a call that value investors like Resendes are increasingly pushing for. "

MY COMMENT

Many many posts ago I posted an article about Warren Buffett and his evolution to investing in some growth companies that he would have ignored earlier in his life. I will try to find that post. BUT....my view is that traditional means of evaluating VALUE do not adequately factor in future growth potential of many companies that on paper appear fully valued......but....in hindsight were/are not.

That is one reason that I try to FOCUS on BIG CAP GROWTH companies in my personal portfolio.

 

ANOTHER....nice open today. I assume that it is on low volume and very shallow. BUT....who cares I will take any GAIN I can get...no matter why.

NVDA is UP again....but has backed off a little bit at the moment. This company has had an amazing one month run up. I thought they would have a short time of weakness heading to the split due to the length of time from the announcement to the actual split. Now...it is starting to look like they might just BOOM all the way to the split date.

AND......this is one of those time when investors see the value of being fully invested for the long term. We are seeing significant GAINS.....and....have been for some time now. A classic STEALTH RALLY. All the day to day drama and fear and turmoil has.....HIDDEN....the fact that over the past SIX MONTHS.....the markets have gone up significantly.

YES......the POWER of long term investing.....as well as the power of NOT trying to time the markets. Not a shocking thing.....since ALL the academic research.......about what works in investing...... FULLY supports what has been happening.

 

HERE is the previous post that I mentioned in the above post. this post was made in the first 10 pages of this thread. I am RE-POSTING it now. I see the information in this post as the BASIC BASIS for ALL successful investing. If I had to sum up my investing strategy and style....this would be it.

HERE IS THE POST......no bold here....I would end up bolding the entire article.

"THANKS..........AND............here is a GREAT ARTICLE. As I was reading this I was mentally yelling.....YES...YES. This article reflects my views on LONG TERM investing. My portfolio was ALL the BIG CAP, ICONIC, AMERICAN, DIVIDEND PAYING companies, all the big names PG, KO, GIS, MO, etc, etc. But about four or five years ago it became apparent that the millennial generation was starting to create a change in society, product preference, digital life, etc, etc. So I have modernized my portfolio into the current model that is previously in this thread.

BUT....this is a GREAT ARTICLE, the writing and the investing story and philosophy. So....I am posting the whole thing:

"An Evolve-or-Die Moment for the World's Great Investors
The dominance of tech stocks has forced some of the best investing minds—including Warren Buffett himself—to reexamine their thinking. Who will adapt and survive?"

http://www.fortune.com/longform/value-investing-warren-buffett-tech-stocks/

"At this year’s annual Berkshire Hathaway meeting in Omaha, Warren Buffett, the high priest of value investing, uttered words that would have been grounds for excommunication if they had come from anyone but him.

Buffett began his career nearly 70 years ago by investing in drab, beaten-up companies trading for less than the liquidation value of their assets—that’s how he came to own Berkshire Hathaway, a rundown New England textile mill that became the platform for his investment empire. Buffett later shifted his focus to branded companies that could earn good returns and also to insurance companies, which were boring but generated lots of cash he could reinvest. Consumer products giants like Coca-Cola, insurers like Geico—reliable, knowable, and familiar—that’s what Buffett has favored for decades, and that’s what for decades his followers have too.

Now, in front of roughly 40,000 shareholders and fans, he was intimating that we should become familiar with a new reality: The world was changing, and the tech companies that value investors used to haughtily dismiss were here to stay—and were immensely valuable.

“The four largest companies today by market value do not need any net tangible assets,” he said. “They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an asset-light economy.” Buffett went on to say that Berkshire had erred by not buying Alphabet, parent of Google. He also discussed his position in Apple, which he began buying in early 2016. At roughly $50 billion, that Apple stake represents Buffett’s single largest holding—by a factor of two.

At the cocktail parties afterward, however, all the talk I heard was about insurance companies—traditional value plays, and the very kind of mature, capital-intensive businesses that Buffett had just said were receding in the rearview mirror. As a professional money manager and a Berkshire shareholder myself, it struck me: Had anyone heard their guru suggesting that they look forward rather than behind?

There is a deep and important debate going on in the investment community, one with profound repercussions for both professional money managers and their clients. Some believe that Buffett is right—that we have become an asset-light economy and that value investors need to adapt to accommodate such changes. Noted value managers like Tom Gayner of Markel Corp. and Bill Nygren of Oakmark Funds, for instance, count companies like Amazon and Alphabet among their top holdings. The fact that these stocks often trade at above-market valuations—a factor that once scared away orthodox value investors—hasn’t deterred them, because the companies’ futures are so bright that they’re worth it.

Other value managers like David Einhorn at Greenlight Capital and Bruce Berkowitz at Fairholme are betting on the very same old-economy companies that Buffett long favored. Berkowitz, Morningstar’s domestic equities Manager of the Decade from 2000–10, has seen his performance suffer this decade, thanks to positions in AT&T and, most notably, Sears Holdings, which declared bankruptcy earlier this fall. Einhorn’s performance has also suffered; his largest position is GM, and he says he has been short what he calls a “bubble basket” that includes Tesla, Netflix, and Amazon.

All value investors continue to agree that price is an important component of value—that’s why we’re called value investors. What’s happening now is a debate about what the drivers of value are—of what constitutes value in the 21st-century economy—and what will drive both the economy and the market forward over the next generation.

Value investors are just that—we hunt for value, and our focus on price in relation to a business’s value makes us easily distinguishable from other investors. Momentum investors, for example, care about price only insofar as they can sell whatever they’ve bought to someone else at a higher one—the so-called greater-fool approach. Then there’s growth investing, in which price takes a distant second place to a business’s prospects for rapid expansion. Because weighing price vs. value is paramount in value investing, those in this school have a reputation of being long-term-oriented, self-denying cheapskates.

The father of value investing was Ben Graham, who gave birth to it roughly 100 years ago, when 100% of the components of the Dow Jones industrial average were just that—industrials. Hard assets were what drove companies like Anaconda Copper and National Lead. Consumer marketing was in its infancy; in 1915, the closest thing the Dow had to a consumer products company was General Motors (or maybe American Beet Sugar).

The year before, Graham had graduated second in his class from Columbia University with such a gifted intellect that he was offered teaching positions in three departments: philosophy, mathematics, and English. Acquainted with poverty at an early age, however, Graham chose a career in finance. The market of his day was dominated by tipsters, schemers, and speculators; stock operators trying to corner the market in United Copper had caused the Panic of 1907, which wiped out Graham’s widowed mother’s savings. Graham loathed such speculations, but he was attracted to the upside of equities. He saw them for what they were: a fractional ownership of a company’s business.

Driven by both his academic temperament and practical necessity, Graham set about trying to figure out a predictable, systematic way to make money in stocks. For an answer, he turned to corporate financial statements and the tangible assets represented therein. Graham saw that while equities went up and down in the short run according to the whims of the market, a company’s tangible assets—its forges and its foundries and the inventory they produced—had a solid, knowable value. Graham began to calculate that value in a precise, mathematical way. He asked himself: What would a company be worth if it were to liquidate its assets and pay off its liabilities? Sometimes the liquidation would actually occur; other times it would be a theoretical exercise that gave Graham what he termed a “margin of safety” when buying a security.

By quantifying value and then juxtaposing it with price, Graham found he could make sense of markets. Thus was born security analysis and, with it, value investing.

From the beginning, value investing focused on the quantitative and tangible aspects of a business. Graham was an intellectual who lived in abstractions; he didn’t want to know about the products the companies made. Irving Kahn, one of Graham’s assistants, told Buffett biographer Roger Lowenstein that if someone began to describe to Graham what a company actually did, he would get bored and look out the window. With his focus on liquidation value, Graham tended to buy boring, beaten-down businesses—cigar butts, they came to be known, good for only a few extra puffs. Walter Schloss, a Graham analyst who later became a legendary value investor in his own right, once pitched Graham on Haloid, which owned the rights to a promising technology that would one day become the Xerox machine. While there is no record as to whether Graham looked out the window, he nevertheless said no.

“Walter,” he said, “it’s just not cheap enough.”

One of Graham’s acolytes was a young man from Omaha who was born into the Depression but came of age during America’s large, optimistic postwar expansion. As a teenager, Warren Buffett tried to understand the stock market by studying charts and other technical indicators; when he came upon Graham’s writings, he said that he felt “like Paul on the road to Damascus.” Buffett came East for business school to study under Graham, who by then was teaching at Columbia, and he briefly worked for Graham after graduation. The classic middle-American boy, however, Buffett soon quit New York for his beloved hometown.

Surveying the economy of the mid-1950s with his own partnership, Buffett saw that it was vastly different from the one Graham had encountered as a young man. While the Dow Jones industrial average was still dominated by industrials, it also contained Procter & Gamble, Sears Roebuck, and General Foods. These companies were fundamentally different from an industrial company: The primary driver of their business value had little to do with hard assets. Rather, the value had to do with the company’s brands—with the loyalty and familiarity that customers felt for Ivory Soap and Jell-O gelatin. These emotional ties, encouraged and cemented by mass marketing, allowed businesses to charge high prices for relatively mundane goods.

The great enabler of such businesses was the rise of national television, which both emanated from and reinforced a culture of homogeneity. Market-leading brands used scale in a very different but no less effective way than manufacturing companies. A beer, shampoo, or cola brand with dominant share could flood the three major TV networks with more advertising than their competition, yet still spend less than the competition as a percentage of absolute sales dollars. This set up a virtuous circle for dominant brands and a vicious circle for those less fortunate. Brands like Budweiser went from strength to strength; strong regional brands like Narragansett beer, once the No. 1 seller in New England, slowly but surely withered away.


With the help of his partner Charlie Munger, Buffett studied and came to deeply understand this ecosystem—for that’s what it was, an ecosystem, even though there was no such term at the time. Over the next several decades, he and Munger engaged in a series of lucrative investments in branded companies and the television networks and advertising agencies that enabled them. While Graham’s cigar-butt investing remained a staple of his trade, Buffett understood that the big money lay elsewhere. As he wrote in 1967, “Although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side, where I have had a ‘high-probability insight.’ This is what causes the cash register to really sing.”

Thus was born what Chris Begg, CEO of Essex, Mass., money manager East Coast Asset Management, calls Value 2.0: finding a superior business and paying a reasonable price for it. The margin of safety lies not in the tangible assets but rather in the sustainability of the business itself. Key to this was the “high-probability insight”—that the company was so dominant, its future so stable, that the multiple one paid in terms of current earnings would not only hold but perhaps also expand. Revolutionary though the insight was at the time, to Buffett this was just math: The more assured the profits in the future, the higher the price you could pay today.

This explains why for decades Buffett avoided technology stocks. There was growth in tech, for sure, but there was little certainty. Things changed too quickly; every boom was accompanied by a bust. In the midst of such flux, who could find a high-probability insight? “I know as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz,” Buffett wrote in 1967, referring to an obscure Polish beetle. Thirty years later, writing to a friend who recommended that he look at Microsoft, Buffett said that while it appeared the company had a long runway of protected growth, “to calibrate whether my certainty is 80% or 55% … for a 20-year run would be folly.”

Now, however, Apple is Buffett’s largest investment. Indeed, it’s more than double the value of his No. 2 holding, old-economy stalwart Bank of America.

Why? Not because Buffett has changed. The world has.

And quite suddenly: Ten years ago, the top four companies in the world by market capitalization were Exxon Mobil, PetroChina, General Electric, and Gazprom—three energy companies and an industrial conglomerate. Now they are all “tech”—Apple, Amazon, Microsoft, and Alphabet—but not in the same way that semiconductors and integrated circuits are tech. These businesses, in fact, have much more in common with the durable, dominant consumer franchises of the postwar period. Their products and services are woven into the everyday fabric of the lives of billions of people. Thanks to daily usage and good, old-fashioned human habit, this interweaving will only deepen with the passage of time.

Explaining his Apple investment to CNBC, Buffett recalled making such a connection while taking his great-grandchildren and their friends to Dairy Queen; they were so immersed in their iPhones that it was difficult to find out what kind of ice cream they wanted.

“I didn’t go into Apple because it was a tech stock in the least,” Buffett said at this year’s annual meeting. “I went into Apple because … of the value of their ecosystem and how permanent that ecosystem could be.”

If the postwar era was about consumer brands operating at scale, the early 21st century is about what we might call digital platforms. Like the branded enterprises before them, they have the permanence and probability that make for a good long-term value investment. Innovation scholar Carlota Perez has written about how at least five times in Western civilization, new technologies have erupted, gone through a speculative frenzy, and then busted, only to settle down after a shakeout into a long, protracted period of stability. We’ve had the high-tech eruption, we’ve had the frenzy of the dotcom boom, and we’ve had the bust. Now we are in what Jonathan Haskel and Stian Westlake, authors of Capitalism Without Capital, call the “bedding-in” phase.

Unlike branded companies, digital businesses often benefit from network effects: the tendency of consumers to standardize on a single platform, which reinforces both consumer preference and the platform’s value. Because of this, the market shares of these platform companies dwarf those of the consumer products giants; software businesses like these are often characterized by a “winner take all” or “winner take most” dynamic. Combine this with the fact that they require little to no capital to grow, and you have Value 3.0—business models that are both radically new and enormously valuable.

“In the past you would’ve needed a tremendous amount of capital to achieve global scale,” says Oakmark’s Nygren, whose top position in his Oakmark Fund is Alphabet, “but these companies have done it just by writing code and pressing ‘send.’ ”

Like their branded predecessors, the platform companies are wisely reinvesting their vast profit streams into not only their core business but entirely new platforms as well. Take Alphabet, which my fund also owns: It began with search, a classic two-sided market in which consumers looking for goods and services are paired with advertisers who want to reach them. Google gained an early edge thanks to a superior search algorithm; with the word “google” now routinely used as a verb, it commands 95% of all mobile search. Google tweaks its algorithm twice a day to maintain its search superiority; meanwhile, the cash flow from this asset-less platform is so abundant that the parent can afford to spend $20 billion a year on research and development. That’s more than the annual earnings of Coca-Cola and American Express combined. It’s going into not only the core franchise but also nascent platforms like YouTube (user-generated video content), Android (smartphone operating systems), and Waymo (driverless cars). None of these businesses earns much now, but they may soon do so, and they are funded entirely by Google’s search platform. Little wonder that Amazon founder Jeff Bezos once told a colleague, “Treat Google like a mountain. You can climb the mountain, but you can’t move it.”

Meanwhile, Bezos has built a mountain or two of his own. As the first big mover in e-commerce, he created a network of warehouses and logistics capabilities that now allows him to deliver packages to more than 100 million Prime customers in two days or less. He too has chosen to reinvest Amazon’s profits back into the business in various forms: lower prices for customers, ancillary services like Prime Video, and entirely new industries like Amazon Web Services, which provides outsourced, essential computational “plumbing” for the next generation of digital startups. In its core retail business, Amazon still has only a roughly 5% share of U.S. retail commerce despite being at it for more than 20 years. Amazon’s stock may be overvalued today—but with its dual moats of immense customer loyalty and low-cost provider status, there is no argument that it is very valuable.

As these platform companies create billions in value, they are simultaneously undermining the postwar ecosystem that Buffett has understood and profited from. Entire swaths of the economy are now at risk, and investors would do well not only to consider Value 3.0 prospectively but also to give some thought to what might be vulnerable in their Value 2.0 portfolios.

Some of these risks, such as those facing retail, are obvious (RIP, Sears). More important, what might be called the Media-Consumer Products Industrial Complex is slowly but surely withering away. As recently as 20 years ago, big brands could use network television to reach millions of Americans who tuned in simultaneously to watch shows like Friends and Home Improvement. Then came specialized cable networks, which turned broadcasting into narrowcasting. Now Google and Facebook can target advertising to a single individual, which means that in a little more than a generation we have gone from broadcasting to narrowcasting to mono-casting.

As a result, the network effects of the TV ecosystem are largely defunct. This has dangerous implications not only for legacy media companies but also for all the brands that thrived in it. Millennials, now the largest demographic in the U.S., are tuning out both ad-based television and megabrands. Johnson & Johnson’s baby products, for example, including its iconic No More Tears shampoo, have lost more than 10 points of market share in the last five years—an astonishingly sharp shift in a once terrarium-like category. Meanwhile, Amazon and other Internet retailers have introduced price transparency and frictionless choice. Americans are also becoming more health conscious and more locally oriented, trends that favor niche brands. Even Narragansett beer is making a comeback. With volume growth, pricing power, and, above all, the hold these brands once had on us all in doubt, it’s appropriate to ask: What’s the fair price for a consumer “franchise”?

To be sure, some of the digital-disruption rhetoric is overdone. Cryptocurrency replacing the bank system? Not likely. David Einhorn’s bearish calls on Tesla and Netflix may well be right, not because the stocks are expensive but because they face rising competition. And for all the hype about autonomous vehicles, they’re not anywhere close to being here—yet. But a lot can change in half a generation. If you google “Easter Day Parade, New York City 1900” and then “Easter Day Parade, New York City 1913” and look at the pictures that appear, you will see that the former has nearly 100% horse-drawn carriages while the latter has nearly 100% horseless carriages—i.e., automobiles. And when driverless cars do arrive, what happens to the auto industry? What happens to the auto-insurance industry—that cuddly, capital-intensive commodity business that value investors love to talk about at cocktail parties?

Long-term investors need to be thinking about such shifts, and they need to position their portfolios in accordance with them rather than against them. Darwin is often misunderstood, says Markel’s Gayner, who counts both Amazon and Alphabet among his holdings. “It’s not survival of the fittest, but those who are most adaptable to change, that make it through.”"

MY COMMENT

HERE Is a part of the article above that I have removed since it was out of context with the flow of the article. It is the summary of the guts of the article:

"Value 3.0 Rules of the Road
Even in an economy transformed by technology, many of Warren Buffett’s principles of value investing apply. Here, some dos and dont’s.

Dos
■ Always look for a business with a clear-cut competitive advantage. If you can’t explain to your spouse what makes a company special as a long-term moneymaker, it probably isn’t. Amazon has a stranglehold on e-commerce; Google owns search; Sherwin-Williams, in which my fund owns a stake, dominates brick-and-mortar paint stores. What makes a company able to earn outsize profits over the next generation?

■ Try to find companies with a small market share, a huge addressable market, and a large competitive advantage. This was Warren Buffett’s recipe for success with Geico, a once-tiny auto insurer that sold directly to consumers rather than pay agents’ commissions. These traits may be present in GrubHub (pictured above), the first mover in the food-delivery market, which my fund also owns. It has an industry-leading market share yet still has less than a 1% share of all American restaurant meals consumed each year. Still TBD: whether consumers will continue to migrate away from in-restaurant dining, and whether Uber and Amazon will try to eat GrubHub’s lunch.

Don’ts
■ As Buffett has said, never confuse a growing industry with a profitable one. One cautionary tale from the 2000s: Vonage, a pioneer in routing phone calls over the Internet. Business exploded over the past decade, but so did competition. Profits for everyone imploded, and the big winner (as is so often the case) has been the consumer. Vonage’s stock has never gotten back to its $17/share IPO price.

■ Avoid businesses whose best days are behind them. This is true even if you’re paying a cheap price relative to current earnings or book value because, in the long run, underlying business quality trumps price. Exhibit A: Sears Holdings looked cheap all the way down until it declared bankruptcy earlier this fall. You can still buy a fractional interest in Sears’s future today for a very cheap price, by the way—36¢ a share, as of this writing."

 

LOL....looks like I am caught in a low volume, shallow......little whirlpool.......with my CONCENTRATED stock portfolio. I am dead flat for the day....ZERO GAIN. The market....at the moment....has turned against my BIG CAP GROWTH companies.....AAPL, AMZN, MSFT, COST, HD, HON, and PG.....are all down, at this moment. The ONLY stocks that I own that are up....right now....are NVDA, GOOGL and NKE.

Nothing to see here.......I will wait till the end of the day for the final word. We will see if the ....."dark side".....can win out today. The markets dont seem to know what to do without all the SENSATIONALIST headlines. There is little in the news today......perhaps the fear mongers wore themselves out......or are on vacation.

 

HERE is the......irrelevant and obvious.....real property news of the day. Anyone with......a brain stem......knows why this data is the way it is.

Surprise 5.9% drop in new home sales; prices hit record high

https://finance.yahoo.com/news/us-home-sales-drop-5-141319935.html

(BOLD is my opinion OR what I consider important content)

"WASHINGTON (AP) — Sales of new homes fell unexpectedly in May and the 5.9% retreat was the second consecutive monthly decline even as the median price hit an all-time high.

The May sales decline pushed sales to a seasonally adjusted annual rate of 769,000, the Commerce Department reported Wednesday. That followed a 7.8% sales decline in April, a figure that was revised lower from what was initially thought to be a drop of only 5.9%.

The median price of a new home sold in May jumped to $374,400, up 18.1% from a year ago when the median price stood at $317,100. The average home price also rose in May to $420,600, compared with $368,700 a year ago.

A shortage of homes on the market and rising costs for materials like lumber, and also labor, is fueling the upward momentum.

The surge in lumber prices that began this year has started to unwind and that could help slow surging housing costs, but the shortage of homes to buy is still creating a very high bar for potential buyers.

“What we need to take the edge off double-digit housing price gains is more houses and the builder backlog and the strong permits rate show more new homes are coming,” said Robert Frick, corporate economist at Navy Federal Credit Union.

The inventory of new homes for sale increased to 330,000 in May, up 4.8% from the end of April. That would represent a 5.1 months supply of new homes at last month’s sales pace.

Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said “supply constraints appear to be easing somewhat” but she predicted that rising home prices would continue to be a headwind for sales.

Sales of existing homes fell for the fourth consecutive month in May, the National Association of Realtors said this week, even as the median price soared 23.6% from a year ago and breached $350,000 for the first time.

Homes that do hit the market often get multiple offers far exceeding the listing price. Demand is also being juiced by low mortgage rates, reflecting efforts by the Federal Reserve to help lift the economy out of the pandemic-triggered recession.

Declines were led by a 14.5% drop in the South, the region of the country that accounts for more than half of new homes sold annually.

Sales were flat in the Midwest and up in the other two regions, led by a 33.3% sales gain in the Northwest and a 6.7% gain in the West.

MY COMMENT

The ONLY thing......."unexpected"......about this data is that it was NOT anticipated.....at least by the experts. Ask any home owner or potential home buyer and the reason has been OBVIOUS for months. Like EVERYTHING right now that is SKEWED by the re-opening.....it is all about....SUPPLY AND DEMAND.

What a frustrating time for younger people looking for a first home or those that want to move up. Mortgage rates are at an all time historic low....yet there are no homes to buy.

 

LOL.....what a crazy day for the markets......as shallow as you can get. I ended up green......as TINY as you can get and still be positive. BUT...I beat the SP500 by .15%.

Looks like the averages went negative a bit more as the day went on toward the close.