VD 113: Fearful when others are greedy

In this issue:

• Fearful when others are greedy

• Stock in focus: basket of oil

• The Rationality Test: NioCorp

• What I’ve been reading these past few weeks

• News from our companies

• Doubler Portfolio update

Fearful when others are greedy

Warren Buffett’s famous quote, “Be fearful when others are greedy and greedy when others are fearful,” has crossed my desk countless times over the last few years whenever we hit a minor dip. Back then, I never actually saw the fear.

As you know, I’ve been spotting the greed for quite some time now. In a CNBC interview following the Berkshire Hathaway annual meeting, Buffett mentioned that the stock market is currently crawling with gamblers. We aren’t just talking about speculators anymore; we’re talking about outright gamblers.

I’ve been saying this for ages, of course, and at a certain point, it starts to feel a bit ridiculous to keep repeating myself. I mean, who still believes me? But it truly is what I’m seeing in the market. Even though there are still buying opportunities for us, I remain convinced that markets are generally overpriced and that we’re inching closer to a real crash on the scale of 2008, 2000, or even 1929.

My fear regarding the magnitude of this isn’t just based on greed or the sometimes-ridiculous valuations we see in many popular stocks. Over the past few years, we’ve also witnessed a self-reinforcing mechanism driven by massive share buybacks from tech giants and the surging popularity of passive investing. Those buybacks pushed share prices up, forcing index funds to buy even more of these companies. That, in turn, drove prices higher, triggering more buying. People started paying more and more for the same dollar of profit, to the point where earnings expectations are now lower than the yields on government bonds. Yet, passive investors just keep on buying.

However, what we’re seeing today is that these “big spenders” are halting their share buyback programs. They are now only buying what’s mandatory for their stock-based compensation plans. The mechanism behind that compensation is a whole different discussion, but let’s just say it leads to earnings being overestimated. The buybacks are stopping, not because they’re value-destructive due to high share prices (which they are), but because the capital is flowing elsewhere: specifically, into their AI investments.

Now, imagine if the inflow into passive funds also dries up or slows down. The buyers for these stocks would disappear entirely. And what if a tough economic climate forces people to sell their passive funds because they actually need the cash? That doesn’t even have to be the only reason; looking at the age curve, there are simply more people retiring who need to live off their pension pots. That alone is enough. If that happens, who is left to buy these shares?

If passive funds are no longer on the buy side and companies aren’t buying back their own shares at the same rate, who’s going to step up? Individual investors? Actively managed funds? I don’t see any other major institutional players who aren’t already invested in these stocks and have the capacity to fill the gap left by ETFs. The same goes for smaller funds and retail investors.

Hormuz vs AI

Right now, there’s a real tug-of-war happening in the market: Hormuz versus AI. Beyond the sky-high valuations—which are reason enough to trigger a significant correction—there are other factors we should be worried about, and frankly, the market isn’t pricing them in nearly enough.

Let’s look at what we actually know about the trouble in the Strait of Hormuz:

• The conflict is far from over.

• The oil and gas tankers that were already en route have mostly reached their destinations. Once that inventory runs dry, that’s when we’re really going to feel it. At that point, it won’t just be about the price anymore; it’ll be about availability.

• Even if a deal is struck tomorrow, it will take weeks for ships to start moving again due to demining, insurance hurdles, and crews needing to return to their posts.

• Once they finally set sail, it’s another few weeks before they actually arrive at their destination.

• We’re talking about 20% of the world’s gas and 15% of its oil being affected here.

• Terminals and pumping stations have been damaged. Rebuilding and getting them back online will take months; in some cases, people are even talking about a 36-month timeline.

• Iran has learned just how easily and cheaply they can hold the world hostage.

Add to this the fact that we’ve seen years of underinvestment in fossil fuels. I actually wrote about this in edition 107, which came out about two weeks before the war started.

The conclusion is clear: even if the conflict ends quickly, high oil prices are here to stay. My concern isn’t necessarily how high the peak price goes, but rather the fact that we’re looking at elevated prices for a prolonged period. This weighs heavily on the global economy because oil isn’t just about the fuel in our cars, trucks, or planes—it’s about chemicals, medicine, cosmetics, construction materials, plastics, clothing, paint, and more. When everything gets more expensive, consumers have to cut back somewhere. After all, it’s the consumer who picks up the tab at the end of the day.

Besides the now-familiar Buffett Indicator, there are plenty of other red flags and unique signals popping up. For instance, we’ve never seen such a rapid recovery after a 10% drop. It’s also only happened a handful of times before that the S&P 500 hit new records while so many individual companies within the index were trading at their lowest levels in over a year.

The other side of the coin

Then again, there are plenty of reasons why a crash might not be just around the corner. For starters, the expansion of AI is a massive win for all the subcontractors involved. And if the promised productivity gains actually materialize, we could be looking at a period of robust economic growth.

So far, we’re also not seeing any indicators that AI is leading to job losses. Sure, the tech giants are laying people off using that narrative—it’s an easy sell and it keeps shareholders happy about those massive investments. But let’s be real: the true reason is that they simply over-hired during the war for talent.

Plus, just imagine if AI makes the leap from the digital world to the physical one. I’m personally dreaming of a robot that can handle my electrical work, plumbing, and gardening.

History shows that when people gain free time, they find something else to do. About 150 years ago, 60% of the population worked in agriculture just to keep everyone fed. Today, that’s crumbled to just a few percent. People moved to factories first, and then into other sectors and services. I’m convinced we’ll absorb the impact of AI in much the same way.

We also know Trump will do everything in his power to keep the stock market propped up. The U.S. Midterms are coming up in November, and he won’t want to lose them, as that would seriously curb his power.

Another thing: we haven’t seen those massive IPOs yet, which is usually a classic precursor to a crash. We do know the S&P 500 is looking to tweak its rules to give mega-caps a bit more breathing room, potentially easing the profitability requirements. This is clearly aimed at companies like SpaceX.

Besides, everyone is already well aware of these high valuations and the underlying issues.

Tough market to navigate

All of this makes for a tricky market to navigate, and we haven’t even touched on inflation yet—which is a perfect reason not to sit on too much cash for too long.

It’s up to us to pick up (undervalued) companies that can weather a storm and come out stronger on the other side. This is also the time to take a long, hard look at your portfolio and see if there are any stocks you’d be better off selling. I really like Howard Marks’ take on this; he doesn’t just see it as a sale, but as an “undo-buy.”

Usually, you sell because one of the following things happens:

• You find new information that invalidates your original thesis.

• The price has simply become too high.

• You’ve found a better opportunity elsewhere.

Because of this, you sometimes end up with stocks lingering in your portfolio for which you don’t have an immediate reason to sell. But if you start asking yourself whether you would buy those same shares today, under current conditions, the story often changes. And if you wouldn’t buy them today, you’re probably better off selling.

This is essential, especially in the current market, which you might—like me—expect to see a correction in. If you don’t have 100% conviction in a stock now, that conviction is only going to crumble if it drops 20% or 30%. I’ve identified two stocks in my own portfolio that I’d un-buy, so I can deploy that capital into a sector where I see far more potential right now.

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