Skepticism
“Our purpose in investing is serious, not fun, and we must constantly be on the lookout for things that can’t work in real life. In short, the process of investing requires a strong dose of disbelief. . . . Inadequate skepticism contributes to investment losses. Time and time again, the postmortems of financial debacles include two classic phrases: ‘It was too good to be true’ and ‘What were they thinking?’” —Howard Marks (2005)
In what seems like a rarity these days, stock markets had a negative week—although not too negative. The S&P 500 fell by 0.42%, and the Nasdaq fell a little more at 1.34%.
Volatility returned after some inflation data early in the week caused stocks to tumble for a while before they came almost all the way back—and then backed off once again to end the week.
It seems—as of now, this week, this minute—that maybe the Fed will be a little slower to cut rates than the market had previously expected. So be it.
If the world continuously focuses on the Fed, which certainly moves the markets in the short run, maybe you can find some value in things the world isn’t paying attention to. Investing is hard enough without having to predict what’s going on inside the minds of central bankers.
And we think one should be skeptical of those who claim they know what will happen regarding rates—and skeptical toward many other things because we’re in a market that still has the seeds of speculation that cause people to lose a lot of money. Maybe we just don’t get it, but what’s happened with the stock prices of Nvidia and Super Micro Computer during the last few weeks smells a lot like 1999 and early 2000.
Back then, the internet did change the world, and optimism about how it would transform everything was justified. But justifying stocks at any price wasn’t such a good idea. If you bought the Nasdaq at its peak, it took 14 years to break even. If you bought it a year before its peak, at a much lower price, it still took 11 years to break even.
We’re seeing much the same with AI today. It’ll likely change the world. But any stock at any price having to do with AI might not be the best allocation of capital. It’s probably good to be a little skeptical and remain diligent about the price you’re paying.
“It seems to me what is called for is an exquisite balance between two conflicting needs: the most skeptical scrutiny of all hypotheses that are served up to us and at the same time a great openness to new ideas. Obviously those two modes of thought are in some tension. But if you are able to exercise only one of these modes, whichever one it is, you're in deep trouble.” —Carl Sagan
Tweets of the Week
In Case You Missed it…
Long-Term Compounding w/ Chris Mayer | Constellation Software, Topicus, & Lumine (video)
The Berkshire Hathaway Playbook
Nvidia, Nano-X and the interpretation of 13F filings
FLASH – Valuation Gap: The spread between two companies in the same business
Focused Compounding Podcast: Ep 432. Outsider CEOs: Bill Anders and General Dynamics
Wisdom From The Top Podcast: The Gospel of Slow Growth, ft. Jason Fried
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