Market Update


The Market

The overall market continues to rally. I think ya’ll are crazy.

Let’s look at where we are today:

  • Market cap/GDP is 132%. This is near the 139% level at the peak of tech bubble in 2000. GDP is also likely to decline significantly this year, so this is likely even higher.
  • Price/sales is 2x. The median since 2001 is 1.48x. This also represents a 20-year period where stocks have been historically expensive. For the entire period from 2003-2017, the market traded below this price/sales ratio.
  • The Shiller PE is currently 26.81. Not quite at internet bubble extremes, but still crazy considering the contraction that is taking place in the real economy. This is where the Shiller PE was before the crash of 1929 and in 2007 before the market fell apart.

Price/sales and market cap/GDP are near internet bubble extremes. This is really crazy.

I remember 1999 and 2000. It was a pretty incredible boom. I remember that it wasn’t about whether or not you could get a job – it was about whether or not you wanted one. The economy was in incredibly awesome condition.

I would not describe the condition of today’s economy as “awesome”.

I expect markets to trade at these kind of valuations when the economy is red-hot and everything is going swimmingly. I don’t expect these kind of valuations during a global pandemic in which unemployment is surging to 20% and we’ve eliminated a decade of job creation in a few weeks.

It’s like we’re selling a house that’s on fire on yesterday’s estimate of value from Zillow.

I think of valuations in terms of expectations. It tells you what the market expects to happen. Right now, the market is predicting a very optimistic future. This likely assumes that stimulus will work and the economy will quickly re-open, with unemployment dropping to 5% or so in short order.

This strikes me as an unrealistic fantasy. An unrealistic fantasy like winning the lottery, or scientists inventing chocolate sundaes that don’t make me gain weight.

It would be one thing to bet on that fantasy if I were being paid for that fantasy with a cheap valuation, but that’s not the case.

The bull case is that reality doesn’t matter and we should buy stocks because the Fed is providing so much stimulus.

Counting on the Fed to prop up an expensive market with deteriorating fundamentals doesn’t strike me as investing. It strikes me as speculation.

Maybe I’m wrong. It wouldn’t be the first time. Most people certainly seem like they disagree with me.

I don’t see why I need to participate in what I think is absolute madness.

I’ll continue to seek out positions where the risk/reward makes sense to me and hold cash if I can’t find these opportunities. Maybe I’ll under-perform. I don’t really care. No one has a gun to my head and is forcing me to participate in what I think is absolute madness. I don’t have a mandate forcing me to be fully invested.


Value investors are pumped.

Unfortunately, I think they’re like a starving man who is presented with a Snickers bar and thinks it’s an all-you-can-eat buffet. We have spent years out in the desert trying to find opportunities in a rich market where growth is rewarded at any price and value has been taken to the woodshed.

We’re jumping for joy at the first semblance of a bargain. I get it.

Of course, I’m talking about deep value investors. The value investors that succeeded in the last five years are those that quote Buffett’s 10x investment in Coke and 5x investment in See’s as a rationale to buy some SaaS company at a P/E of 200.

During economic calamities, we ought to be presented with a 2009-style opportunity. During a moment of total economic metldown the likes of which we haven’t seen in 100 years – we ought to have a 1974 style opportunity.

What we’re getting is a 2000-style opportunity.

I don’t think this is 2000. Value performed well in the early 2000’s because value was cheap and the economy wasn’t so bad. In the early 2000’s, unemployment peaked around 6%. The fact that the economy was doing alright caused value to chug along and deliver returns. Pricey stocks were annihilated because they were priced for the ’90s boom to last for 50 years.

Unemployment is likely to peak above 20%. I think that cyclical value stocks will continue to get killed in that kind of environment.


Goldfrapp – Felt Mountain




The new Dune movie looks awesome.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

The value of the market, the value of value, and some soul searching


Macro Valuations

I’ve written a lot about how the market is really expensive, no matter which way you slice it.

Meanwhile, we are facing a grim economic reality in which 6 million people are losing their jobs every week and cash flows are evaporating for American companies. Some estimate that unemployment will hit 20% (Great Depression levels) and GDP will take a massive hit, making the Great Recession look like a footnote.

Call me crazy, but I think valuations should be a lot lower in this environment.

My theory about market valuations is simple: the higher they are, the harder they fall.

Valuations don’t matter until we have a recession. When expensive markets run into a recession, they get annihilated. Because we can go for a decade without a recession, that’s a lot of time for valuations to run up to unsustainable levels. It’s also plenty of time for investors to get complacent and think valuations don’t matter. That was the prevailing attitude at the end of the ’90s and it has been the attitude recently.

The history of markets shows that markets move with earnings and cash flows over the long run and then exhibit speculative extremes in the multiples that investors are willing to pay for those earnings and cash flows.

Markets tend to extrapolate the present and assume current conditions will last forever and then get surprised when the environment shifts.

My goal (in my active account, anyway) is to take advantage of these sentiment shifts for individual stocks and the broader market. I want to buy from Mr. Market when he is depressed and sell to him when he is euphoric.

With market cap/GDP presently at 131%, macro valuations suggest that the market will deliver a negative return over the next decade. History suggests this negative return doesn’t happen in a straight line and that there will be a big bull market and a face-ripping bear somewhere in there. I think that the face-ripping bear is happening right now and we’re in the middle of it.

Right now, the markets are rallying because investors are realizing that the Fed won’t allow the system to collapse (I agree with this). They also think that the Fed they can engineer a quick and rapid recovery and pepper over rich valuations (I don’t agree agree with this).

Everyone seems to be getting very bulled up and cocky.

I think they are making a mistake.

It’s also possible that I’m making a mistake, so I decided to take a look at some additional data to figure out if that’s the case.

Value Investing Vs. The Market

Value purists would say that I shouldn’t pay attention to all of this nonsense.

They would argue that I’m not investing in the market. I’m investing in individual businesses. I’m not investing in the stock market, I’m investing in individual value stocks.

Unfortunately, it is impossible to assemble a group of 20-30 stocks that are not correlated with the market. Whether I like it or not, my stock portfolio is correlated with the market. The market matters.

To get around this and be less correlated with the market, I could concentrate in 5-8 of my “best ideas.”

I think this is a path that can cause permanent impairments of capital. A blow up in one or two positions can endanger the entire portfolio.

I’m also skeptical that I really have any “best ideas.” The best ideas of the best investors in history often blow up.

This is why diversification is the path I’ve chosen and I think 20-30 stocks is the best way to prevent portfolio blow ups while still offering the opportunity for outperformance.

The disadvantage of diversification is that I am more correlated with the market’s returns.

The Value of Value

With all of that said, I am worried that my focus on the valuation of the overall market is blinding me to the bargains within the deep value universe.

For this reason, I decided to take a look at the absolute valuation of the cheapo segment of the market. To do this, I used Ken French’s free data available on his website.

I restricted the data to the post-1990 universe. I’m considering the post-1990 period to be the modern era in which valuation multiples have been elevated.

I’m not expecting to be able to buy stocks at 1980 single digit CAPE valuations, for instance.

Let’s start by looking at cash flow/price.

Cash Flow/Price


At the end of 2019, the value segment of the market was close to its mean.

Not particularly exciting.

VBR (the Vanguard small value ETF) is down about 30% year to date, so I’d estimate that this is probably close to 20% now from 15% at year end 2019. That’s really encouraging, as it implies that the value segment of the market is close to its 2009 and early 2000’s levels. Those high levels will probably set the stage for tremendous performance in the upcoming years.

Interestingly, value was very expensive for most of the 2010’s. I think this is the key factor in value’s under-performance in the last decade. Value was expensive versus its long-run mean.


Meanwhile, in compounder-bro-land, the market is more expensive than it was during the internet bubble. No surprise there.

Something interesting to note: this glamorous segment of the market was cheap in 2010 and the early 1990’s, likely setting up the excellent performance for glamour in the 1990’s and the 2010’s.

Book to Market

In most environments, last year’s cash flows are a good proxy for what’s happening next year.

In Quantitative Value, Wes Grey and Toby Carlisle found that trailing-twelve-month earnings work better than normalizing them. It’s a very surprising result, but it suggests that last year’s earnings tend to be a good proxy for next year’s.

Of course, we are not in a normal environment. Many businesses are seizing up and revenues are collapsing with economic lockdowns in place. This makes this current environment unlike any recession we have experienced since World War II.

For this reason, I think book value is useful in this kind of environment. When earnings disappear, different metrics of value are useful even though earnings-based metrics work better in the backtests.


From this perspective, the value segment of the market was very cheap relative to its mean in the early 1990’s, the early 2000’s, and 2009. This makes sense, as those periods coincided with tremendous performance for value.

Like cash flow to price, this was also expensive through most of the 2010’s, explaining value’s woes during the last decade.

By this metric, at the end of 2019, value stocks were expensive.

With VBR down 30%, I estimate this is probably up to 190%. That is pretty good. It’s not as cheap as it was in 2009 or the early 2000’s, but it’s getting there.


Meanwhile, in compounder-bro-land, the market was more expensive at the end of 2019 than it was during the internet bubble.

Interestingly, it’s also evident that this segment of the market was cheap at the dawn of the 2010’s. This likely drove the tremendous performance of this segment of the market for the last decade.

Considering that QQQ is flat year to date, this segment of the market likely still beyond internet bubble extremes.

Good luck, compounder bros. I think you’re going to need it.

Soul Searching

Looking at this data, it suggests to me that I might be too cautious right now.

While the broader market is overvalued, the value segment of the market is approaching levels of cheapness last experienced in 2009.

On the other hand, this can get a lot cheaper, especially if the broader market tanks. This is particularly true considering that cash flows are about to disappear for a lot of businesses.

I could be allowing my emotions to blind me, which is a classic behavioral investing mistake. I am concerned about losing my job, for instance. I have a sizable emergency fund, but the idea of losing my job still worries me and can be clouding my thinking.

Earlier this year, I was contemplating selling my house and moving in search of another opportunity.

Now, I worry if I will be able to sell my house at a decent value. What job opportunities will even exist with the economy in lockdown?

Emotional stress might be interfering with my ability to see things clearly.

When I launched my blog, my hope was that I could build a portfolio of net-net’s when the next bear market arrived. During the boom, I’d stick to low price-to-earnings stocks and then shift my focus to net-net’s and negative enterprise value stocks.

There were net-net’s two weeks ago, but many of those bargains have since disappeared.

Is it possible that the opportunity to buy net-net’s emerged and disappeared in two weeks?


My gut tells me this is not the case and I will have an opportunity to purchase a portfolio of 20-30 high quality net-net’s and negative enterprise value stocks, but this French data makes me second guess that.

During this meltdown, I’ve been tempted to simply throw everything into my asset allocation which is down only 7.9% year to date. This allocation doesn’t try to predict the future and has caused me no stress.

If this market truly has passed me by and I’m wrong about everything, then I need to do some serious soul searching and re-evaluate my approach.

For now, I’m not ready to give up on my active account just yet. I do think there will be an opportunity to buy net-net’s and negative enterprise value stocks at some point during this bear market.

If not, I may need to simply pursue my asset allocation strategy and stop trying to pick stocks and predict the future.

It could also make more sense to focus more on arenas of the market where I can have more of an advantage, such as dark stocks and international net-net’s.

With that said, I don’t think I’m wrong, even though I’m open to that possibility.

I think it’s a bit of a fantasy to think we’ll have a 1987-style decline and 1988-style bounceback. After all, during 1987 and 1988, it was a time in which the economy was booming and we didn’t have a recession. Mr. Market was just being crazy. We faced a similar outcome at the end of 2018 and throughout 2019, another period in which we didn’t have a recession. Mr. Market was just being crazy.

This does not strike me as a comparable situation.

We’ll have to see, I guess.

This is a hard game, indeed.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

What the Perma-Bulls and Perma-Bears Get Wrong


Perma Bulls and Perma Bears

Right now, it feels like the financial world is divided into two camps:

  1. “End the Fed” Perma Bears: They think that the Fed engineered a series of asset bubbles and is responsible for the subsequent crash of those asset bubbles. We just had a big asset bubble and this bubble is now collapsing. The Fed is an unholy abomination that does more harm than good. “Fiat” is a cursed word. The perma bear view of monetary policy is best channeled by this Onion article. The old ones like gold. The young ones like Bitcoin. They both think stocks are terrible to own.
  2. “Always Buy Stocks” Perma Bulls: They think that the market is mostly efficient and the Fed helps the market avert crises and is a positive force. Buy an index fund and stop obsessing over the Fed, they say. Earnings will increase over time, stocks will pay dividends, and it’s best to just ignore the noise, buy-and-hold. They like to advertise that they don’t bother with macro forecasting and focus on the long term trajectory of stocks.

The two camps disagree with each other pretty intensely. Perma bulls look at most perma bears as either idiots or charlatans. Perma bears look at perma bulls as naive fee-hungry AUM gatherers.

I disagree with both camps about a lot of things and I agree with them about a lot of things.

I think they both have valid points. I also think there are things that they’re wrong about.


I value flexibility.

I occasionally find myself dragged into a dogma or a point of view. I think it’s really important to fight that tendency.

This is a pretty good quote from Charlie Munger on the subject:

“Another thing I think should be avoided is extremely intense ideology, because it cabbages up one’s mind. You’ve seen that. You see a lot of it on TV, you know preachers for instance, they’ve all got different ideas about theology and a lot of them have minds that are made of cabbage.

But that can happen with political ideology. And if you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very careful with this ideology. It’s a big danger.”

As someone who has had my own dalliances with intense ideology, I can completely relate to this.

Once I develop a worldview, it is very easy for me to be trapped by that worldview, particularly when I only absorb content from sources that I agree with.

I have my biases and so does everyone else.

I don’t think there is a silver bullet to avoid hot-blooded emotional biases completely, but I think it’s important to always consider how I might be wrong.

Perma Bulls and Perma Bears would probably benefit from a similar approach. I’m usually perplexed by the iron-willed certitude that they’re right. Ya’ll really never have doubts that you might be wrong?

What I think the perma bulls are right about

1. Markets are efficient over the long run

Bulls often point out that markets, over the long run, reflect economic reality. Over the long run, they are mostly efficient.

They are mostly correct.

Markets, over the long run, are going to reflect economic reality. This is even true during the last 10 years: the era of quantitative easing and zero percent interest policy.

Perma-bears argue that this boom has been all smoke-and-mirrors and doesn’t have anything to do with what’s happening in the real economy.

Well, what’s a pretty good proxy for what’s going on in the real world?

I think truck tonnage is a pretty good example. Truck tonnage closely tracks actual stock market performance.


It seems like stocks mostly track what’s happening in the real, physical, economy.

Over the long run, the S&P 500 closely tracks the earnings growth of the companies within the S&P 500. This includes the boom of the last 10 years that the perma-bears think is utterly nonsensical Fed manipulation.

Earnings grow over time. This does provide an upward trajectory to the market over time.

Peter Lynch sums this up pretty well in this clip:

2. The Fed does a decent job

Cullen Roche had a great tweet thread the other day, in which he examined the role of the Fed in the nation’s economy.

To sum up the tweet thread, the role of the Federal Reserve is to serve as a clearing system between banks and ensure that the system continues to function correctly.

Before the Fed, busts were always horrifying. This is because any contraction in the US economy turned into a banking crisis, which made everything worse than it needed to be.

The Fed prevents this from happening.

From Cullen’s thread:


As the above chart shows, the Federal Reserve largely succeeded in reducing the volatility of the economy. Now that the Fed intervenes when the turds hit the fan and prevents the banking system from falling apart, recessions are a lot less severe than they used to be.

The Fed was created out of the panic of 1907. JPMorgan stepped in and saved the system. Realizing that we couldn’t rely on one man to save the system forever (JPMorgan wasn’t an immortal Highlander, as far as I know), we needed an institution to prevent these panics from raging out of control.

(Side note: I love at the center of the 1907 panic was the “Knickerbocker Trust.” Is there a more old-timey name for a financial institution?)

Another reason that the booms and busts are less severe is the fact that the Fed generates inflation.

Perma bears hate inflation and usually cite inflation as the reason that we should end the Fed and tear the whole system down.

The reality is that a little inflation isn’t a bad thing. In fact, it’s a wonderful thing. One of the reason that those 19th century recessions were so severe is because when recessions arrived, prices usually declined. This means that everyone was incentivized to delay purchases, hoping for cheaper prices later. This magnified the decline further, creating a deflationary spiral.

Does $1 need to buy the same amount of goods from one year to another? Why? What’s the point? If wages and financial assets increase with the rate of inflation, what does it matter if cash stuffed in a mattress can buy the same goods that they could in 1955?

Even though the Fed existed in the 1930’s, they didn’t intervene appropriately. They let banks fail and it was their job to make sure that the system didn’t collapse. They allowed the money supply to shrink, making the deflation worse.

They had a role and they abdicated it.

No one explains this better than Milton Friedman:

In other words, by abdicating their role, the Federal Reserve allowed what would have been a very severe recession to mutate into the Great Depression. If they stepped in and did their job, they could have saved the system. Instead, by allowing the money supply to shrink and banks to fail, they made the problem worse.

It’s also worth noting that the Great Depression was exacerbated by the gold standard, which prevented us from expanding the money supply in a manner that was necessary.

There is a reason we ended the gold standard: it never worked particularly well. It also broke down in the early 1970’s, when 40 years of an artificially suppressed gold prices started to lead to problems with the US treasury.

What the perma bears are right about

1. Markets enter bubbles

Efficient market theorists will outright deny the existence of bubbles. In fact, they did a good job of bullying everyone from using the term until the early 2000’s after the internet bubble shook out. After the financial crisis, we went to another extreme and started calling everything a bubble.

Eugene Fama, for instance, claims that there wasn’t really an internet bubble. Or, more specifically, that it was impossible to identify the bubble until after the prices collapsed.

This is obviously wrong. Many people predicted there was a bubble.James O’Shaughnessy is one example.

There are often very obvious extreme bubbles. Japan in the late 1980’s is one example, which John Templeton correctly identified. The internet bubble is another. Bitcoin in 2017 was another very obvious bubble. Housing was another bubble, which was predicted by a number of people, including Michael Burry.

The wild swings in the multiple that investors are willing to pay for stocks is a sign that markets are not perfectly efficient and don’t always carefully estimate the present value of future cash flows.

The below is from the data on Shiller’s website:


Does this look like a market that is always rationally calculating the present value of future cash flows, or one that often gyrates between bouts of extreme greed and despair?

The change in multiples reflects that bubbles happen. They aren’t a figment of people’s imagination.

In fact, at extremes, bubbles are predictable. They do happen from time to time and they are possible to identify before prices collapse.

The market in the late 2010’s entered bubble territory. By pretty much every metric available, the market in the late 2010’s was at an extreme of valuation.

2. The Fed makes mistakes and contributes to bubbles

Does the Fed contribute to the cyclical nature of the US economy? Does the Fed contribute to bubbles? Does the Fed make mistakes?

Yes, yes, and yes.

While the Fed does a very good job at containing the effects of panics and ensuring that the system doesn’t go off the rails, they do make mistakes. This isn’t because they are evil. It’s because they are humans. Humans have biases, make errors, and get things wrong.

The Fed probably contributed to the bubble of the 1920’s.

They let the party go on too long and let things rage out of control in the late 1920’s. They should have taken the punch bowl away. Like a 20 year old managing risk at a frat party, they spiked the jungle juice with more Everclear instead of letting things calm down. Then, in 1929, someone called the cops and the fun was over.

The Fed also contributed to the inflation of the 1970’s.

Richard Nixon was dead set on winning his 1972 election and did everything possible to ensure victory. While he was having his cronies break into hotels to help make this happen, he also put pressure on Arthur Burns to ease monetary policy.

We were already experiencing the early stages of inflation, but Nixon wanted to win and didn’t care. He did not want the Fed to apply the brakes. He wanted a booming economy by the time that the election came around. Arthur Burns complied. The economy was doing well once election day came and Nixon won in a 49 state landslide.

Inflation then grew out of control and the Fed started raising rates to deal with it. Then, as if delivered by fate, we faced an oil crisis at the same time. The economy plunged into the horrible recession of 1973-74.

Scrambling to end the recession, the Fed started easing again. They never really got the inflation under control, but ending the terrible recession was a bigger concern.

The recession ended, but the inflation came back.

Inflation didn’t stop until Paul Volcker stepped in and engineered a recession in the early 1980’s to break the back of inflation. This is the recession we probably should have had in the early 1970’s, but Nixon and Arthur Burns didn’t have the political will to do it. Volcker and Reagan had the backbone that Burns and Nixon lacked.

The Fed typically contributes to the cyclical nature of the US economy. I think that the yield curve predicts recessions and booms because it’s a good proxy for how tight or loose monetary policy. They overshoot in both directions.

The Fed usually overshoots when they are raising rates, triggering a recession. Meanwhile, they can leave rates too low for too long, contributing to asset bubbles and inflation.

My Views

The bulls have points and the bears have points.

I agree with the bears that the Fed makes mistakes, but I also agree with the bulls that the Fed, for the most part, reduces the severity of booms and busts in the US economy.

Even though they make mistakes, they should also get credit for correcting those mistakes. Yes, the Fed was helmed by Arthur Burns and generated inflation. But doesn’t the Fed get any credit for Paul Volcker ending it?

I think that the 2008 recession could have turned into another Great Depression, but an aggressive policy response prevented that from happening. At the same time, I also think that the Fed contributed to the housing bubble.

I agree with the bears that markets enter bubbles, but I don’t think that the Fed is the sole cause of it.

Bubbles have been happening throughout the history of civilization, with or without a Federal Reserve. The South Sea Bubble and Tulipmania happened without a central bank, after all.

Bubbles happen because humans set prices in markets and humans are emotional beings.

Usually, bubbles start with a kernel of truth like:

1. 1999: The internet is going to the change the world. The companies that embrace the internet are going to dominate our future.

2. 2004: Real estate is a rock solid investment. It only occasionally declines violently. It’s less volatile than the stock market. You can apply leverage to it and generate income.

3. 1988: Japan is outperforming the United States. The country has a highly educated population and they have created an excellent and efficient business model.

4. 2017: Blockchain is a transformative technology.

5. 1980: Gold is a good hedge against inflation.

People take those kernels of truth and go too far with it.

Have you ever gone too far with a good thing? I certainly have! Markets  do the same thing.

Does the Fed contribute to these bubbles? Does the Fed contribute to booms and busts? Of course, but they’re not the sole actor here. In fact, they’re probably not the dominant actor.

Our limbic system is probably more to blame for the internet and housing bubbles than Alan Greenspan.

Bubbles are a feature, not a bug, of financial markets. This is because fear, greed, euphoria, and despair are features of the human condition.

Markets are increasingly dominated by computers and algorithms, but that doesn’t stop the fact that the money belongs to human beings and human beings are intensely emotional. This is particularly true when it applies to money that they have suffered to earn.

The perma bears argue that the Fed is both the arsonist and the fire department, channeling the plot of Backdraft.

I’d argue that it’s an institution that has mostly done good for the country and occasionally makes mistakes because they’re controlled by human beings and nobody is perfect.

Today’s Market

I think that we had a bubble at the end of the 2010’s and it is unwinding now. On this front, I agree with the bears.

I think the Fed probably made a mistake and waited too long to start raising rates. By 2013-14, the financial crisis was over and it was probably time to start tightening. The low rates led to mal-investment. The low rates probably contributed to the fracking boom, for instance.

I also think that the Fed is responding as it should to the current crisis, agreeing with the bulls.

The Fed is responding to the crisis aggressively, which is what they should be doing when faced with the worst recession in the last 90 years. They are throwing the kitchen sink at a brutal problem. They are doing everything they can to prevent the system from collapsing.

This is exactly what they should be doing!

However, I don’t think that the Fed is an all powerful wizard. For this reason, I don’t think that the Fed can prevent this bubble from unwinding, any more than the Japanese could prevent their market from eventually falling to a fair value.

(And yes, I know that the Japanese bubble was far more extreme than anything we experienced in the late 2010’s. I’m simply using this as an example that central banks aren’t all-powerful and mighty.)

It’s probably best to not be “perma” anything. I try to objectively look at the situation tactically and not through the lens of an ideology. There are times to be bullish about stocks and times to be bearish.


My favorite Pink Floyd song from an album that doesn’t get any respect.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Village Super Market (VLGEA)


Key Statistics

Enterprise Value = $240 million

Operating Income = $20.8 million

EV/Operating Income = 11.52x

Price/Book = .99x

Earnings Yield = 5%

Price/Revenue = .25x

Debt/Equity = 33%


Village Super Market is a chain of grocery stores trading at book value and located primarily throughout New Jersey and with other locations in Pennsylvania, New York, and Maryland. The company has been operating since 1937.

They are a part of the chain where I buy most of groceries: Shop Rite. Peter Lynch advocated “buy what you know,” so I hope this works out for me.

The Shop Rite that I go to is owned by a different operator and not a part of Village, but Shop Rite is a well known grocery brand around New Jersey, Pennsylvania, Delaware, and Maryland.

Shop Rite is known throughout the region as having the best prices. I used to shop at one of their rivals and was able to reduce my grocery bill by 30% when I switched.

My Take

For the last few years, Village’s earnings and cash flow have been in decline. This is why the EV/EBIT multiple is higher than I typically pay and the earnings yield is lower.

However, the stock is cheap on a price/book basis in comparison to its history. It currently trades at book value. As recently as 2014, Village traded at 2x book value on a lower equity level. Back then, shareholder equity was around $250 million and it is $321 million today.

The decline in valuation has been during this period of declining operating income. It also experienced declines during the recent sell-off.

Why have earnings been in decline? I think this is due to the trend towards Americans eating out more. Recently, Americans spent more money eating out than they did buying groceries.

With the rise of COVID-19, this has now completely reversed and spending on groceries is surging. I suspect this is a trend that will continue. Americans will continue to purchase large orders of groceries to ensure that they have enough food if there is another lockdown.

I also think that Americans are likely to see the financial benefits of eating out less. During a time of recession and financial stress, they are going to gravitate more towards the grocery store than the restaurant.

Another factor that has been hurting Village is Costco. Personally, I used to exclusively shop at Shop Rite. In the last couple of years, I have bought more bulk items at Costco. I’ll buy things like bread and eggs at Shop Rite every week, and then make a monthly trip to Costco and load up on things like meat that I store in my freezer.

Lately, I stopped going to Costco completely. With the COVID-19 panic, Costco is so crowded that it isn’t worth the trouble. I’m willing to pay a little extra and just go to the grocery store and not have to deal with as insane of a crowd.

While I think the competition with Costco is likely to continue, I don’t think that they can replace the grocery store. For me, Costco is out of the way and is a bit more of an “event,” while going to my neighborhood grocery store is a quicker ordeal.

Additionally, I believe that COVID-19 is going to break the trend towards restaurant eating.  I don’t think that Americans are going to go full-throttle back into their old routine.

Meanwhile, I suspect that grocery stores are about to experience a significant boost in sales and earnings, which should justify a higher multiple. Here is an image from my Shop Rite a couple weeks ago:


It seems to me like this kind of sales volume should justify a better multiple of sales and book value.

Moreover, no matter how bad this crisis gets, grocery stores are going to remain open. They’re as essential as you can get.

In short, Village is a company whose business has been positively affected by COVID-19 and yet it still trades at a very low multiple of sales and book value.

Additionally, even if this thesis is incorrect, the company has a strong and liquid balance sheet. Debt/equity is only 30%. They have $75 million of cash on hand. The Z-score shows a low probability of bankruptcy at 4.36. The Beneish M-Score shows a low probability of earnings manipulation at -3.5. I also take comfort in the company’s long 83 year history of operation.


This is a New Jersey stock, so it’s only appropriate that I post a New Jersey song from the Boss.


PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

The Permanent Portfolio


Harry Browne

Harry Browne was a libertarian activist. He was also skilled investor. He successfully predicted the inflation of the 1970’s and took on heavy positions in gold at the beginning of the ’70s.

During the 1970’s, gold rose from $35/ounce to $800/ounce. I’m sure Harry Browne grew quite wealthy as a result.

While Harry Browne was a skilled investor and foresaw the inflation of the 1970’s, he didn’t think that most people should try to predict the market and pick stocks.

For this reason, he sought to create a simple portfolio that would deliver a decent return  over long periods of time and offer protection in different economic environments.

The Portfolio

Harry Browne called this approach “the permanent portfolio.”

The permanent portfolio is quite simple and extremely brilliant. It invests in only four separate asset classes:

permanent portfolio

Gold protects during inflationary periods or currency debasement. Cash restrains drawdowns and provides dry powder for rebalancing, along with providing a source of funds for shocks to income. Long term treasuries perform best in deflationary panics, like 2008 or 1929. The US stock market, obviously, delivers a return during periods of prosperity.

And that’s it! Four asset classes and a very small allocation to stocks.

There are few financial advisors that would endorse such a conservative approach.

It’s an unusual, iconoclast portfolio.

How does it perform?


You would think that a portfolio like this would dramatically under-perform US stocks with only a 25% allocation to equities.

Since 1970, the portfolio and US stocks had the following characteristics:


The permanent portfolio underperformed, but one would expect that the underperformance would be a lot more significant with only a 25% exposure to US equities.

The portfolio accomplished this result with massively less stress compared to solely investing in US stocks. The 2008-09 drawdown was only 13.52%, compared to 50.89% for US stocks. The same is true for other terrible years for equities.

In fact, most of the time, the permanent portfolio goes up when US stocks are going down.


In addition to those big, bad years, the permanent portfolio offered significant protection during quicker events like the crash of 1987. US stocks lost 29% during that crash, while the permanent portfolio lost a mere 5.75%.

US Stock Valuations

It’s also worth noting that valuations for US stocks (and hence, returns) were a hell of a lot lower and returns were higher in the 1970-2000 period than we can expect from the future.

After all, the period from 1970 to now includes the super-charged bull market of the 1980’s and 1990’s, which took market/cap GDP from 40% to 140%. It took the CAPE ratio from 7 to 45.

That’s not going to happen again.

It’s not going to happen because today’s stock valuations are close to 2000 levels. Poor returns since 2000 have also been buoyed by a massive decline in interest rates, which probably won’t happen over the next 20 years considering that rates are now near-zero.

I think that anyone who expects 10% returns from US stocks from these valuations is going to be very disappointed. For the next decade, I wouldn’t be surprised if US stocks deliver a flat to negative return, likely with a gut wrenching crash somewhere in the mix.

Right now, we’re only slightly below internet bubble valuations, meaning 2000 is probably a more likely starting point for returns than what we experienced in the 20th century.

So, how did the permanent portfolio perform since the peak of the last bubble?

Since 2000, the permanent portfolio has outperformed US equities!


Meanwhile, it outperformed US stocks with significantly less stress. Lower drawdowns, lower volatility. It wouldn’t surprise me if this happens over the next twenty years, as well.

Withdrawal Rates

Since 1970, the permanent portfolio has a higher safe withdrawal rate, too, despite the lower returns.

More money can be safely withdrawn from this portfolio than can be withdrawn from index funds.

This happens because of the lower risk, not in spite of it. The lower risk and lower drawdowns make it much safer to withdrawal money from this portfolio in retirement.

I think that’s a pretty incredible result.

It’s a result that runs counter to everything we’re normally taught about investing. Namely, that risk always equals reward.

It’s that elusive 21st century “equity risk premium,” which doesn’t seem to exist anymore, considering that bonds have outperformed stocks over the last couple of decades.

We’re taught that if someone is aiming for retirement, that they need to take massive risks to earn a high rate of return. The evidence doesn’t back this up.



I don’t invest in Harry Browne’s portfolio, but my own asset allocation takes cues from this approach. I own long term treasuries to help me out during market panics and deflationary environments. I own gold to protect myself from the potential of currency debasement. I think small cap value, international small caps, and REIT’s will outperform market cap weighted indexes, which is why I own those instead of indexes.

I think the permanent portfolio is a very sound approach that makes a hell of a lot of sense.

It certainly makes more sense to me than buying a stock market index fund at crazy valuations, which are practically guaranteed to deliver low returns.

100% US stocks is also guaranteed to deliver an incredibly volatile result and massive drawdowns, as demonstrated by market history.

Too many people, in my view, think that one has to endure massive pain to grow one’s savings. The permanent portfolio is one example that there is a better way.

If you want to read more about Harry Browne’s portfolio, check out his book, Fail Safe Investing.


The Black Seeds – One By One.

Featured in my favorite episode of Breaking Bad, Four Days Out.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.