#9 – Does Warren Buffett Think The Market Is Overvalued?

Wes Moss [00:00:53]:
And thanks for being here.

Connor Miller [00:00:54]:
Of course, as always, thanks for having me on. And happy March. I can’t believe we feels like we made it.

Wes Moss [00:01:01]:
We finally made it. We finally made it. And there’s a lot of big time headlines that have happened. The markets finally started to hit some all time highs. We’ve gotten several of them in really these first two months of the year. Some of the biggest mergers that we’ve seen, huge earnings from Nvidia, biggest credit card deal we’ve seen since it’s been almost 15 years with Discover and Capital one, of course, that’s now maybe getting challenged or blocked, which we’ve seen a lot of mergers. And then, of course, we haven’t talked about the Buffett letter that’s recently come out. And every time we get a Buffett letter, it always provides such great insight and so helpful as investors.

Wes Moss [00:01:47]:
And one of the questions I got this week, Connor, had to do with an investor just being nerd. This is a listener emailing and saying, gosh, Warren Buffett seems always, first of all, I think this happens a lot. It feels like Warren Buffett’s always saying there’s not a whole lot out there to buy. And that there’s always this headline of how much cash Berkshire has, and the numbers are always really staggering. Now, it’s gotten to be such a giant company, but there’s usually not a whole lot of context about this. And this is an article that says, as of the end of last year, Berkshire has an, and they always say Buffett, but it’s really, Berkshire has an excess of $167,000,000,000 in cash and cash equivalents. And then you start thinking, wait a minute, he’s holding a lot of cash. Then you get another headline that says that the reason there’s so much cash is owing to a lack of viable investment opportunities, which leads people to say, wait a minute, wait, what’s Warren Buffett saying, does it mean the market’s overvalued? He’s holding that much cash? Has Buffett gone to cash? Is he out of the market? Because there’s nothing good to invest in? And I think it’s a really good topic here.

Wes Moss [00:03:05]:
Connor Miller, first of all, we did some math around this. Yeah. Is that what Buffett is saying or no?

Connor Miller [00:03:12]:
Well, I think, one, you have to consider the size of Berkshire today, and it’s just to make a move that’s going to be substantial to their share price. I mean, there’s just not that many companies out there left for him to acquire that are really going to move the needle as well.

Wes Moss [00:03:30]:
Right. So this is interesting if you think about, first of all, if you look at the market capitalization. So the total size of Berkshire, and I’m rounding here, is, call it 850 to 900 billion. So we’re approaching a trillion dollar valuation. And then you start to think about, well, how much then is 167,000,000 or billion in cash? Seems like extraordinarily large number, but just divide it by its size and it’s 18% in cash, which means 82% of Berkshire Hathaway is invested, which for an investor to be over 80% in stock, that’s close to being fully invested. I think the headline points to there’s so much cash, there’s no opportunities. To your point, Connor, he said that it’s going to take a lot to move the meter. You could easily read that, as he’s not seeing anything that he wants to own, but it doesn’t mean that he’s out of the market.

Wes Moss [00:04:30]:
The other thing that I think is really interesting is that unlike the half a billion dollar to a trillion plus dollar companies, it’s hard to find one that isn’t making some sort of product or selling some sort of service. We got Nvidia earnings a couple of weeks ago. They’re making semiconductors. We know that Apple, of course, makes iPhones and sells subscriptions to ten different services that you pay $9 a month for. And they have the revenue coming in, and it’s about, what are they doing next? And afford and GM and Tesla, they’re selling cars. And you look through the Dow Jones or in the SP 500, the oil companies are pulling oil out of the ground. They’re selling oil. Berkshire is not doing any of that.

Wes Moss [00:05:15]:
They’re not making anything. They’re really almost like a mutual fund. Yeah.

Connor Miller [00:05:20]:
They’re really a conglomerate of sorts, because the core business of Berkshire really is a small piece of the overall profitability. When you think about all the other companies that they own.

Wes Moss [00:05:31]:
Well, I guess, in fairness, some of the wholly owned companies, they’re making candy, they’re making furniture. But that’s not going to move the meter, right? A new line of living room sofas is not going to move the meter.

Connor Miller [00:05:47]:
Not of that size.

Wes Moss [00:05:48]:
So really, they’re in the business of finding a company that can then move the meter, which is very different than most companies that we think about. When we think about buying pieces of businesses or becoming equity holders, we’re thinking, what’s the company going to do next? What’s the next big thing for this company? What’s the next service product offering they’re going to have that will be big enough to move their earnings? As an example, we got a headline this week that Apple decided to stop making, or the project that was supposedly, and it was very clandestine, but making a car. So they exited the car business. And there’s a lot of reasons for that, maybe making a car with low margins. And we know that electric vehicles are pretty difficult to make money from still, at this stage in their lifecycle, in the history of electric vehicles in the auto industry, they’re saying it’s going to be really hard to move the meter to our earnings when we enter into this really expensive, low margin business. So maybe. Is that why they exited the business?

Connor Miller [00:06:55]:
Yeah, I mean, it’s a project that they’ve been working on, I think, for ten years now. Originally it was going to come out a couple of years ago, kept getting pushed back, and I think you’re right. Ultimately, they just decided it wasn’t going to be profitable enough relative to the other products that they could be investing in to really move the needle.

Wes Moss [00:07:12]:
I should have started today’s episode out with this. Is Warren Buffett saying the stock market is overvalued straight ahead here on money matters. That’s really what I should have said. So if you’re just tuning in, that’s the sentiment we’re talking about here. The investment world follows Buffett very closely. He has become well known as the greatest of all time, kind of the goat investment guru of our age, but he’s also been doing it for a very long time. We were reviewing some of the principles in Morgan Housel’s book last Sunday here on money matters. One of them, I think my favorite, is no one is crazy when it comes to how they think about their money producer, Mallory.

Wes Moss [00:07:53]:
Her favorite, by the way, is tales. You win. Maybe we’ll revisit that. But there’s a whole chapter that Hausel talks about. And this is, again, how we think about our money is very helpful to how we behave and how we execute and think about money. And one of the lessons is to understand that in any sort of outcome, there’s a lot, of course, there’s risk, but there’s also a lot of luck. But nobody ever talks that when things go well, you typically don’t hear it talked about in terms of luck. And what Housel was saying is that, yes, Buffett’s taken a lot of risk, but part of what he has done is just, he has been lucky.

Wes Moss [00:08:34]:
You could call it luck or not, but he’s just been in the game for so long. And he started in the 1960s, which was a pretty good time to get started in the market, and he’s just survived in the game almost longer. I’m sure there’s other people that are out there that maybe have a slightly longer horizon of investing, but I don’t know of one. And every new annual shareholder letter publishes the results from when they started and his start back in 1965. All the way through last year, we’re talking about almost 60 years worth of investing. Talk about compounding. And the results really are, they’re starkly different than the overall market. Now.

Wes Moss [00:09:19]:
Morgan Housel will say part of that is just being in the game forever. And there are other investors that have had higher compound rates of return. There’s a story he tells about a hedge fund guy who averaged over 60% rates of return, annualized rates of return, 60%, but came nowhere close to having the net worth of Buffett because he was not in the game for very long relative to, and almost very few people are in the game as long as Warren Buffett approaching, call it three quarters of a century.

Connor Miller [00:09:50]:
And even a guy like Warren Buffett may say that if he was to start today, he may not have the same success over the next. What is that, 60 years as he had over the last 60 years? It may be a little bit harder to start something like that.

Wes Moss [00:10:06]:
And another thing that they intimate in the latest shareholder letter is that it’s going to be hard to repeat the kind of rates of return relative to the market than they’ve seen in the past because they are so big and they’re not making something brand new, they’re just finding another company to add to the portfolio. And that’s really what could move the meter for them, because they’re really an investment company.

Connor Miller [00:10:29]:
And I think about just the speed at which information moves today, 40 50, 60 years ago. That value of being able to source all that information may be more reflected.

Wes Moss [00:10:43]:
In his earlier numbers.

Connor Miller [00:10:45]:
Yeah.

Wes Moss [00:10:46]:
And if you go back the big, big years that he had were arguably his earlier years, you can go back and see there was a 100% return year for Berkshire. You’ve got to go back to 1979, when Berkshire was up 102%. In that given year, the stock market, or the SP 500 was up 18% that year. So there were some massive, massive years early on. 19, looks like 85. This is a long table here. 1985 up, call it 93%. The stock market was up 31.6%.

Wes Moss [00:11:27]:
So in those early years, you had some giant upswings, and we haven’t seen that now for the last. Call it 1025 years or 30 years, but the results have been really consistent. So here are the numbers. And this just goes back to another thing Morgan Howell was talking about, is that within the power of compounding, a small shift, if you give it a ton of time, can really add up enormously. So one or two or 3% may not sound like a lot in any given year, and it may not even be that big of a deal over five years or ten years, but over 30 and 40 and 50 years, that compounding can be enormous. Berkshire has compounded, let’s see, 19.8% per year, almost 20% per year. S and P 500 has compounded an average of 10.2. So you would think just on the surface, it’s about double.

Wes Moss [00:12:27]:
But the long term results are nowhere near double. S and P 500 is up 31,000%. Put it in number contact in investment context, 10,000, if you’d been invested that entire time, would be worth about 3.1 million. Now, you double the rate of return. Do we just double the total compounded rate of return? Not even close. So, for Buffett, it’s 4.38. If I can even read this, the print so small, 4.38 million%. So $10,000 would have turned into 438,000,000 versus a measly 3.1.

Wes Moss [00:13:06]:
Pretty amazing numbers. The power of compounding it can build continents, countries. Here’s something from that latest letter from Buffett. I can’t remember a period since March 11, 1942, the date of my first stock purchase, that I’ve not had a majority of my net worth in equities, us based equities. And he says, and so far, so good. Dow Jones Industrial average fell below 100 on that fateful day in 1942 when I pulled the trigger. And I was down about $5 by the time school was out. That’s why everybody loves this guy, this young guy who bought stock.

Wes Moss [00:13:51]:
And after math or after English, he was, I’m down $5. Soon things turned around, and now that index hovers around 38,000, which. There it is. Here we are. Today, America has been a terrific country for investors. All they’ve needed to do is sit quietly listening to no one. All they have needed to do is sit quietly and listen to no one. I guess that’s for investors.

Wes Moss [00:14:18]:
Sit quietly and listen to not the salacious headlines about the world falling apart.

Connor Miller [00:14:25]:
Not us, though, right? They can still listen to us.

Wes Moss [00:14:27]:
They can still listen to us. And there are, there was a nuclear headline this week. NATO troops come into, if they come into Ukraine, Putin says this means this could start a nuclear conflict. It’s not the first time he said that. He’s brought up the word nuclear several times in the past. And by the way, everyone, quickly, we’re not, we’re not sending troops. So there’s always this worry that, yeah, something really bad could happen. And that’s the reality of the world.

Wes Moss [00:15:00]:
And we have to be able to be long term optimistic and understand that in the short run, yeah, it’s totally natural to be scared and nervous about what could be happening today, tomorrow, this week, next month. But the reality is that we have to live through those really significant, scary moments, and they happen constantly. We’re constantly surprised. More money matters. Straight ahead. How does setting the goal to have income for a lifetime sound? It’s not a trick question. Many happy retirees create income for a lifetime, and it’s something that’s called income investing. It’s a way to harness the power of many different forms of cash flow, including rent, royalties, dividends, distributions and interest.

Wes Moss [00:15:51]:
If you’d like help with income investing, you can reach capitalinvestmentadvisors@yourwealth.com. That’s your wealth. Here’s what’s happening in the world that matters economically. And then it leads to a big pr misstep from a fast food company. And the big headline of this week, I would say economic headline, had to do with, you guessed it, inflation. It’s not the typical CPI that we always hear about, consumer price index. We all know that that’s inflation. We know that so many things are tied to CPI for some reason.

Wes Moss [00:16:34]:
Connor, the Fed likes to look at PCE, which is a really fairly different way to look at inflation, personal consumption expenditures, which is another way to look at inflation. And the reality here is that those numbers were pretty good. If you’re looking for lower inflation. So for the week, or announced just this past week, for this past month, up about four tenths of a percent, but only up 2.8% from a year ago. So we’re in that magical 2% land, 2.8%. So the headline PCA, which includes food and energy, which makes sense that you would include those things because you kind of need them, it was even less so if you’re including food and energy. Headline pc at 2.4%, isn’t that what the Fed wants?

Connor Miller [00:17:26]:
That’s all they’ve been saying there for the last year and a half. As we’re trying to get back to 2% now, the question is going to be, are they hard pressed on getting back to 2.0%, or is just somewhere in the neighborhood of two to 3%?

Wes Moss [00:17:42]:
Okay, I think they’re in that range, and I think that the 2% range is what the Fed does think about that. You’ve got this $27 trillion economy. Do they really think they can micromanage every single 10th of a percent or every ten or 20 or any ten basis points? I think they’re close to home. They’re close to where they want to go. That’s, I think, good news for consumers, because it could mean the Fed finally takes their foot off the brake pedal. Interest rates may start to come down at least a little bit, and that could be very helpful to the housing market, which if you haven’t bought a home, you’re still priced out of the housing market. Housing prices are high. Mortgage rates are high.

Wes Moss [00:18:27]:
What’s also interesting about housing, I can just see it happening, because every time you get an imbalance, or every time we have, and there’s rule and economics, every time you get some sort of big mismatch between supply and demand, human nature doesn’t stop. Human nature still gets married. And then people get married and have kids, and they have a second child and a third child, and all of a sudden they need more space. None of that slows down. But the housing market slowed down, and people buying houses have slowed down, but human nature hasn’t slowed down. So by nature, that demand for people moving up, moving to a bigger home, doing something different, because their family, it’s more appropriate for their family, all that does is fill up this giant reservoir drip by drip of demand. And that’s how I see the housing market happening. I get asked a lot about, do we think the housing market is going to go down? Is it going to rates come down? Are prices going to get are we going to have a housing crash? With the demand that’s been building up, it’s hard to see home prices go down a whole lot.

Connor Miller [00:19:37]:
Well, and even through this, the amount of homes that have been sold has been lower, but home prices have started to creep back up again after kind of stalling out for.

Wes Moss [00:19:48]:
We did. We got a k Shiller home price index number this past week as well. That was a little over 5%. So home prices on average in the United States are still 5% higher than where they were a year ago. And what the Fed has been trying to do with higher rates has largely worked. And the epicenter of where you see it working is the housing market. Higher rates, everyone slows down. Not only do they slow down from buying, they slow down from selling because they want to keep the world mortgage.

Wes Moss [00:20:18]:
So here we are, this reservoir of human nature, demand, families growing, wanting to move, just keeps growing. That’s not going to stop. So the minute we see imagine, we get to imagine we wake up tomorrow and all of a sudden mortgage rates are no longer flirting with 7%, but they’re five and a half still not even that much lower, but more affordable. Imagine the rush of people saying, wait a minute, now I can go buy. So if that happens and we still don’t have a ton of demand on, we still don’t have a ton of supply, just don’t see how housing prices drop dramatically from here. Hopefully we get some more affordability for people with lower rates.

Connor Miller [00:21:00]:
Yeah. And part of that just comes from seeing incomes continue to rise. And so we saw with this report, we also saw real incomes continue to rise from here. That’s been a really positive sign in the economy, is we’re starting to see wages continue to outpace inflation. And so whereas the last two years, the consumer was kind of just keeping up with prices, they may get a four or 5% raise, but prices are four to 5% higher now. We’re starting to see those raises and prices aren’t rising at the same pace. So their spending power is actually going up a little bit.

Wes Moss [00:21:38]:
So you’re saying even more of a tailwind to keep housing prices where they are or potentially move higher. Yeah.

Connor Miller [00:21:43]:
And just the overall economy in general.

Wes Moss [00:21:45]:
How about the wendy’s menu? Do you think that’s ever going to come down?

Connor Miller [00:21:50]:
Sounds like it’s going to rely on demand, right.

Wes Moss [00:21:53]:
They really touched a nerve. So this week, Wendy’s surge pricing, they’re going to experiment with what they call dynamic pricing. But guess what? The nerve they touched on is inflation. Well, wait a minute. Dynamic pricing. I go to the drive through and it’s super busy. Does that mean then I get surge pricing for my wendy’s? What do they even call the Wendy’s burger?

Connor Miller [00:22:17]:
Just the pat I know they have frosted the baconator. Is that Wendy?

Wes Moss [00:22:20]:
I think that’s Wendy’s. The baconator. So does that mean the baconator is now $12 to buy a baconator as opposed to $7 or six? I don’t know what the price is.

Connor Miller [00:22:30]:
Now, in all fairness, what Wendy’s would say is if you pull up at 11:00 in the morning and no one’s in line, you may pay even less for your baconator.

Wes Moss [00:22:39]:
And this brings up the concept of dynamic and fluid pricing. We’re used to it. If you think about it, most pricing has been that way for a long time. If an airline has a really popular destination, and those will be more expensive flights. Colorado in the winter for people to go skiing and flying to the coast in the summer to hang out on the beach. Of course you’re going to get this supply demand equilibrium prices. That happens. But then we were introduced, I think maybe in a more profound way, when we started using Uber and Lyft.

Wes Moss [00:23:18]:
And you’d get used to a $12 Uber or Lyft ride. Or it was $22 and then, wait a minute, it’s the holidays and everyone’s going to a Christmas party because it’s two Thursdays before Christmas. And now that $22 ride is $52. What? Where I’m going to go downtown and go to a game or a concert and now all of a sudden, what would have normally been a $20 ride, it’s 40. We know that is surge pricing. Now in America, I think we’ve been indoctrinated to surge pricing. So the minute this article came out, they’re touching on a surge pricing. B inflation.

Wes Moss [00:23:55]:
Is my bacon eater going to inflate? And they tried to really walk it back. So they looked at this as a giant pr mistake. This is an email to CNN. Wendy’s was very blunt and said Wendy’s will not implement surge pricing, which is the practice of raising prices when demand is highest. This was not a change in plans. It was never our plan to raise prices when consumers are visiting us the most. So I guess that just goes back to dynamic pricing. What is that? I’m not even sure what you.

Wes Moss [00:24:30]:
I guess you just call it dynamic pricing, which is the way prices normally are. What’s different here is a digital menu that can change quickly throughout the day.

Connor Miller [00:24:41]:
Well, and I think what a lot of us are so accustomed to is when you pull up to the Wendy’s drive through, you kind of know about what you’re going to pay. Right. And so now it just adds this element of decision in there of, well, do I actually want to pay $12 for my baconator or now I need to go somewhere else where I normally would just stop at Wendy’s on the way home.

Wes Moss [00:25:04]:
Yeah, but they’re saying that they’re not going to raise prices, which is a practice. They’re not going to do that supposedly. So I don’t even know what they’re saying. Are they only going to lower prices when the line is slow?

Connor Miller [00:25:18]:
I guess it’s to be seen. I would think there’s going to be some element of raising when demand is high and lowering when there’s not as much demand.

Wes Moss [00:25:26]:
I think this brings up a more interesting question, which is do we start to just see dynamic or surge related pricing everywhere? Do we see it more blatantly everywhere? Could you go into the supermarket? Could you go to Kroger or Publix? And because it’s Sunday afternoon and everyone’s shopping now, milk instead of $4 is $4.50, and companies all across the landscape start pricing relative to their consumer traffic and their consumer demand. And do they do that in a way so that it discourages crowding and encourages lower periods during the week? Let’s call it a Tuesday afternoon when at 02:00 there’s less people, let’s say at Publix versus a Sunday afternoon. Do they encourage more people to fill those shallow times or lower demand times with lower prices so they have a more balanced week. Does Starbucks do it now? I don’t know if there’s ever a non busy time for Starbucks.

Connor Miller [00:26:31]:
Yeah, they’ve already got the search pricing on there.

Wes Moss [00:26:33]:
It’s search pricing all the time. It’s always know. I stopped going to many. It’s actually been a couple years. Is Starbucks still always crowded every time you go?

Connor Miller [00:26:45]:
Every time I drive by there’s a car line of at least three to five cars, it seems.

Wes Moss [00:26:51]:
Have we gotten to a double digit drink at Starbucks yet? Do we to?

Connor Miller [00:26:57]:
We’ll have to check on that.

Wes Moss [00:27:00]:
I’ll tell you what, you start putting in surge pricing, you’re going to see one of those caramel macchiatos. It’s going to be double digits, which is scary to think about. More money matters straight ahead. How about earnings? How far are we through for this quarter? And what are earnings look like what’s the health of the S and P 500 look like?

Connor Miller [00:27:23]:
So we’re about done. We’re 97% of the way through, 98%. So we’re pretty much all the way there. By most measures, it’s been a pretty solid earnings season. Obviously, you’ve had the big headline with Nvidia. Their profits were up 250% over the last year. That stole a lot of the news you had meta come out. They had a good quarter, announced a dividend, but it was really some of the usual suspects.

Connor Miller [00:27:52]:
Technology had a good quarter. Industrials, actually consumer staples. So talking about some of that dynamic pricing, being able to pass through some of those higher cost on, but also.

Wes Moss [00:28:04]:
What is the ultimate. Imagine surge pricing or dynamic pricing during the pandemic for toilet paper.

Connor Miller [00:28:11]:
Oh boy.

Wes Moss [00:28:13]:
It would have been $100 a roll.

Connor Miller [00:28:15]:
Maybe that would have prevented everyone from.

Wes Moss [00:28:17]:
Stocking up on it besides toilet paper and paper towels. When you just mentioned consumer staples, what comes to mind? What’s one product that comes to mind that is the ultimate consumer staple good. That you buy at the grocery store or I guess you can get off of Amazon.

Connor Miller [00:28:34]:
Now when I think consumer staple, I mean, I go to cereal, right?

Wes Moss [00:28:39]:
Cereal, yeah, cereal.

Connor Miller [00:28:40]:
The ultimate consumer staple product.

Wes Moss [00:28:42]:
All right. I think this is what I think of Pringles. I think of Pringles chips for some reason, because a, they’re Procter and are, they’re in a manufactured tube and they’re pressed together. So there’s almost something even manufactured about the food that they are. I guess it’s food. We don’t have a whole lot of Pringles in the house, but we do have Wendy’s. And we will continue, I’m sure we’ll continue to have some Wendy’s once in a while. Much more than Wendy’s, though, of course, is chick fil a.

Wes Moss [00:29:18]:
And still to this day. Hey, let’s go to chick fil a, guys. It’s Sunday. Let’s go to chick fil a. It’s Sunday, so it’s still far and beyond the number one fast food choice in our family. The reality here is that America has, even though the economy has been strong, we’ve had an unemployment rate of 4% or less for almost two straight years. We have now inflation. Just this past week, the PCE, personal consumption.

Connor Miller [00:29:47]:
Personal consumption.

Wes Moss [00:29:48]:
Consumption expenditures different than CPI. I was hanging on. CPI is back in the 2% range, so we had 2.8% on the. If you strip out food and energy or two point, where were we on that? Under 3% for the headline number. And then if you take out food and Energy, it’s what, two point eight?

Connor Miller [00:30:09]:
Two point eight percent. So, yeah, the core number that the Fed, that’s their favorite barometer of inflation, came in at 2.8%.

Wes Moss [00:30:17]:
And to some extent it’s interesting because CPI, consumer price index, is easy to understand because it’s this fixed basket of goods and you can measure what it costs last month versus this month versus last year, and you can get a range, whereas PCE consumption expenditures is really about how much we spend on these items. So to some extent we’re spending more because prices are inflated. But then it also takes into account the demand destruction that comes with, well, I’m not going to buy that ticket because it’s just too expensive. The CPI is just a sticker price here. This is what it costs. The PCE is really about what we’re spending and how we’re being impacted by inflation. That’s why the Fed likes PCE, I guess, so much more.

Connor Miller [00:31:03]:
Yeah, because it’s more consumer behavior driven and, okay, well, meat prices are higher, so I may downshift to chicken or pork or something else that would.

Wes Moss [00:31:12]:
Substitutions.

Connor Miller [00:31:13]:
Exactly.

Wes Moss [00:31:14]:
Dynamic meat pricing. Everything’s going to be dynamic. Wendy started it. They messed up and they made it seem like they were going to do surge pricing. They walked that back. They said, we will not increase our prices when we have high demand. So I don’t really even know then why I don’t get it. If they’re not going to increase the prices, does that mean they’re only going to decide? Who knows? But I could see one day in a digital supermarket when every price is in some way immediately dynamic.

Wes Moss [00:31:46]:
Connor, your point is that all prices are dynamic. It’s always a supply demand equilibrium. We find a price that makes sense, there’s enough supply, and the consumer, they meet in the middle. It’s the chart that we learn in economics. It’s where the two lines cross. That’s the equilibrium. But it will be interesting to see a digital price of milk change in front of your eyes because there’s three people staring at the same gallon of milk. Scary to think about, but I don’t know why that doesn’t happen.

Wes Moss [00:32:14]:
I think that I can absolutely see a future with the amount of data processing and artificial intelligence, that everything starts to change on a dime.

Connor Miller [00:32:25]:
Well, I think technology has been the hindrance to this point, but like you brought up the AI buzzword, that actually could actually even help inflation in the long run if it’s just more efficiently finding consumers to goods and charging the appropriate pricing.

Wes Moss [00:32:42]:
Oh, you’re saying something good about artificial intelligence. Take over the world, take our jobs, hopefully not take everything from us. We don’t need you anymore humans. We’ve got artificial intelligence. I did a podcast interview speaking of the human brain, how many iPhones worth of information do we store in our memory? Connor Miller how many iPhones worth?

Connor Miller [00:33:11]:
Not even one.

Wes Moss [00:33:12]:
5000. So we’re not out matched just yet. We have in our memory, in our capacity, the human brain can store information equivalent to about 5000 iPhones. Now, I don’t know if I were to couch that. Are they also talking about iPhone iCloud in the clouds? I’m not so sure, but at least either way. Still ahead.

Connor Miller [00:33:34]:
5000 is a lot. I don’t know if my brain is quite that. Maybe it’s like half that it is.

Wes Moss [00:33:39]:
The difference is our recall. We have this amazing capacity for storage, but when we get tired, we get stressed as we age and we don’t keep our mental fitness up. I was talking about to a neuropsychologist about retirees and how to keep sharp and vibrant in a happy retirement is that we lose our recall comes back, we get less efficient. So we can’t grab onto the information we want quite as well as we peak in our early twenty s. So.

Connor Miller [00:34:10]:
We have less ram, right? Is that the, I think it’s a little bit like technical term for it.

Wes Moss [00:34:15]:
Lots of memory, which continues to expand even as we get older. But I guess the processing ram, I can grab the information that can start to get a little compromised. That’s not you yet. So you’re never lost for a word the number of 401K millionaires. Connor Miller and this is great news. Up over 11% in a brand new report from last year. And those 401K millionaires are what they are the poster children for staying the course. Think about how long it takes to amass a million dollars.

Wes Moss [00:34:49]:
In average balance of the 401 and K in 2023 ended, I was up 14% to 118,600. This is from fidelity. The average individual retirement account up 12%. So Ira versus 401K up to 116,000, or almost 117 in the fourth quarter, 2023. What struck me here, and I think that part of this is there was Yahoo did a similar story. I think this was CNBC and I contributed to it with a reporter and they wanted to know, well, if you get to a million dollars, that sounds great. What’s next? Can you take your foot off the gas pedal? Can you slow down? And of course the answer, Connor Miller, is what more money means more happiness. Of course, you keep, remember there’s a plateau effect, maybe.

Connor Miller [00:35:39]:
Can you slow down to a certain point? Right? I mean, isn’t that what the happiness effect is? You got to get to a certain point, but then it plateaus off?

Wes Moss [00:35:47]:
Yeah, I believe that there is, and my research has shown, and there’s other research that thinks of it slightly differently, but there is a very highly correlated increase in happiness, less worry in the early stages of saving money, meaning that a little bit. An extra $10,000 in income can be a big jump in happiness, an extra $50,000 save, big jump in happiness. But then when we get to a certain point, we get what I think of as diminishing marginal happiness per new dollar. So then once we get to a point, and the average happy retiree, and I’ve adjusted these numbers for the massive inflation we’ve just lived through, is about one and a quarter million, so 1.25 million. And then happiness levels tend to level off. So new money above that doesn’t necessarily bring new happiness levels. And the median numbers around is $700,000 for the happy retiree median.

Connor Miller [00:36:50]:
Does it ever go down? Is there a certain wealth threshold where it actually goes down, or does it just. You’d get that diminishing level of return.

Wes Moss [00:37:00]:
This is something I believe I have not done that research on. When at some point does it start to go down? I remember, I believe it’s a Malcolm Gladwell book that talks about that when you get to a point. So it’s almost this upside down, you. And yes, your happiness levels go up and up and up, but when you get to, I don’t know the exact level this was, but it was extremely wealthy. Those happiness levels actually go down. And I think I remember, and again, I’m getting older, my memory is supposed to not stop, but my recall is not maybe what it was when I was 25, but I remember, I want to say it was Malcolm Gladwell. It could be another author literally said, more money, more problems, and all of a sudden, happiness levels started to crater. What was interesting, also about all the stories that were floating around from the fidelity study that came out this week was all about 401K millionaires, was that those balances are still not back to where they were in 2001.

Wes Moss [00:38:04]:
That, I think was the most interesting part about that story. Yeah.

Connor Miller [00:38:08]:
So we were speculating because when you think of the stock market, well, now it’s back to all time highs. But this was, as of, I guess, December 31, 2023, it’s only a little.

Wes Moss [00:38:20]:
Over two months ago should have been.

Connor Miller [00:38:22]:
About back to all time highs. Not all 401 ks obviously are in stocks. Bonds are maybe not quite back to their highs. So that’s a piece of it. Some people had to pull money out due to hardship. So that’s all that factoring in. We’re getting close but not quite back to where we were.

Wes Moss [00:38:42]:
And maybe part of. Here’s another part of this, Connor. It’s that more retirement savers are borrowing from their 401 plan. This is also part of that story. Ticked up to almost 9%. So the percentage of workers who took a loan from their 401K, including for hardship reasons, up to almost 9%. And that’s up from in the 7% range in 2022. So again, remember, federal law allows workers to borrow up to 50% of their retirement account, up to $50,000.

Wes Moss [00:39:19]:
So think of it as whenever you get to $50,000, that’s the limit. And then you can pay that back over the course of x number of years depending on what your 401k plan says. Interesting that we’ve seen those numbers climb. Could be part of the reason that balances, at least from the fidelity study, are still not back to where they were two years ago. Now this year so far it’s a young year, but we’re now in let’s call. I think of when I was growing up in Pennsylvania, I didn’t really think of March as spring, but now living Atlanta, I do because flowers are going to be coming out. They’re already starting to come out a little bit.

Connor Miller [00:39:59]:
It’s almost like a fall spring because.

Wes Moss [00:40:01]:
You think it should start getting and then we get hit again. But this year we’ve seen the Capital one and discover merger. We’ve seen two big technology companies initiate dividends for the first time. So we have meta, formerly artists, formerly known as Facebook and Salesforce, that is also initiated a dividend for the first time. Forty cents a share quarterly dividend. We also saw stocks finally peak back above their all time high. That took over two years to get to. So if you felt frustrated over the last couple of years, it’s because the markets have actually been pretty frustrating but been good for the better part of for 12, 13, 14 months because we went 2002 was down, 2003 was up, but really was just recovering from 2002.

Wes Moss [00:40:53]:
And here we are in early 2024, finally just started to make some new headway, bitcoin back to hitting $60,000 per bitcoin this week. And then a resilient consumer GDP for at least the last quarter of last year. 3% and even the Ni cave japanese stock market finally made it back to an all time high after, what, 34 years? 34.

Connor Miller [00:41:20]:
Mind blowing.

Wes Moss [00:41:21]:
This week, there was an awful lot of conjecture around what Warren Buffett’s really thinking. What is he saying and what is he writing between the lines? He gave a wonderful tribute to his longtime partner and friend, Charlie Munger. In his latest letter to shareholders, his annual letter, he talked about his sister Birdie, and he says, again, this is just the guy. So lovable. Not only is a genius investor over time, but also lovable because he always, what is this? A stock or before he buys a company, what would my sister birdie. What would my sister birdie. It was birdie, correct. What would she own? This would be an okay company for her to own for the long term.

Wes Moss [00:42:07]:
What kind of investment letter is going to make you cry? Right. Only Warren Buffett can do that. But at the same time, he has this. It’s not the first time. In fact, it’s often that I hear this from a shareholder letter from him, is that he keeps amassing cash. And the bigger he gets, even though the percentage is still not enormous, it’s not small, it’s about 18% in cash is this shocking number. And people look at the number and they say, wait a minute, Berkshire has $167,000,000,000 in cash, and he’s also saying it’s going to be hard to find things of great value. Well, if you read between all those lines, is he saying the market’s overvalued and he’s in all this cash? Do I need to go to cash, too? Connor Miller? And the answer, of course we know, is what, of course?

Connor Miller [00:43:00]:
No.

Wes Moss [00:43:00]:
Not to put you on the spot.

Connor Miller [00:43:03]:
That was a little bit of an easy one, but no, I mean, using Buffett’s philosophy, like he said, ever since, what was it, 1942, he’s never had less than a majority of his assets in stocks, because he knows from experience, and he’s got a lot of it, that over the long run, stocks are going to do well. The army of american productivity is going to continue to propel the economy and stocks higher. Over time. Of course, there’s going to be periods of volatility, but he knows from experience that the long game is really the game you want to be playing.

Wes Moss [00:43:41]:
Here we are. He was born in August of 1930. So in March of 1942, I guess he would have been twelve years old or 1111 or twelve years old. And I don’t know what grade. Let’s see, what grade would that be? That would be fifth or 6th grade. He was in fifth or 6th grade. And I should know. I have kids that same age.

Wes Moss [00:44:05]:
And this was a quote from his most recent letter. I can’t remember a period since March 11, 1942, the date of my first stock purchase, that I’ve not had the majority of my net worth in equities, us based equities, and so far, so good. The Dow Jones industrial average fell below 100 on that fateful day back in 1942, when Buffett pulled the trigger, quote, pulled the trigger on his first stock, he was down about $5. That’s more than lunch. In 1942, he was down $5 by the time school was out. Soon things turned around, and now that index hovers around 38,000. America has been a terrific country for investors. Now some thoughts around his rates of return.

Wes Moss [00:44:53]:
Now, even he says, and this starts to make a lot of sense. You’ve got a company, Berkshire, as an entity. If you do, the market cap shares times the price, you’re looking at 850,000,000,000 to 900 billion, almost a trillion dollar market cap. So $167,000,000 in cash is a lot of cash, but it’s only about 18%. So, technically, just like when he was a kid, he’s still mostly invested. That means 82% of Berkshire Hathaway is still invested in companies. Now, a few of those are private, but the vast majority of Berkshire, those are publicly traded companies. Now, what he’s also saying is, because they’ve gotten so big, it’s hard for them to really move the meter beyond normal market returns.

Wes Moss [00:45:37]:
When he was young, in spry, he was able to have some huge returns. Now, you go back to 1974, Berkshire was down 48, almost 50% in one year. But they had some really big years. Up 102% in the late 1970s, up 93% in the mid 1980s. So they had a couple really big years in the early going, and then more recently, the returns have been a little bit more market oriented. But even the last 25 years, he’s still ahead. And this is what’s interesting. In the power of compounding, just a little math over a longer period of time can really add up from, if you go back over the last 25 years, the market, and, Connor, you did this math here.

Wes Moss [00:46:29]:
We looked at what, 1995 or 1990?

Connor Miller [00:46:33]:
We did the last 30 years. So, going back to February of 94, March of 94, back to 1999, and then also 2004.

Wes Moss [00:46:43]:
So from 1999 till today, the s and P was what, approximately, on average, per year?

Connor Miller [00:46:50]:
I believe it was 10%. Let’s double check on that.

Wes Moss [00:46:55]:
Let’s pull out these numbers. We’ve got seven and a half percent per year equated to 553%. Yeah. So back to 1994, SP 594.

Connor Miller [00:47:04]:
Okay, 10% per year. So that’s about 1800% in total over the last 30 years.

Wes Moss [00:47:13]:
And then the S and P 500.

Connor Miller [00:47:16]:
That was the s and P 500. Berkshire then is up 13% per year over the same time frame.

Wes Moss [00:47:22]:
Right? Okay. That’s right. And this is the point I’m trying to make. So, over the last 30 years, SP 500 is a little over 10%. Berkshire is about 13 close. Clearly, Berkshire did better. But if you now take that compounded full rate of return, S and P 500, about 1800%, 1800%, still a wonderful return. But those extra couple of percentage points per year over a long period of time, Berkshire up 3800%.

Wes Moss [00:47:55]:
Little bit over a long period of time creates an entire country like Iceland. Now, let’s look at these numbers. I actually cannot even comprehend. And we’ve double checked these just to make sure. They almost don’t even make sense, but we’ll talk about it anyway. My favorite page every year to look is Berkshire Hathaway’s performance for the SP 500. Again, remember, we’re not recommending, going out and buying or selling the stock. This is just in the annual letter we’re reading.

Wes Moss [00:48:30]:
It’s one of the early pages. It’s kind of midway through the report. But if you take a look at the annual they have averaged, Berkshire has averaged, Berkshire has averaged 19.8%, the SP 510.2. But this table goes all the way back to 1965. That compounded rate of return gets us to a little over 31,000% for the S and P 500. Put it in money terms, $10,000 turned into 3.1 million. 10,000 into 3.1 million, or a little over 300 x your money. Now, we take a close to 20% return over that same period of time.

Wes Moss [00:49:12]:
$10,000 turns into 438,000,000. Just hard to fathom that. And so much of it is because of the latter several years compounding for a long period of time. So that’s not just 300 x your money, it’s 44,000 times your money. That’s the number of times.

Connor Miller [00:49:38]:
So you would think in your brain, well, double the annual return. Double the money. Right. I end up with 6 million. No, you end up with 438,000,000.

Wes Moss [00:49:47]:
The power of compounding a little bit of a change for a really long period of time can be absolutely tremendous. And this is from somebody who got started early. Morgan House will say, well, he had a head start on a lot of people that are in the business today. He had a million bucks right around age 30. So we go back to, let’s see, when was he? He was born in 1930. So by 1960, he had a million dollars. Berkshire performance. We can see it was way back to 1965.

Wes Moss [00:50:16]:
Again, not talking about buying or selling any of these companies that we mentioned here today. Simply, I think, really, really important educational examples around some of the most important concepts when it comes to being a happy retiree, an early retiree, Morgan Hausel, would call it just the sheer vast power of surviving and allowing yourself to catch the tailwind of compounding. We’ve been talking most of the year about last year and a half about inflation, two years about inflation, and the numbers are getting better. PCE personal consumption expenditures down to the 2% range, which is welcome news. The market liked it this week to some extent. However, there was great expectation that we’d see all these interest rate cuts this year, and there’s been some cool water on those expectations. So, yes, the market is still saying we might get some later in the year, but not nearly as many as that. We headed into the year, so we’re effectively in a pause.

Wes Moss [00:51:16]:
We’re in a fed rate pause. They raised rates, raised rates. We know that happened, what, 1112 times? And then they’re staying put. So the question is, what happens historically between the raise and the first time they start to lower?

Connor Miller [00:51:34]:
Really, the answer is, it depends. It depends on how long they’re able to pause. If there’s volatility in the economy or the markets that are forcing their hand to cut and be more accommodative, that can be a bad thing for stocks. But generally speaking, the longer that they pause, actually, the better it is for the markets. And really, in my opinion, the answer behind that is the longer they can wait. That means the economy is good. If they’re not having to cut like they did in 2020 or in 2008 really quickly, that could be signs of stress. If they’re able to just sit back like they are today.

Connor Miller [00:52:14]:
We’ve got low unemployment, we’ve got rising wages. Inflation is coming down. Those are all good things for both the economy and historically for the stock market.

Wes Moss [00:52:25]:
You’re right. So that makes a lot of sense. As I look at this data here, 2018 through 2019, we had 225 days of the Fed technically pausing, and market was up 19% during that period of time. If you go back to 1989 through 19 or February of 89 through June of 89, it was over a little over 100 days that the Fed had paused or paused at rate of return there a little over 13% actually. I think that’s really good context. The Fed is not lowering rates today because economy is pretty good. They don’t need to. So the longer the Fed would pause and not start to reduce rates, makes sense that you’d be potentially a stock market tailwind.

Wes Moss [00:53:11]:
We’ll leave on that optimistic note we’ll leave on that optimistic note or we’ll wrap up today on that optimistic note. Connor Miller thanks for being here my friend. As always, you can find me and Connor Miller and the money matters team easy to do so@yourwealth.com. That’s your wealth. Have a wonderful rest of your day.

Mallory Boggs [00:53:33]:
This is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only, and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. There is no guarantee offered that investment return, yield or performance will be achieved. The information provided is strictly an opinion and for informational purposes only, and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

Mallory Boggs [00:54:21]:
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