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Moat Market Intel: Age of Bull Market, Years with Shallow Drawdowns and Good Wealth Planning Rules of Thumb

This week, we have 8 points.

I thought that I would like to make some comments on certain market stuff but I think it will be good to separate them out.

1. Rules of Thumb for your Wealth Planning

This turned out to be one of the most read articles on Abnormal Returns. It is also rather short and easily understandable.

Adam Grossman explains that he has never been a fan of using rules of thumb for financial planning.

Indeed, he cites a very good example. I can give you another.

If we allocate the bond portion of our portfolio allocation based on how old we are, it is possible for someone with multiple properties to be weighted heavily into bonds.

However, given the nature of properties, as well as the high allocation to an asset class that does not get revalued so often, a more appropriate allocation may be a higher equity allocation.

But Adam argues that rules of thumb have their place. It allows our plan to have flexibility and some forward-looking sense. It prevents us from trusting historical data too much and set ourselves up for a future that could turn out differently.

Adam gives us a few good rules of thumb:

  1. Safe withdrawal rate to use when planning how much we need: The range would be between 3% to 5%.
  2. What is the growth rate we use in our returns planning: Population growth is slower today than in the past. Sensible to use a lower growth rate of 7%.
  3. How would future downturns look like: Assume a downturn last seven years, which is more than twice the long-term average and longer than any downturn since the great depression.
  4. Life expectancy: Use 100 years old.

Adam makes it very clear, a lot of his rules do not have a very close scientific basis.

My understanding is that he looks at enough historical data, tries to understand the environment going forward and use some rules that mediate between the two.

Like with a lot of planning, there is enough conservatism built-in.

2. Apple Won Versus Epic

There is much written about the verdict of the court case between Epic Games versus Apple. Epic Games sued Apple claiming that Apple is an antitrust monopolist.

Most people (like myself) who are not trained in the law, could not tell whether Epic games open up any advantage for game developers.

Ben Thompson at Stratechery has a lengthy write-up on the verdict.

Apple won and it was not even close.

Based on what Ben describe, this does not bode well for a whole farm of Epic’s games and those produced with Unreal Engine.

3. What Happens During Periods of Very Low Drawdowns

Charlie Bilello put out a tweet that tells us the biggest drawdown this year was a miserly 4.2%.

There were 3 other periods with a lower drawdown than that.

I was curious about this so I went to take a look at the annual return for the next year:

  1. 1965: 12.45%
  2. 1996: 22.96%
  3. 2018: -4.38%

A mixed bag.

Jurrien Timmer review not the years with the lowest drawdown but periods with low drawdowns.

Come to think of it, it doesn’t tell us much. Periods of low volatility, eventually followed by some higher volatility. How is it different from periods of high volatility, which is followed by periods of high volatility?

Basically, the cost of long term buy and hold is to endure volatility.

4. Modern Finance Begins in 1998

The Diff has a piece explaining why the period of persistent low inflation may behind us.

He explains that we can take a look at modern finance through what we see in the stock prices. Something work in the 1990s, then it stop working, then it work again and then it stop working in 2007.

There were a few things that worked well. US grew faster than Europe. Emerging markets grew even faster. There were some stuff that can be produced cheaper. The economy in developed nations transit to be more services oriented.

This chart on inflation is quite glorious. As a retirement planner, I wonder if the inflation rate of each line item will stay this way.

Byrne argues that it won’t be.

We were lucky to have China to produce these goods and services at cheap cost. But chinese manufacturing wages is up 4 times. China is also transitioning its economy into a more balanced one and on the whole, the economy is losing this engine.

Byrne basically say that if there is a need to keep prices low… we are running out of options.

5. Zheng Yiming’s Last Speech

ByteDance’s former CEO made this speech at ByteDance’s annual all-hands on deck company event, two months before he stepped down.

It is a deeply philosophical stuff, and probably reflected his mood at a critical juncture after he built a monster and facing a possible ban from the Trump administration.

6. A day in the Life of a 72-year old Retiree

Watch.

As an introvert, I find it incredulous everyday can be like this. No further comments.

7. Ping An Insurance Value Play

A compelling value report by Superfluous Value Blog.

Ping An is cheap, there’s no getting around it. The business currently sells for 6.5x earnings with an extremely well-covered 4.4% dividend yield. These are the sorts of numbers I am used to seeing, while holding my nose looking through deep value companies. That they come with an industry dominant business, which achieved a 19.5% ROE last year in tough conditions, has grown EPS 23.4% pa since IPO and announced a buyback with its interim earnings, with more likely to come is… quite attractive.

8. How Old or Young is This Bull Market?

Ryan Detrick provided some bottom to peak data on how long some of these markets run.

We do not know how old this bull would be but we do see some bull market that fizzled out in 26 to 32 months. In recent history, the bull runs for longer.

Also notice that the old bull market returns tend to be lower. Currently we are already up 100% in this one. The annualized return are much, much lower than the current 62%.

I am not sure how to interpret this. Either we are going to have some nasty draw downs in this bull (maybe not so likely if its a bull) or that this bull will have some time to run, but the returns will not be as great as this first 17 months.

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Dime

Friday 17th of September 2021

great stuff, thanks once again Kyith

Kyith

Saturday 18th of September 2021

Hi Dime, no problem

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