Its the time of the year to be thankful for all that we have and cherish most– Family, Health and Wealth! Its the time of the year to view life with a perspective of half-glass full!

Glass Half Full

Tell you what, its taken quite a bit of courage and self-control for me to have the optimistic perspective this holiday season! You see, in the last 2 years I have attempted 3 times to fly back to my childhood home town and visit ageing parents! Covid-19 spoiled the party, the first two times and the third time, which I was so looking forward , was cancelled because, American Airlines Flight out of London to Mumbai was cancelled for the day of my travel, god only knows why and AA was unable to find me a replacement connection flight to India from London sooner than 2 days after my original scheduled return date!

To add wound to the salt, AA did not give me refund for my flight cancellation, after I being clearly told that refund should not be a problem given the flight cancellation was not my fault! Rather than taking a fight with AA and wasting another several hours of my life on phone, I have made a conscious choice of considering the ticket money as sunk cost and have moved on.

Its now more than 15 days since the above fiasco and a lots have certainly changed in the world since then. Omnicron, the new Covid-19 variant has taken a foothold and several nation states are taking pre-emptive steps to thwart the spread of the virus but imposing strict mandates including indoor masks, quarantine at airport for un-vaccinated and availability of booster shots for all. Glass half-full perspective has certainly been useful to me! Had I traveled to India, I sure would have gotten stuck at home quarantined for 14 days. Instead, I am at least happy to be spending quality time with AVI family and kids!

Market Cycle

Back in June of this year, I took a temperature of the markets to only realize how frothy they had become. I did not make any specific forecast on how events will unfold, but I did form an opinion on certain sectors of markets being quite expensive, while also concluding that there was still room for markets to grow. As we close out on to 2021, lets revisit the numbers to see how events have unfolded in the past six months.

Lets begin with the regression trendline chart that is produced by Advisors Perspective. Back in June, the inflation-adjusted S&P 500 index price was ~154 % above trend. As we can see from chart below, at the end of Nov of this year, we are at ~186 % above trend.

Now let us look at where the Buffet Indicator, a macro measure of market price levels, measured as a ratio of total United States stock market valuation to GDP. As of Q4 of 2020, the ratio was sitting at 2.168 times GDP (or ~195.71 % above trend line). As of this writing, the ratio is now at 204.5 % above trend. The total stock market valuation is now more than double US-GDP!

Yet another popular indicator and one which is very much is in news nowadays (see here and here), the Shiller CAPE ratio is now sitting at 38.76. Back in June when I looked at this metric, it was sitting at 33.72. CAPE ratio breached 40 in Nov, for the first time since the dotcom bubble burst back in 1999. Market wobble in recent weeks have now pulled the CAPE back to below 40, still there is significant room downwards to reach trendline!

CAPE very nicely captured the great depression of 1929 as well as the internet-bubble at the turn of the century. It however completely missed the housing-bubble! Back in June, CAPE was at 33.82, second highest number ever reached and since then the ratio has kept its steady upward march going. CAPE has never been a predictor of impending recession, but it sure is a very good post-hoc measure to access market frothiness and the over-exuberance! Would this time be any different, its hard to tell!

While Buffet indicator and CAPE ratio are flashing warning signs, they do not take into account the role interest rates play in valuations. Excess CAPE yield (ECY), which is calculated by taking inverse of CAPE minus the inflation-adjusted ten-year treasury yield, provides a better view on the yield margins investors must be expecting to hold stocks over bonds. As of Sept 2021 ECY was at 3.22 and as can be seen from the chart below, at these levels, the subsequent average 10-year return from equities is between 4% and 15%. Based on these numbers, as long as ECY stays above 3 %, historically speaking, there is no reason to worry!

The difference between the S&P500 forward earnings yield (~4.69 %) and the inflation-adjusted 10-year treasury yield (-0.98 %) is at 5.67 %, quite attractive to continue to stay invested!

Finally lets look at the growth-value spread chart,

After some early recovery in the earlier part of the year, the growth-value spread has considerably widened, easily surpassing the spread of the internet-bubble years! Expensive seems to be getting more expensive and cheap seems to be getting more cheap.

Ok, so has the story line changed since we last looked into macro indicators? Short answer, not really! On the surface, S&P 500 index, a broad based market indicator of US stocks has continued its march upwards. However, the mania of meme stocks, and blank-cheque stocks and the pandemic-stocks has certainly subsided. Zoom, and Pelaton, the quinessential pandemic stocks, have each fallen over 50 % from their peak! So have the meme-stocks, such as GME, AMC, and AAL. So is the situation with blank-cheque firms. MAGNA (FAANGs before Facebook changed to Meta) is quite another story though! They are all dominant firms in their sector and are very much the drivers for the relentless upward march of S&P 500 index. Add to these, Microsoft and chip stocks such as Nvidia, AMD and Qualcomm and we see why markets bear relative high valuations even today!

If I have to venture a guess as to what to expect in 2022, quality stocks, trading at relatively cheap valuation will continue to shine through 2022! However, story stocks and stocks trading at >10 multiple of revenue will be re-rated, as inflation kicks in and with it higher interest rates!

Networth Status– Dec 2nd week

As I was updating this post, I realized that I did not update AVI family networth status for the month of November. So as to maintain continuity providing monthly updates on AVI networth status, I will summarize numbers as of Dec 10th below and hope to write one more final post on AVI-family networth report at the end of the year!

• Net Worth (as percentage of FI number): 141.18
• Accessible Net Worth (as percentage of FI number): 86.06
• Liquid Assets/ Debt Ratio: 5.174
• Cash Balance/Two Year Living Expense Ratio: 0.85

Synopsis

• For the first time in 2021, AVI family cash balance has dropped below 1! This is a conscious move on my part.. given the trend in inflation and interest rates. Liquid cash sitting idle in an inflationary macro-environment does not feel right! Sound sleep at night was a big part of my reasoning to always have significant cash buffer. However, after diligently tracking AVI family expense relative to income for the last two years, I feel, cash buffer at 50 % (or 1-years worth of comfortable living-expense) should suffice for continued sound sleep at night
• Accessible net worth is still some ways off from my desired goal of 100 % FI number, all that means into 2022, I will continue to grind at work at the same time maintaining relatively modest life-style
• Liquid asset to debt ratio looks quite healthy and a very strong motivator for me to pay-off AVI-family home-mortgage so as to no longer requiring me to track this metric
• Net worth (which includes equity in the house at current market price) looks quite robust to feel comfortable for sustainining a coast-FI lifestyle, not so much to sustain a fatFI lifestyle!

Video/Books/Audio since last post

• Book: Came across the book titled, The Midnight Furies, by Nisid Hajari, while I was browsing the shelves at local library. The book offers a gripping, fast-paced look into the personalities that shaped the future of Indian sub-continent for ever. One is but left to wonder a counter-factual world where we never would have seen the India of British Raj split into two bickering nations!
• Book: Heard Michael Maubossin speak with Barry Ritholtz on Masters in Business podcast about the updated edition of Michaels book, The Expectations Investing and decided to take a deeper look into the book. The premise of the book reminds me of the Charlie Munger quote, invert always invert!
• Chess Championship: It was a treat to watch Ian Nepo dual with the reigning Chess champion, Magnus Carsen at the FIDE world chess championship. The first 5 games ended in nail-biting draws only to lead a epic 7 1/2 hr game 6 when Magnus finally got a break through. Unfortunately for Ian Nepo, the pressure of it all was just too much and he ended up lossing 3 of the next 4 games and the reigning champion won the crown again!