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Fair Value, Now What?

Tony Hellenbrand • Jun 30, 2020
Lately I’ve been getting asked how I was able to “Call the Bottom” in late March. I want to make something clear: I didn’t.

If you go back and look at the article from March 16th or read the email I sent out to subscribers on the 26th, (pure dumb luck), I ran a bad case, a best case, and a base case valuation on the S&P 500. I arrived at a base case valuation of 2,950, and at the time the S&P was hovering around 2,300, so we started recommending clients initiate buying plans.

These plans did not mean “This is the bottom” or “Go all in.” Far from it. Many of our clients were buying several days before the precise bottom, and several days and weeks after. Regardless of how clearly I try to make this point (that we simply were buying something the math said was likely cheap) this morning my inbox is chock full of people asking what I think about valuations now.

Are we in a bubble? Is the market ahead of the fundamentals? Are we going to double dip? Will the market crash? Will we need a second stimulus? Maybe. I have no idea.

Here’s what I know, when you accumulate all of the available earnings estimates and make a conservative estimate of fair value, you end up with a fair value of about 3,060 on the S&P 500. As I type this we sit at 3,080. Regardless of whether the number is 2,950 or 3,060 or 3,080 or 3,150, any way you slice it, we’re at fair value, now.

Analyst Earnings Estimates:
Valuation Table

Credit: Aswath Damodaran http://pages.stern.nyu.edu/~adamodar/


Well, the assumptions I’m using to arrive at this valuation really tell the story: it’s a 6.2% discount rate. So what it means is that if you are buying stocks today, you are saying “I accept a ~6% return going forward, and all the risks that come with stocks.” So...do you? 


Is that good enough for you? Because the answer to this question is different for everyone. If you’re a 35 year old, I think 6% forward returns in an asset that has shown an untouchable track record for beating inflation is a great deal for you.


However, if you’re retired and using your portfolio to generate income, with all the uncertainty in the world today, (Do I really need to list them?) are you ok with 6%? 


I think for most of your money, yes, you should accept that. Especially for income you won’t need for 10 or 15 years or more.


However, if stocks are 90% of your portfolio and you need income from that portfolio in the next 3-7 years, I think you should not accept it. 


More clearly, money you need for income anytime soon should probably not be in stocks at these levels. There are a plethora of options, but again, the “best” one is going to depend on your situation.


So, am I buying stocks today? Yes. I am. But I’ll take 6% long-term with a 50% loss every few years all day. 


Should you? Not if you need the money anytime soon...

File at 62 vs. Delay: At What Age Do I Break Even on Social Security?

By Eric Sajdak, ChFC® • 07 Jul, 2020
"If I delay my Social Security benefit, at what age would I breakeven versus simply filing at 62?" We field this type of question frequently from retirees. The Social Security system allows you to file anytime between 62 and age 70. At first glance, filing at 62 seems to make the most sense. After all, there are 12 months in a year and eight years between ages 62 and 70—That's 96 months of monthly paychecks that you wouldn't be getting if you delayed. However, you get penalized for taking your benefit early. Below is a diagram showing the penalties and delayed credits for someone whose Full Retirement Age is 66:
stealth taxes

3 "Stealth Taxes" that Increase Your Tax Bill Without You Knowing

By Eric Sajdak • 28 May, 2020
It is your right as an American to (legally) pay the least amount in taxes that you owe—nothing more, nothing less. But in recent years, Congress has made a concerted effort to shift the IRS code and levy you with taxes you didn't even know you were paying. We call these "Stealth Taxes." These changes are never talked about by your congressman (or woman). They lie deep within the tax code and can potentially cost you significantly unless you learn about how to avoid them. In this article, we cover three of those "Stealth Taxes" and what you can do to minimize or avoid them altogether.

Risk-Free Assets

By Tony Hellenbrand • 01 Apr, 2020
Greenwich, CT. May 2008. Feels like forever ago. Another life. Hard to believe it was just over a decade ago. My first “Real” job. Analyst for S.N. Phelps & Co., a firm that managed money for a bunch of insurance companies. In the open office environment, my boss, the firm’s proprietor, the late Stanford Phelps, sat directly across the desk from me. After exchanging pleasantries and sipping my coffee, Stan asked me a question: “What assets are risk free?” As with all of his questions, it was a test, a teaching moment and a trap, all rolled into one. I knew the academic answer of U.S. Treasuries wouldn’t cut it, here. My mind raced. I knew Stan was a well known student of George Patton and demanded fast answers, even if incorrect. “There aren’t any.” I answered, praying for my job. Thankfully I had a month-to-month lease. Please don’t fire me. Please don’t fire me. Please don’t fire me. He smiled “That’s an ok answer…” I exhaled. “But there’s a better one,” Stan continued, “EVERY asset is risk-free IF you buy it cheap enough. This building. If I bought it for a nickel, is there really any way I lose money on it? Even if I do, I lose a nickel. If I buy Manhattan for a buck, can that really hurt me?” “No.” I answered. “Even if it goes up and down in value 95% every day, it doesn’t matter.” Stan smiled and pounded the desk with glee, “That’s exactly right!” Will I make the case that stocks are risk-free at these levels? No. Definitely not. However, there is a price where they are so cheap that it’s difficult to lose. Is that level 20,000 on the Dow? No. But some individual names are already getting down to the point where someone beginning a buying plan from these levels that can stick it out for a few years is going to make generational wealth. “Buys of a lifetime.” According to Kyle Bass’s recent CNBC interview where he exclaimed “You can be a value buyer again!” This concept of price and risk can also work against you. Return-free risk. If you paid $1 Trillion ($1,000,000,000,000) for the device you’re reading this article on, there’s realistically a 100% chance you lose all the money. I would argue we’re seeing this in the market right now, in the form of bonds. As I type this, the 10 year Treasury is paying 0.63%. An investor buying a 10 year Treasury today is paying 158x earnings for an asset that can’t grow earnings for 10 years. If you own bonds today... Why? So-called “Safety” is ludicrously over-priced at these levels. How dangerous is a stalwart like Clorox (CLX)? The chart would say it’s not nearly as dangerous as the rest of the market, holding up well the last few weeks. You “only” have to pay 27x earnings and collect a 2.42% dividend, essentially 4x as good of a value as bonds. Not cheap enough? Diageo, one of the largest liquor distillers in the world, is currently at 19x trailing earnings. Put differently, Diageo, a large, stable, growing business, has an earnings yield over 5%. Why accept 0.86%? Not cheap enough? Let’s get real crazy. The Dow Jones Industrial Average is trading at 17x earnings. That’s a 5.9% earnings yield. Is more trouble ahead? Yes. Will some of them fall to zero? Yes. Is the bottom in? Who knows. (probably not.) All I know is if you can wait 10 years, I’ll take 5.9% over 0.63% every time.
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