🎙️ Smashing Records

How difficult is it to consistently beat the benchmark S&P 500 over time?

It’s so challenging that over 90% of U.S. professional money managers — with all the brainpower, tools, and tech at their disposal — fail to do it after accounting for the fees they charge. Today’s chart below is another reason Warren Buffett believes many investors should sit in low-cost index funds.

“In my view, for most people, the best thing to do is own the S&P 500 index fund," Buffett once said. "The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Corporate insiders exercise caution amid rally

• Costco’s gold bars keep flying off shelves

This, and more, in just 5 minutes to read.

Chart of the Day

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In The News

💡 Corporate Insiders Are Cautious Amid 2024 Stock Rally

The S&P 500 is off to its best start in nine months since 1997, but not every big player has been involved. Corporate insiders aren’t showing much optimism. 

Just 15.7% of insiders at U.S. companies reported net buying this year, the lowest level in the past decade. That number rose to 25.7% in August before falling to 21.9% last month, below the 10-year average of 26.3%, according to The Wall Street Journal. 

Some investors believe insider activity is a key precursor of the market’s future trajectory. 

What’s at play: Berkshire Hathaway and Warren Buffett have continued to build an enormous cash pile. Big tech billionaires Jezz Bezos and Mark Zuckerberg have sold billions of dollars of their companies’ shares in 2024, and many other big investors are either taking some profits or riding the market up without making any big buys. 

• “Insider trading is a very strong predictor of aggregate future stock returns,” said a Ross School of Business professor at the University of Michigan. “The fact that they are below average suggests that the stock returns in the future will be below average as well.”

By the numbers: Major stock sales include Palantir’s Peter Thiel, Nvidia’s Jensen Huang, and Dell’s Michael Dell. 

Some analysts say insiders could be concerned about a recession, high unemployment, or a stock market rally that runs out of steam. 

But stocks keep marching higher and bouncing back from drawdowns. The S&P 500 has risen 21% this year, setting 43 record-high closes.

The numbers, though, have held up after a respectable summer earnings season. The economic figures have also held steady. Last week’s jobs numbers were surprisingly strong, inflation is falling, and the Federal Reserve has begun a rate reduction path. Another earnings season kicks off this week with big banks. 

Why it matters:

To be fair, some investors say insider selling isn’t much of an indicator. Stockholders sell shares for many reasons, including diversifying their portfolios, freeing up cash, rebalancing, and taking profits. In other words, a stock sale doesn’t necessarily reflect a negative view of a company. It’s also possible that insiders are simply refraining from chasing the rally and not trying to be greedy. 

Officers and directors at U.S. companies bought $2.3 billion of their companies’ stock this year through September, the lowest total since 2014. Last year, they bought $3 billion in the first nine months. In March 2020, insiders bought almost $1.3 billion before the market took off, which many saw as a bullish sign.  

• “The insider buying gave our firm confidence to put money to work in the stock market during an extremely challenging time,” noted one managing director. 

Early this year, Buffett slashed his massive Apple stake and now sits on about $280 billion in cash. 

• “Investors should take notice,” said the chief investment officer of Summit Global Investments. “I don’t think you’d say he’s trying to time the market and look for pullbacks, but I am thinking he’s saying, ‘This is overvalued, and I value cash more than I value this investment.’”

Read more

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🧈 Costco Gold Bars Sell Out Amid Major Rally

The gold rush of 2024 rages on. Bullion prices are smashing all kinds of records this year amid geopolitical tension, and more people want in. Bloomberg is calling the run “a breathtaking surge.”

Few places are a better barometer of investor interest in the metal than Costco, which has struggled to keep its gold products stocked even as prices keep climbing. The retailer sells gold bars by offering prices that undercut traditional precious metals dealers.

Combined with Costco’s extra rewards for loyal customers and Gold’s appeal as a safe haven and hedge, it’s no wonder the warehouse retailer is hardly able to keep up with demand. 

Costco doesn’t publicly reveal much about its gold sales, but a Bloomberg survey found that about 77% of Costco outlets in 46 states sold out of bullion bars in the first week of October. 

• Spot gold has soared nearly 30% this year, one of the bigger market stories in a year defined by falling inflation, easing Fed policy, and another strong year from U.S. equities. Gold isn’t just one of the best-performing commodities this year; it has outperformed the S&P 500 and bonds.
  

• Continued geopolitical tension and its role in safeguarding wealth have driven renewed interest. Gold, which is non-yielding, usually rises in low-rate environments. In September, it hit $2,600 an ounce after the Federal Reserve cut interest rates. 

Staying precious: An analyst told Bloomberg that Costco is the “one bright spot” in the consumer gold-buying market. “There’s a whole new cohort of retail buyers,” she said. “We do think that’s positive in the medium to long term, given that Costco has managed to bring in new buyers into the precious space.”

Gold wasn’t available at Costco until last summer, and now it offers Swiss-made 24-karat bars roughly the size of mini chocolate bars. 

Why it matters:

Costco’s soaring gold sales show just how investors feel about the bullion. Costco customers pay annual membership fees and tend to have higher household incomes than customers at other retail chains. One Costco gold buyer spoke for many when he said it’s “easy to make a purchase knowing that there has been historical value in it.”

• Costco has also made owning gold and silver more accessible than ever. Jewelry aside, only 2% of Americans own gold and silver, according to some estimates. And Costco gold buying “can provide a form of constant support” for the precious metal. 

Personal diversifier: In its first quarter last year, Costo sold over $100 million in gold bars, which (along with silver) continue to be “a meaningful part” of e-commerce sales growth, Costco said. 

Josh Young, a Houston money manager, said Costco’s gold deal — it has sold one-ounce bullion bars for a 1.6% premium to spot gold’s price — “seemed too good to be true,” especially considering the rising geopolitical tension and gold’s perception as insurance against financial risk, including what he called “significant hyperinflation.”

• “It’s physical and gold does have a long history of being a store of value even though there’s no cash flow from it. It’s a good personal diversifier.”

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Quick Poll

On Friday, we asked: Do you think AI will primarily supplement or replace human financial analysts in the future?

— On team supplement, answers included: “AI would be helpful in scanning broadly a range of input data that help humans achieve the end result.” Said another: “Software always suffers the flaws or bias of input and machine structure. It would be inadvisable to allow it to do much of anything without human oversight.”

— Others believe AI will be able to replace jobs such as financial analysts. “Companies will look to cut jobs in every corner,” one investor wrote.

— One respondent believes it will be an equal mix. “There’s already a lot of automation and AI for many of the trade systems. As far as AI replacing individual investors such as Mohnish Pabrai, I can see it happening, but I still think we’re far from it. AI models are still not independently intelligent like individual investors.”

See you next time!

That's it for today on We Study Markets!

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