🎙️ Unplugged

📈 While inflation persists, interest rates remain elevated, geopolitical tensions simmer globally, and housing costs soar, most major market segments continue to thrive: The S&P 500 just clocked another record high Wednesday.

As stocks, gold, real estate, and Bitcoin have continued to rise, it’s further proof that the stock market is not the economy. It’s also another reminder that the S&P 500 has risen for decades despite all kinds of reasons to worry or sell.

In a nutshell, that’s why the best investors separate market performance and stock valuation from transitory economic conditions to withstand short-term volatility and benefit from the market's upward trajectory.

— Matthew & Shawn

Here’s today’s rundown:

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

• Big tech companies unplug the stock market from reality

• In honor of Charlie Munger

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

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In The News

💸 Big Tech Stocks Unplug the Stock Market From Reality

There’s Big Tech, and then there’s everything else. The dominance of Big Tech stocks like Apple, Microsoft, Nvidia, and Alphabet in the S&P 500 could be masking how fearful investors truly are about the Federal Reserve keeping interest rates higher for longer.  

The average stock has been heavily impacted — both positively and negatively — by movements in bond yields more than at any point this century, according to a Wall Street Journal analysis. But the index overall remains relatively insulated due to the huge cash reserves of the Big Tech giants, among other factors. 

Cash hoarding: The divergence is rooted in corporate profits and interest rate exposure. 

• The mega-cap tech companies have massive cash hoards, allowing them to earn high returns while also locking in low interest rates by refinancing debt before the Fed's rate hikes began in March 2022. Of course, smaller companies lack such cash buffers and easier access to bond markets, making them more vulnerable to higher rates.
  

• The valuation split is also stark, and the correlation between individual stock performance and bond yields is at record levels compared to the S&P 500.
  

• A combination of higher debt loads, floating-rate exposure, lower cash reserves, consumer spending sensitivity, and refinancing challenges make smaller enterprises more vulnerable to the impacts of higher rates.
  

• The trend reflects economic disconnects, where poorer and younger borrowers feel acute pressure from higher rates, dragging on growth. But Big Tech's sales are largely insulated unless the slowdown worsens. 

Flipside: Ironically, this is the opposite of 2022, when Big Tech plunged on valuation concerns, underperforming the average stock. Now, the AI frenzy is offsetting valuation worries for the mega-caps, while the smaller rate shock versus 2022 and recognition of their debt profiles further buoy the largest names. 

Why it matters:

For starters, the S&P 500 closed at another fresh record Wednesday, and shares in big tech stocks (notably Nvidia) continue to climb.

Yet investors outside Big Tech have reason to worry about higher rates lingering. Per WSJ, the smallest 50 S&P 500 members trade at just 15x earnings — as cheap as the index was during the 2020 pandemic panic. If rate cuts materialize, these smaller, cheaper stocks could finally outshine the mega-cap tech leaders.

Bottom line: The outsized influence of cash-rich, low-debt Big Tech distorts signals about investor rate fears in the S&P 500. If the Fed pivots, that (possibility) creates opportunities in smaller, more rate-sensitive stocks.

Read more

More Headlines

🤔 The reason many rich people aren’t satisfied with their wealth (archive)

 📈 GameStop soars after Roaring Kitty reveals $116 million position

😮 Just six stocks fueled 75% of the S&P 500's latest banner month

🏀 NBA nears rights deal worth $76 billion with NBC, ESPN, and Amazon

🤖 Google, Microsoft lay off hundreds of cloud employees to go all-in on AI

🍻 Samuel Adams brewer reportedly on the block, as U.S. beer sales fall

🙏 A Few More Charlie Munger Stories

Charlie Munger died last year at 99, but his legacy continues to live on.

We attended a Munger remembrance in New York City. Here are some takeaways of the event, which included: Tom Gayner, CEO of Markel; Donald Graham, chairman emeritus, Graham Holdings Company; Ronald Olsen, partner, Munger, Tolles & Olson. It was moderated by Lawrence Cunningham, who wrote The Essays of Warren Buffett, which Cunningham self-published into an international best-seller.

Quality over cheap: One of the fundamental principles behind Berkshire Hathaway's success, per Munger, is prioritizing high-quality companies over cheaper ones. “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices,” Warren Buffett recalls Munger telling him in 1965.

Circle of competence: Gaynor emphasized the importance of understanding one's own strengths and limitations. He says mistakes of omission are most common — we regret what we didn’t do more than what we did. One example: Gaynor didn’t invest in Berkshire Hathaway in 1984 because he thought it was overvalued. He made up for it by investing in the company a few years later. Lesson learned. 

Be selective and patient: Wall Street loves activity, but Munger was happy with “sitting on his ass” and waiting for the “fat pitch.” Sometimes, that meant not investing for months or even years. His approach involves focusing on clear opportunities and avoiding extensive analysis of companies outside one’s expertise. This selective approach, akin to Ted Williams' "fat pitch" philosophy, minimizes wasted effort and enhances decision-making efficiency.

Reading and continuous learning: Munger's dedication to reading and lifelong learning was evident all his life. Those who knew him well say he always had a book on his hand. His extensive reading habits, including historical and biographical works, enriched his perspective and decision-making abilities. 

Influence: Munger's influence extends beyond investing; he was also a revered teacher and mentor. His approach to problem-solving, characterized by avoidance of self-pity, left a lasting impact on those around him. His legacy (and Berkshire’s) is described as a "seamless web of deserved trust," reflecting integrity.

Additional Insights

• Munger's office, cluttered with books, symbolizes his relentless pursuit of knowledge.
  

• His capacity to engage and dominate conversations with quick wit and intelligence was noted as remarkable.
  

• Choose your partners as you would friends; choose your clients as you would your friends
  

• To honor Munger: Read, learn, give; he believed a $20 or $25 book is one of the best investments you can make (investment in knowledge and experience)
  

• If you make a promise to someone, keep it. And everything worthwhile takes a lot of time: Build slowly and carefully with patience and persistence.
  

• Think long-term; it’s much less competitive to invest over decades. As a thought exercise when investing in a company, consider: Will this company be around in 25 years?
  

• Munger believed many day-to-day problems in life aren’t worth getting worked up over; just “get on your way,” he’d say.
  

• When presented with a “great” idea, Munger would ask: “Compared to what?”
  

• It’s OK to make mistakes and keep moving forward, so long as you don’t make massive, fatal mistakes.
  

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Quick Poll

On Monday, we asked: What factor do you consider most important when evaluating a new investment product?

— A reader who considers strategy most important wrote, "I want to ensure their approach is the same as mine as that will be the deciding factor for long term returns.”

— One respondent who works with their advisor said, “We each select 3 investments. Then discuss considering how each fit into our portfolio and investment strategy. Then select. We are about 50/50. His choices and mine. Works for me. Life is good.”

— Others said, “I try to avoid products. I buy businesses, bonds and (rarely) collectibles.” Another belives that “you have to take all of these into consideration in order to make a good decision!”

See you next time!

That's it for today on We Study Markets!

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