2024 Q4 Update and Outlook

An investment manager’s daughter excitedly told her father about how she had developed an app to make the Bitcoin lightning network faster.  “That’s great, honey.” He told her.  “Would you like to hear my opinion on Bitcoin?”  “Of course,” she replied.”  “It’s worthless.” “I know, Dad, but go ahead and tell me anyway.”

Sometimes I feel like an old codger and wonder whether these young investors know something I don’t.  How is it that people with no investment experience or training can make so much money so quickly by buying things they mostly don’t understand at valuations they can’t explain (or have never even considered)?  There is a lot of excitement about artificial intelligence, and for good reason – it could increase productivity in many fields, completely automate some jobs, improve performance for jobs requiring expertise, revolutionize medical research, and make it easier for people to come up with memes for social media.  The big questions are, how much will this be worth, and who will benefit?  The answer is, no one really knows.  We can look forward and try to guess who will be the winners and losers, but to make money at this endeavor, we must be more accurate than the collective guess of the rest of the world.  That sounds like a real challenge, so instead let’s look let’s look at this in historical context, and then consider what today’s valuations imply.  

               The S&P 500 gained 25% in 2024, for the second straight year of 20%+ returns.  The last time it had three such years in a row was in 1878-1890.  One of the greatest productivity-boosting new technologies ever came out in that period – the electric light bulb!

               The S&P 500 Index is getting less and less diversified.  The top ten stocks (with ownership in only nine companies, as Alphabet has two share classes represented) ended 2024 with a 37.3% weighting in the S&P 500.   All but Berkshire Hathaway are tech or tech-adjacent, and have Price/Earnings ratios of 25x or more.   The average is 51.5x.  This suggests a euphoric bubble.

Continue reading here: 24Q4 Econ Update.pdf