Wild Swings In 2024: Why Markets Could See New Highs And New Lows | Ted Oakley

David Lin
4 Mar 202434:32

TLDRIn this insightful discussion, Ted Oakley, founder of Oxo Advisors, shares his investment philosophy and market outlook. He emphasizes the importance of maintaining buying power and avoiding overpriced stocks, highlighting the risks of momentum investing. Oakley discusses the current market dynamics, the potential for a market correction, and the challenges faced by commercial real estate and the banking sector. He also touches on the impact of high interest rates on corporate America and the importance of liquidity in investment strategies. Oakley's perspective is grounded in a value-oriented approach, focusing on companies with strong cash flows and low debt, and he warns against the dangers of chasing growth at the expense of sound financial principles.

Takeaways

  • 📈 The speaker is maintaining a defensive investment stance, focusing on preserving buying power and safety, particularly through treasuries which offer a yield above the inflation rate.
  • 🔄 The speaker criticizes the current market for being driven by momentum rather than value, warning of the risks of overpaying for stocks, especially the 'Magnificent Seven'.
  • 📊 The speaker's investment strategy involves a significant shift towards short-term fixed income (less than 60 months) and owning stocks with low debt and high cash flow.
  • 📉 The speaker is cautious about the sustainability of the current market highs, citing historical examples of significant declines in overvalued companies.
  • 🏦 The banking sector is mentioned as potentially facing challenges due to flatlining loans and deposits, with some banks making little to no profit or even losing money.
  • 🏢 The speaker observes a bifurcated economy, with some sectors like commercial real estate and infrastructure performing poorly or exceptionally well, respectively.
  • 📚 The speaker's book '30 Million and Broke' discusses the pitfalls of sudden wealth and the importance of financial discipline and happiness in maintaining wealth.
  • 💡 The speaker emphasizes the importance of liquidity and diversification in protecting wealth, with a focus on real estate, known companies, and financial assets.
  • 🔮 The speaker predicts that 2024 could see both new market highs and lows, depending on the momentum and speculative nature of the market.
  • 🌐 Geopolitical risks, particularly in the Middle East, are identified as potential triggers for market corrections or declines.
  • 📝 The speaker advocates for a disciplined approach to investing, avoiding the temptation to chase growth at the expense of value and financial stability.

Q & A

  • What is the primary objective of investing according to the speaker?

    -The primary objective of investing, as mentioned by the speaker, is to maintain buying power, which is achieved by holding treasuries that provide a return over the inflation rate.

  • What is the speaker's view on the current stock market?

    -The speaker believes the current stock market is a momentum market focused on price rather than value, where people are overpaying for good companies, which could lead to long-term financial losses.

  • How does the speaker evaluate the health of the economy separate from the stock markets?

    -The speaker evaluates the economy as bifurcated, with some sectors like commercial real estate and mortgage applications showing signs of struggle, while others like infrastructure and tech companies are doing well.

  • What is the speaker's strategy for fixed income investments?

    -The speaker's strategy for fixed income investments is to focus on short-term treasuries, specifically those with maturities less than 60 months, as they believe this approach will be more suitable for the upcoming decade.

  • What does the speaker think about the 'Magnificent Seven' stocks and their impact on the S&P 500?

    -The speaker notes that the 'Magnificent Seven' stocks have been driving the entire S&P 500, and their high valuations have led to a situation where the speaker's firm does not add to their holdings due to the perceived overpricing.

  • How does the speaker define being defensive in the current market environment?

    -The speaker defines being defensive as maintaining a significant portion of their portfolio in treasuries, averaging about 55%, and focusing on companies with low debt and high cash flow, which are undervalued compared to the market average.

  • What is the speaker's outlook on the 10-year treasury yield?

    -The speaker is uncertain about the exact direction of the 10-year treasury yield but guesses that it may go up, as they believe the current rates do not have the potential to lower further.

  • What does the speaker suggest for investors who are looking for yield?

    -The speaker suggests that investors should consider tax-free bonds over corporate bonds, especially if the spread between corporate and treasury yields is not wide enough to justify the additional risk.

  • How does the speaker view the potential for a market correction?

    -The speaker acknowledges the possibility of a market correction, as they believe that the expensive valuations and momentum investing could lead to a significant downturn if the market loses momentum.

  • What is the speaker's advice for individuals who have experienced a liquidity event and have a substantial amount of wealth?

    -The speaker advises such individuals to be cautious and not to let ego drive their investment decisions. He emphasizes the importance of maintaining liquidity, diversifying investments, and focusing on cash flow rather than chasing high-risk investments.

Outlines

00:00

📈 Market Sentiment and Defensive Positioning

The speaker discusses the rationale for holding treasuries, emphasizing the importance of maintaining buying power and safety in a market driven by momentum investing. They highlight the risks of overpaying for good companies and the average decline of companies that went public between 1998 and 2000. The conversation includes a guest, Ted Oakley, founder of Oxo Advisors, who shares his views on the market's defensive stance despite recent highs and the potential for a market correction.

05:03

🔄 Shift in Investment Strategy

The discussion continues with Ted Oakley explaining his investment philosophy, which focuses on value over growth. He shares his concerns about the high multiples of the 'Magnificent Seven' stocks and the bifurcated nature of the economy, with some sectors like commercial real estate and infrastructure performing differently. Oakley also talks about his preference for companies with low debt and high cash flow, and his cautious approach to the market, which includes a significant shift towards short-term fixed income investments.

10:04

🏦 Banking Sector and Economic Concerns

The conversation touches on the banking sector, with the guest noting that while banks have managed deposits well, there is a slowdown in lending and borrowing. He expresses concern about the potential for banks to face difficulties if they have to take write-downs on loans. The guest also discusses the manufacturing sector's weakness and the impact of consumer spending habits, suggesting that the services industry may continue to perform well despite economic challenges.

15:05

📉 Potential Market Correction and Risks

The guest, Ted Oakley, shares his thoughts on the possibility of a market correction, citing the expensive valuations of stocks and the potential for a market that has run out of steam. He discusses the risks associated with the Middle East and the momentum market's tendency to correct when overpriced. Oakley also addresses the concept of '30 million and broke,' warning about the dangers of mismanaging wealth after a significant liquidity event.

20:06

💡 Strategies for Wealth Preservation

Ted Oakley discusses the importance of financial discipline and the dangers of overextending oneself after a liquidity event. He emphasizes the need for a diversified investment strategy and the value of holding liquidity. Oakley also shares insights from his book 'The Psychology of Staying Rich,' highlighting the financial habits of wealthy individuals, including their strategic use of debt and focus on cash flow.

25:07

📚 Book Discussion and Wealth Management

The guest talks about his upcoming book '30 Million and Broke,' which addresses the challenges of managing wealth after a significant financial windfall. He emphasizes the importance of financial literacy and the pitfalls of poor investment decisions. Oakley also mentions his other book 'The Psychology of Staying Rich' and shares the wealth preservation strategies of high-net-worth individuals, including their preference for liquidity and diversified investments.

Mindmap

Keywords

💡Treasuries

Treasuries are government debt securities issued by the U.S. Department of the Treasury. In the video, the speaker discusses holding Treasuries as a defensive investment strategy, emphasizing their role in maintaining buying power and providing safety in a volatile market. The speaker mentions that Treasuries currently offer a yield slightly above the inflation rate, making them an attractive option for investors seeking stability.

💡Inflation rate

The inflation rate is a measure of the average increase in prices and fall in the purchasing value of money over time. In the context of the video, the speaker uses the inflation rate as a benchmark for evaluating the returns on Treasuries, stating that a Treasury yield above the inflation rate is desirable for investors looking to preserve their purchasing power.

💡Momentum investing

Momentum investing is a strategy where investors buy stocks that have shown high returns in the recent past, expecting the momentum to continue. The speaker criticizes this approach, suggesting that it often leads to overpaying for stocks and can result in significant declines, as evidenced by the historical data of companies that went public between 1998 and 2000.

💡Market correction

A market correction refers to a decline in the value of a market or asset, typically by at least 10% from its recent peak. The speaker implies that a correction could be on the horizon due to the speculative nature of the current market, where high valuations and momentum investing could lead to a significant drop in asset prices.

💡Bifurcated GDP

Bifurcated GDP refers to a situation where different sectors of the economy are performing at different levels, leading to an uneven economic growth. The speaker mentions this term to describe the current economic landscape, where some sectors like infrastructure and tech companies are thriving, while others, such as commercial real estate, are struggling.

💡Value investing

Value investing is an investment strategy that involves selecting stocks that appear to be undervalued by the market. The speaker identifies himself as a value investor, preferring to invest in companies with low debt, high cash flow, and reasonable valuations, rather than chasing growth stocks with high multiples.

💡10-year Treasury yield

The 10-year Treasury yield is the return on investment for a 10-year U.S. Treasury bond. It is a key indicator of the long-term interest rate environment. The speaker discusses the 10-year Treasury yield in the context of his investment strategy, expressing skepticism about locking in a fixed rate for a decade, given the uncertainty in the economic and interest rate outlook.

💡High-grade corporates

High-grade corporates refer to bonds issued by companies with a high credit rating, indicating a lower risk of default. The speaker mentions these as an alternative investment option, suggesting that they could be considered if the yield spread over Treasuries is sufficiently large to compensate for the additional risk.

💡Liquidity

Liquidity refers to the ability of an asset to be quickly and easily sold without significantly affecting its price. The speaker emphasizes the importance of maintaining liquidity in an investment portfolio, especially in times of market uncertainty, as it allows investors to take advantage of opportunities or mitigate losses.

💡Bubble territory

Bubble territory refers to a situation in financial markets where asset prices have become inflated to an extent that they are significantly detached from the fundamentals. The speaker suggests that certain stocks, particularly the 'big seven' with high multiples, may be in bubble territory, indicating a potential for a sharp decline in their prices.

Highlights

The primary objective of investing is to maintain buying power, which is achieved by holding Treasuries that provide a return over inflation.

Momentum investing is prevalent, but historically, it doesn't work out well in the long run.

The average decline for 350 companies that went public between 1998 and mid-2000 was 91%.

The market is bifurcated, with some sectors like commercial real estate and infrastructure performing differently.

A defensive investment strategy involves a significant shift towards short-term fixed income and companies with low debt and high cash flow.

The 10-year Treasury yield trend is uncertain, but short-term Treasuries are preferred due to the potential for higher rates.

Value investing is preferred over growth investing, focusing on companies that are not overpriced.

The economy is not out of the woods yet, with potential for a slowdown despite government support.

Manufacturing and services industries show signs of weakness, which could impact the broader economy.

Banks have shifted deposits to safer areas, but loan growth has flatlined, indicating a slower economy.

Public companies can survive high interest rate environments due to their financing strategies.

The global credit impulse is declining, with people paying down loans and being cautious about borrowing.

Commercial real estate faces challenges as companies struggle to fill spaces, leading to subleasing and reduced rents.

The major theme for 2024 is uncertainty, with the potential for both new highs and new lows in the markets.

The top risks for the markets include geopolitical tensions in the Middle East and the possibility of a market correction due to overpriced assets.

The 'big seven' stocks are in bubble territory with high multiples, similar to the Nifty 50 in the 1970s.

Wealthy individuals protect their wealth by being widely diversified, with a significant portion in cash or cash equivalents.

The book '30 Million and Broke' discusses how individuals can lose significant wealth due to poor financial decisions after a liquidity event.

The importance of cash flow and saving is emphasized, as it leads to better financial outcomes than high income with high expenses.

The psychology of staying rich involves strategic debt and a focus on long-term growth rather than short-term gains.

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