Are tech stocks now good value? | Hacker News Reader

Are tech stocks now good value?

economist.com

52 pointsrzk88 comments

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They have a term for this kind of article on Wall Street:

Trying to catch a falling knife

"<Category> stocks have been beaten up. It's time to buy now!"

Like clockwork, you can count on those stories appearing after a crash.

They have a much better term that really captures this stuff it is, "a martingale."

Edit: Just to clarify, a martingale is a bet that's equally likely to go either way and has zero expected value.

Only if you double your bet every time you lose. Otherwise it's called a dollar cost averaging.

The simplest reasonable betting strategy is to bet some fixed percentage of your available stake, which means bet bigger when you win and smaller when you lose. The Kelly criterion might help you compute the optimal amount to bet, but you can do ok just picking an arbitrary small percentage, like 1%.

This is a nice strategy if you like casino gambling and focusing on the atmosphere and experience and not going full bore on advantage play. Say you have a $20,000 marker limit. Your starting bet on a game with a reasonable house edge like a player friendly blackjack table should be $200 a hand. Then as you win or lose your bet will grow or shrink respectively. While it's possible with extraordinarily bad luck to blow through your entire bankroll, odds are very good that you'll come home with at least a decent chunk of your stake if you can play basic strategy. Even though with basic strategy on a good table the house has around a half a point of edge, last I knew comps were computed using a 2 point model. So if you value the RFB experience even a basic strategy player can come out "ahead."

Of course you should never gamble money you can't afford to lose. It's always possible you will have catastrophically bad luck.

Pretty much the same applies to any gambling, including options trading. The main difference there is you probably want a considerably larger stake that you're willing to lose than twenty grand and you need considerably more discipline than you do at a table game. That and of course you want to avoid bets where the potential downside is more than your stake, which isn't a problem that you face at a casino.

If stock prices were martingales, you would not be able to predict whether they will continue to drop or rebound after a crash.

Is it not the case?

Yes, I probably botched the grammar.

But parent was implying that a martingale means that after a crash, stock prices rebound.

The origins of the word martingale and why it is used to refer to various betting strategies is interesting and obscure: https://ergodicity.net/2012/04/11/the-history-of-the-marting....

Probably the etymology that makes most sense is that it refers to people from Martigues who were considered to be naive. So people knew that the simple strategy of “betting all that was lost” was horrible even in Middle Ages.

And it's sort of self-fulfilling, right? If these stories have a big enough impact, a lot of people will buy the stocks and they will actually stop falling.

Ultimately the stock prices respond to economic reality: profits and interest rates and growth levels

The funny thing about headlines though is that often the reverse happens. Once everyone is crying doom, stocks go up. When people say it is time to buy, stocks go down.

And in a bear market the bottom usually comes when no one is paying attention anymore.

As an example after the financial crisis stocks bottom March 2009, after two years of falling and a good seven months after the big crisis.

Exactly right. The bull market begins when the last seller has bailed out.

So, has that happened yet?

Common quote, doesn't have much to do with reality. Last 3 bottoms (2009, 2018, 2020) were manufactured because of regulatory changes.

right, politics is one thing that really drives the market, because (usually) you can't predict it. If you could, it would already be reflected in the prices.

March 2009 was not a "natural bottom", it was more of a bailout bottom - we now know it happened because of a change in the mark to market rules on bad assets that made possibility of more bankruptcies much less likely and stemmed contagion. Similarly in 2018 (FED pivot) and 2020 (QE infinity).

You'd have to go back to 2002 possibly to find a more "natural", exhaustive bottom where sellers got tired.

The majority of money is in passively managed index funds. individual investors don’t move the market for the most part outside of the meme stock craze.

IMO - Retail buys based off of articles in the Economist and stuff Cramer says. Institutional money will have different criteria for what constitutes "value" and where medium-long term speculation might be warranted. Based on the above the detrimental effects of a falling knife are clearly going to affect one group vs the other.

It is true that market timing is always dubious. But that also means that there's never a wrong time to invest in the market as a whole. Individual stocks when crashing are dangerous if you can't outsmart the reason they are crashing, but in aggregate stocks will go up by a modest amount on decade long scales.

I felt weird about that advice a few months ago, when the market seemed genuinely overpriced as a whole and due for a correction. But a decade from now the difference between investing six months ago, now, or six months from now will be just part of the noise. The right time is visible in retrospect, but since you can't do that you can at least pat yourself on the back for getting a better deal today than you would have gotten a few months ago.

> but in aggregate stocks will go up by a modest amount on decade long scales

They have in the past. There is no guarantee that they will continue to, although I do personally suspect they will.

in aggregate stocks will go up by a modest amount on decade long scales.

There is some truth here, but it isn't entirely true. People who get in the market at their peaks, often see multi decade long negative returns (adjusted for inflation). If you bought the market in 1928, you were negative until the mid-50s. If you bought in the late 60's you were negative until the mid-90s. If you bought in the late 90's, you were negative until the mid 20-teens.

That doesn't represent the situation most investors are in: large lumps of cash don't come people's way very often, most of us are paid on a monthly basis.

True, and regular investing does pay off. Others have pointed that out.

However, these evergreen articles (i.e. just dust off the one from the last market crash) are suggesting that you should particularly invest in tech right now, not that you should regularly invest in it. Possibly even with money that was going to be on the sidelines otherwise.

Here's a relevant example that timing isn't that important in the long term: https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-w...

Timing is quite important in the longterm. This article is saying that you can still make a profit despite bad timing (assuming the stock market does well), not that timing is not important.

It also only analyzes a single time period (1970s - 2015), which happens to be quite a good one for stocks, and then makes an implication about markets in general which is quite speculative.

Yes, but the point is: even with the worst possible timing you still get ahead of inflation ($1.1M from $184k invested). With regular investments you could double the profits. Also, 1970-2015 period includes three big crises, with crashes of around 50% (1972, 2000, 2007), and a bit milder crash of 1987 (34%), calling it "quite a good one for stocks" is kind of a stretch.

The U.K. stock market peaked [inflation adjusted] in 1899 and never hit that mark in real terms again:

https://fredblog.stlouisfed.org/2019/12/how-has-the-u-k-stoc...

Notably ~1917 is when global power shifted from the U.K. to the U.S., cemented in 1945.

(not sure if they included dividends - would probably change the calculations, but for sure you see that 1815-1900 was a ~85 year general bull market in U.K. stocks, followed by ~75 years of real-term declines from 1900-1975).

-----

Also, the U.K. stock market went nowhere from 1874 to 1952 in pound terms, a whopping ~70 years!

Investers in the 1914 German stock exchange were negative for 100 years.

But was there a better alternative? Sometimes the current is so strong that no lifeboat can stay above water.

They could have invested outside of Germany, but maybe that wasn't legal.

Of course, lots of money found its way to Switzerland anyway over the decades, and those bankers were very close-mouthed.

Someone investing over three decades doesn’t invest on a single day or year at the beginning of that time period.

Most people put money in stocks via ETFs inside 401k, IRA, and brokerage accounts periodically (usually monthly) over decades.

The Portfolio Charts[0] site has heat maps showing how long it takes for a given portfolio to have a positive ROI. The charts only go as far back as 1970, but they're interesting nonetheless.

Indeed, for the Total Stock Market portfolio[1], if you had invested a lump sum in 2000 you would have needed to wait until 2014 to see a positive ROI. A more conservative 60% stock / 40% bonds portfolio[2] would have recovered (though not by much) by 2010.

That said, as another commented pointed out, this is not very reflective of the reality of most retail investors: most people will invest over long periods of time rather than all at once.

[0] https://portfoliocharts.com/

[1] https://portfoliocharts.com/portfolio/total-stock-market/

[2] https://portfoliocharts.com/portfolio/classic-60-40/

> but in aggregate stocks will go up by a modest amount on decade long scales.

They have, but why must they? We’re heading into a decades long period of hyper-aging in much of the world and the commensurate rise in capital costs, an energy crisis in Europe that is far from over, the decline of East Asian mass manufacturing and associated inflation, a labor shortage in the US right when it has to massively increase domestic production, and a shortage of all raw materials where Russia or Ukraine were major suppliers. I suppose in 20 years when the markets have adjusted suppliers, the damage is priced in already, and capital supplies are recovering in the US thanks to the Millennials, it might start looking up here, but from a similar or higher base than now? That’s not obvious to me.

It isn't absolutely certain, but it is true that technology has a way of moving forward at a remarkably consistent rate. That is the ultimate driver of real growth.

That does seem like it should flatten eventually, and maybe that's now. But I can't anticipate a radical change and can only guess that tomorrow will be more or less like yesterday. That is potentially fraught but the best I can do.

> technology has a way of moving forward at a remarkably consistent rate

For centuries the general pattern has been improving technology, followed by better nutrition and healthcare, followed by greater populations and productivity, followed by greater capital to invest in technology and on and on. Over more recent decades this was put into hyperdrive with the boomer population bubble in the west spurring massive consumption and then massive capital investment, and as developing nations tapped into global trade this lead to a massive rise in the standards of living and cheap mass manufacturing. However the meteoric industrialization of developing nations has lead to record drops in fertility and so the likes of China are already reaching hyper-aging. We may have already hit peak global population or will soon as hyper-aged communities start to predominate around the globe and increased death rates follow. Better technology can't induce increased consumption in the aged right when we have fewer younger people to develop and less capital to fund that development.

TLDR: that seems like a recipe for less technological development, lower GDP, and therefore possibly a decades long depression in stock prices.

As long as technology and human society progresses, then yes, GDP is guaranteed to rise, and stocks are guaranteed to rise a bit more than GDP, because they represent the best, most innovative part of the economy (mom and pop's grocery stores are not traded on Wall Street, technological startups are)

> As long as technology and human society progresses, then yes, GDP is guaranteed to rise

My whole point is that it looks like human society globally is going to decline rapidly and, in some regions, catastrophically. Old populations don't consume as much, once they get old enough they don't produce as much, how would GDP grow then? Well that is the looming reality for Europe, China, Russia, Japan, Canada etc. The USA is relatively ok there but it's just a matter of time before we get there too unless birthrates veer sharply towards at least replacement level.

I 100% believe in market timing. I usually do extremely well during market crashes, and average during market rises.

I missed the dotcom crash because I didn't want to invest at all, but caught all of the 2008-2009 crash and went long on the bottom in March 2009, but was mostly average after the crash. I caught the entire pandemic drop in March 2020 and also got long at the bottom, but again was only average for the last 2 years. I then went extremely short November 2021 and have been short ever since, and have doubled my trading account. I'm still very short, but by rolling over my options and extending the strike price, I've pocketed most of my gains so if the market rips higher from here I'll only lose about 10% of my gains, but I'm also long META and other stocks, so I'll participate on the long side as well.

Have you considered opening up your own hedge fund?

No, I'm not that good. I enjoy trading very much for myself and trading with other people's money would be too stressful.

Market timing both works and is bad advice for the average person by definition (it takes being way better than average to be a successful market timer).

Also you're competing with people who have access to insider information (even though they're "not supposed to"), so it's kind of tilted against the average person; though not impossible to still come out ahead.

It's similar to poker. For the average person playing poker is a -EV game because of rake, but if you're skilled, poker can be very much +EV.

Have you compared your performance with the index?

How do you reason whether a crash is near or has bottomed out?

No one knows how high interest rates will go. Interest rates are approximately the floor of what a very low risk return on capital looks like, especially for an average citizen. If they approach 7% and stay there as some think is possible, I would expect stocks to keep selling off, especially if public co revenues don't continue to grow rapidly as the economic "slowdown" continues (not worth arguing exactly what constitutes a recession).

Whether a given investment is highest return option for your investment does not change with interest rate. So it does not matter how high interest rates will go.

One thing you might be looking at, though, is if high interest rates somehow affect a given business. If a business relies on being able to get a lot of debt readily and cheaply they might be worse option than one that does not.

They are if the fundamentals say they are. So yes, many are. GOOG seems fairly valued if you assume antitrust doesn’t crack down hard in the near future

Many are also still egregiously overvalued at 10x or more sales. NET, DDOG and NVDA come to mind.

It’s not hard to look at growth rate relative to current value to separate the two. Seems most investors lost any sense of fundamentals in the ZIRP world though

You can treat earnings/FCF multiple as the yield you get today. So a PE of 20 implies a 5% yield this year, while the 10y is at 4% ish. Then use various growth projections and future discount rate projections to determine if that multiple is justified.

Personally I’ve only been buying companies at around 10% current year yields, and only higher if they have sufficient growth to justify it

I'd say start averaging into solid names, like Google and Amazon. We may not be at the bottom, but by the time we've figured out what that bottom was, we'll have missed it. Time in the market beats timing the market, etc.

I believe these companies have 30% more workforce than needed, if they wanted to drive earnings they could. Big Tech being a value... if not already, definitely getting close. I see this as a "get lean" opportunity.

It’s fair to say that companies like GOOG could easily be at a PE of 10 or less today with more financial discipline.

It does provide a lot of buffer against recessionary times

You can't generalise, and nobody really knows.

> You can't generalise.

Sure you can. NASDAQ https://finance.yahoo.com/quote/%5EIXIC/ and VGT https://finance.yahoo.com/quote/VGT/ Agree that nobody knows.

There's been a ~20% recovery from the low & I feel like we are months away from a lot more shitty bad news about the future that sends us to a worse low. The world economy & consumerism outran itself: the demand side now has a billion more buyers (good), the supply has a more middle-class work force (good), but this adds up to one first big crunch we have never invested or prioritized essential sustainability to surive/endure throuhh, and every political situation outside rare rare exceptions is vastly far to the right & toting individualism like crazy, keeping us from making wider wins to success. in heady high times maybe that made sense, worked but there's no band together, no practice left of optimizing & figuring out where strategically to make important wins. the social can-do has beem dymamited.

Some of this is deserved, inflated valuations, but wow, when stuff is going bad generally, the profit:earnings isnt that relevant, everything everywhere goes to shit together.

Markets can only go up so of course! /sarcasm

We have lived through a few generations of unprecedented economic growth on a global scale. This has wildly skewed our assessment of market performance and its long term behavior.

It is widely understood that such growth is not sustainable, and we are, on a civilization level scale, increasingly bumping into the limits of growth. It is entirely possible that at some point we will enter an inflection point and have unprecedented periods of decline.

Especially in Tech we're overly used to the "inevitable" boom being larger than whatever crash has happened before.

However we never really solved the core problems of the 2008 crash, and have been increasingly propping up our entire economy systems with more and more debt. The only way this can be sustained long terms is limitless exponential growth, otherwise you cannot manage those debts.

A lot of the bigger tech companies are approaching, if not at, worldwide saturation.

The main question - when, if ever, will we return to a near zero interest world.

Disclaimer: UK centric thoughts (because that's where I live)

Some projections are signalling deflation on the horizon.

Given the brutal cost of living crisis, I suspect the government and BoE have grossly underestimated how hard things are getting (and how much harder they'll eventually get) for a giant slice of the population.

I'm an absolute lay person here, but surely maintaining (relatively) higher interest rates whilst cutting government investment and raising the tax burden to post war highs during the worst cost of living crisis in a generation is an economic wrecking ball.

If my naive take is anywhere close to sensible, I'd bet on a screeching u-turn and rates lowering again to try and rescue the situation.

Side question: what are "normal" levels for interest rates? I hear people use this term all the time (usually while advocating for hawkish rises in some direct or implied way). Surely the interest rate mechanism is inherently dynamic and therefor entirely context specific, rendering the notion of a "normal" level useless.

Lower interest rates will create more inflation. The UK economy is overly “financialized”. It needs more workers, low cost energy, productivity improvements, and an overall improvement in its ability to supply goods and services.

Near zero interest is completely unsustainable and clear evidence of problems in the market. They have lead to unimaginable asset bubbles that we still haven't seen pop.

There's been some research [0] that the last decade has seen the lowest interest rates in 5,000 years.

We have been continually increasing solving market problems by just creating more credit but eventually you have to pay your debts.

We're headed for trouble potentially bigger than anything we've seen before if we continue on this path.

0. https://www.wiley.com/en-us/A+History+of+Interest+Rates%2C+4...

I'd like to see longer-term revenue reports to make sure their P/E ratios (or similar) are decent. The staff reductions etc. have yet to fully play out in terms of costs and results.

If you wait for that then it’ll be too late and you’ll find yourself in the midst of the next tech bubble. Now is the time to buy if you’re going to.

I thought I spotted the bottom of crypto stocks to buy, but was very wrong. Bottom-detection is a tricky art.

https://web.archive.org/web/20221122110322/https://www.econo...

Non paywalled

https://archive.ph/kalIC

If you're asking that question, then stocks need to go much lower again. Just don't buy the near top, like what happened with Cloudflare during the hype last year. [0]

[0] https://news.ycombinator.com/item?id=29355360

If you google the chart of the S&P 500. It's tripled in the last 15 years. And more than than from the bottom of 2008. Also, it is only 16% down from it's ATH's in 2021. Things don't just go up forever. There are and always have been cycles.

What goes up, must come down.

But, also still surprises me the amazing wonder that is Compound Interest. https://www.nerdwallet.com/banking/calculator/compound-inter...

Best time to buy is if you have a long-term horizon is when there is widespread fear. This cycle might bust, and there might just be that, or a period of high inflation. It's not yet imo. Also, hard to time the market, and also to stock pick, even for very professional investors, it's hard, extremely hard to beat the market. Just buy the S&P 500 ETF and let it work in the background.

Also, those new to investing, Morgan Housel's The Psychology of Money is a great read!

I think so. I've started buying shares every month in Cloudflare and Shopify - use their products and think they have fantastic momentum and great teams working on industry-defining tech. Disclaimer - I don't work/have never worked at either

This is the way to do it, IMO.

    - Do a proper valuation of the company
    - If the price is right, start Dollar Cost Averaging 
        into a position during a downturn

No one can perfectly time the market. However, we certainly can approximate the proper value of solid companies, and we generally can tell when sentiments and market conditions are biasing low.

(Disclaimer: I am not a financial advisor. Do your own research, etc.)

> If the price is right

That is doing a lot of the work. In particular, you need to be able to predict what interest rates will be doing in the future.

The problem is the "proper valuation" though, isn't it?

Especially for something like CloudFlare. I'm a customer, I understand their product and what they're offering, I like their products, I think it works pretty well, I see them having a lots of sites on their CDN, I think they're providing value.

I don't have the faintest idea what their suites of products are worth to the average website owner, and how many of those average users they have, or how much it would be worth to large enterprises etc. And even if I did, I wouldn't have any idea of what that should translate to in share prices.

So in the end all I can reasonably do is very basic stuff like looking at revenue vs share price, and maybe at how competitors are valued. Are you going to have any success with that kind of analysis that's barely scratching the surface?

Literally all of finance boils down to trying to correctly price assets and financial instruments in regards to future performance. Anyone who can consistently and correctly price any asset at any point in the future will be incredibly wealthy.

The best we can do mathematically is to say that at small time scales, right now, things are priced what the market believes they should be price and that's as "correct" as possible.

Everything else is speculation.

considering how many companies are preparing for a recession, and since i’m reading recession next year in a lot of places, i think this is a bit premature. but time will tell.

the thing about buying the lows is that expectations have to be low for that to happen :) by the time its obvious the stocks will have already recovered.

the difficult question to ask is - how much worse could things get relative to current expectation.

Exactly this. Everyone else is happy to buy when things are booming and it's baked into the price.

You are going to get rekt

I am skeptical of Shopify. They have a major scam problem they seem unable to deal with. (Not saying a large portion of shopify sites are scams, but a very very very large percentage of scam sites are built on shopify).

This feels like thinly veiled propaganda to trick people into buying crashing stock, not a tech article. Curious to see it upvoted so much it hit the front page...

It’s written for retail investors. Of course it’s attempting to get them to lose money. The owners of this media are not retail investors: they stand to gain as retail investors lose.