People keep talking about how crazy the market is, up more than 25% this year. It's a big year to be sure. But on the the other hand, even though the market has been decent in recent years, it hasn't been particularly bubblicious.
To put the 25% return into context, I think it's a good idea to look at it over 2 years or 3 years. Since the end of 2017, for example, the market has return an annualized 8.4%/year. Pretty good to be sure. Since the end of 2016, its up around 12%/year. Going back five years, it's up 8.8%/year (these figures exclude dividends).
Not bad at all, but not bubble-like either. If you were going to train an AI machine to look for bubbles, you would look at valuations (interest rate adjusted), sentiment etc. But one of the biggest factors that I would include would be historical returns over various time frames; strong performance reinforces the positive loop of increasing positive sentiment -> higher prices -> better-looking historical returns -> increasing optimism and 'proof' (both statistical and social) of the greatness of stocks etc.
The 10-year return is 10.9%/year, but that's off a depressed level due to the great recession. Over 20 years, the market has gone up only 4%/year.
Here is a table of the S&P 500 index change over various time periods.
S&P 500 Annualized Returns Through November 2019 (excl. dvd)
1-year return: 25.30%
2-year return: 8.39%
3-year return: 11.95%
4-year return: 11.34%
5-year return: 8.81%
10-year return: 10.91%
20-year return: 3.87%
30-year return: 7.55%
50-year return: 7.31%
S&P 500 Annualized Returns Through December 1999 (excl dvd)
1-year return: 19.53%
2-year return: 23.05%
3-year return: 25.64%
4-year return: 24.28%
5-year return: 26.18%
10-year return: 15.31%
20-year return: 13.95%
30-year return: 9.67%
50-year return: 9.36%
This is pretty insane. The annualized return over 5 years to December 1999 was 26%! And we are sort of freaking out that the market is up over 25% year-to-date in a single year, and not even double digits annualized over 2 years.
So anyway, that's why it doesn't really feel like a bubble. People aren't quitting their jobs (to trade stocks), buying new cars (with their capital gains), bigger houses and things like that we saw back in 2000. Most people I talk to still tend to hate stocks, the financial crisis still fresh in their minds.
Buffett did mention DIS as one of the well-managed companies (along with GE at one point); his relationship with DIS goes back to when DIS bought Capital Cities during the Eisner years (and Iger was working for Thomas Murphy / Dan Burke). And I think it goes even further back than that, actually.
It's fascinating to read about the events that we've been reading about in the newspapers from the people that were involved. This one involves Buffett / Murphy / Burke, Steve Jobs, George Lucas, Pixar and a lot of what is going on in media today. This connects (unintended) to the Malone interview below.
Anyway, this book is a quick read so go get it. By the way, I have not subscribed to Disney+ yet as I am big into Netflix and there is just so much stuff there that I can barely scratch the surface of what I want to watch (by the time I cancelled the DVD part of my Netflix subscription, I had more than 400 DVD's in the queue). My favorite things are the European cop dramas (French, Belgian, German, Norwegian etc.), the Indian and Japanese shows, and of course many U.S.-based shows too. I just watched The Irishman which is really good (creepy is the special effects to make these close-to-80 year olds look middle-aged), but at the same time I also thought, gee, do we really need another wise-guy movie?
People keep talking about the competition in direct-to-consumer streaming and how increasing competition will hurt Netflix etc. This is probably true to some extent; when Netflix was the only game in town, that's one thing, but with many participants jumping in, that's another story altogether.
On the other hand, when you think about it, this is not really an either-or world. People aren't going to sit there and debate whether to switch from Netflix to Disney+ or Apple. Netflix charges $14/month or some such thing, and Disney+ is even cheaper.
A lot of people are still paying $100/month or more for the conventional video package ( I dropped that a couple of years ago mostly because I don't watch most of the channels (ESPN, for example), but what bothered me even more was that they were charging me $14/month for each cable box in the house, which seemed ridiculous to me. Those things can't cost more than $100 (look at Roku at $20; and if it actually does cost more than $100, it's for functionality that I don't need), and they are charging $14/month forever; this makes absolutely no sense.
If you cut the chord, you have $100/month in video budget you can allocate (you still need to pay for the internet), so you can have Netflix, Hulu, Disney+, HBO and a few other things and still be under $100...
There are a few annual events that are really exciting to me. Of course the Berkshire annual meeting (I just watch the video later), annual report, JPM annual report etc.
And another one of those is the CNBC John Malone interview by David Faber. Faber is one of the few people (of the reporters/anchors), if not the only one, who seems to understand the market and business.
Anyway, I jotted down some notes while watching the recent interview (done during the Liberty Media investor day). This is not everything, though, but a large part of it. He also talked about regulation, GOOG etc, for example, so go check out the video.
Here are Malone's thoughts on various topics:
Who is best positioned in streaming right now?
Malone answered by rephrasing the question to, "Who will be around in five years?"
Disney and Netflix.
Disney has great content, a great global brand, but doesn't have a large direct relationship with customers so must piggy back on those who do, like Verizon.
Netflix, so far in the lead, good base / revenue stream.
Apple may surprise. Slim content, but has great distribution in their direct customer relationships. They offer free for one year to buyers of AAPL products etc...
AAPL has optionality; see how it goes and decide how much they want to spend (how much they can afford).
HBO is a decent service, but doesn't have the revenue stream to match Netflix.
AMZN has a totally different monetization strategy so... not primary biz.
Content is for marketing. AMZN may evolve to become a bundler of others' content
Tech companies want to be the platform, get info on customers, be gateway,
let others waste money on content.
DIS will be successful.
Direct relationship w/ customer in scale with growth and pricing power is a powerful business model.
DIS knows they need direct consumer relationship.
HBO Max: HBO content budget was $2bn/year.
If you want HBO, you already have it, so not much gain in new customers in the U.S.? Malone doesn't see the growth. Maybe even attrition.
HBO budget is not enough to protect for the long term. Takes years to develop content internationally. Don't own rights to intl distribution. Problem seeing scale at HBO to get to top of direct consumer biz. HBO is the same as it's been for 25 years. If you want it, you already have it so where is the growth?HBO may capture wholesale spread (as big bundle moves to direct).
ATT will face challenges. Historically has been the biggest dog in every fight, but not now, and not in this space (streaming media). About scale and globality. Need global scale, or won't get enough scale to compete in this space. This will be the challenge for ATT, HBO. FANG companies are all global. If you're only in the U.S., how do you compete?
Sports is glue that keeps big bundle together... will eventually blow up. Not sure when... big bundle still overpriced due to sports content...
At some point, hail Mary passes for some will prove to not be working so content cost will moderate. Some will fail (and stop spending) etc...
NFLX will have to moderate spend at some point. Bundling of these services will happen too. Distributors may bundle too, if it reduces churn etc... will evolve like traditional cable. Comcast offers Netflix etc.
Cord cutting will level off. Erosion won't stop completely, though...
Cutting video increases margins at cable companies as margins for broadband is higher. Happening naturally.
Satellite will end up serving people with no other options, rural etc.
Linear TV will lose subscribers, ads, but as you get direct relationships, value of ads go up as you know more about customers. Ad rev potential goes up; more focused ads etc. Have to fight decline in reach due to decline of big bundle. Provide content direct through app and sell content to others etc. Random access via app; if you subscribe to Discovery Channel, you get stuff through app too (not everything).
Cable industry changed when congress changed retransmission constraints; Margins started to go down. Content providers were able to extract more and more...
Will be profitable for people with unique situations, consistent, stable demand, pricing power, level of uniqueness... those businesses ultimately gets regulated.
Discovery owns content globally, generating free cash, need to migrate to direct to consumer.
Malone bought more stock this week (November 2019). Discovery will solve issues. Stock is dramatically undervalued. Malone bought $75 mn worth of stock. Growing, generating free cash. Market cap to levered free cash flow, cheapest on screen... They own all their content, generates tons of cash, investment grade b/s, they are growing while others are shrinking (5.5x cash flow). Cheap for good company...
Malone paid $28.03/share.
They have no global presence. Lot of content is bought. CBS is totally dependent on sports rights so not sure about long-term profitability. Not sure if CBS has enough power to carry all the channels.
VIA underinvested for many years, bought back stock at high prices, tactical mistake.
How important is MTV, Nickleodean to distributors? Question sustainability of model, and also they are U.S. only.
Yes, stock is historically cheap, but... licensing out content to others. Ice cube melts faster when you don't put content on your own channel.
CBS/VIA needs to get global for long term sustainability. Find niche, glue to make customers sticky. Something unique.
Sold LionsGate; didn't see them execute strategy of using library/content to drive Starrs. They focused too much on selling content instead of driving their own distribution.
Need global scale, or niche in small area that big guys don't care about to survive.
Wired and Wireless Together
Liberty Global followed strategy based on belief that combination of wired and wireless would lead to synergies. Turned out to be true. Belgium, Holland (combined with Vodaphone). Once they built scale, they were able to acquire. Synergies were real and very substantial.
In U.S, for Charter, same idea. Keep growing until they understand the economics of a combination. At the moment, not far along enough on that path. Once scale is achieved, think about building own network. Hybrid tranmission over time. Could be joint ventures, mergers etc.
Malone interested in Altice, but Patrick wants control etc...
Not an expert, but doesn't understand Uber, how is scale going to make it profitable? Like selling hot dogs at a loss and making it up in volume. Can't see how scale changes economics. Can't understand why Dara took job.
Worries about attack on success and wealth in this country.
Worries about where country is going.
If Warren wins, wealth destruction will exceed wealth transfer. Has places in Ireland, Canada, Bahamas etc... (that he can escape to), but Malone rather stay here, be optimistic about balance.
Malone is Libertarian, would vote for Bloomberg.
Trump has right strategy, but not the right guy; he doesn't build a team. A lot of people that worked for him trying to take him down now.
Great post, as usual. Thanks.ReplyDelete
This is the best economy blog in the world that I read.ReplyDelete
Aside from that being a big compliment, perhaps I am missing out on a few? :)
Does anybody have any pointers on other blogs with similar content?
Anyway, many thanks, Brooklyn!
An interesting thing about Disney that I see a lot of analysts missing is that they bought 21st Century Fox.ReplyDelete
That company owned Star India, which in turn owns Hotstar - a streaming channel in India that apparently already has 300m+ active subscribers here.
That scale combined with the Disney library is quite valuable.