Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Markets

Patience is a Virtue

We have been involved in the business of writing financial newsletters for a little over six years.

Our goal in writing this newsletter is the same as our goal was when were professionals managing billions of dollars – figure out ways to make money.

One of the big differences, though, is having a large audience of retail investors.

At our hedge funds, we also had an audience of investors. This was a much smaller audience (a couple 100) and they were relatively sophisticated.

This doesn’t mean they had any better insight, but they did approach everything differently.

They focused almost exclusively on the overall portfolio performance and very seldom on any individual position.

This is very different from our readers.

In this business there is a ton of focus on the individual ideas.

This makes a ton of sense.

While many of our readers may buy most (or even all) of our ideas, many (most) of them buy only some.

We try to keep our number of direct recommendations to a manageable level to enable folks to buy everything, but buy some or buy all – we think either is a good approach.

As a result, one of the differences between managing money and writing newsletters has been our readers asking about specific recommendations.

The vast majority (90%?) of the time, the question is “Do you still like “xxx”?”

Our answer is ALWAYS the same and here it is…

“If we have an existing recommendation on a stock that has been published then we still like it.”

This seems kind of obvious, but it is an important point.

The most important part of it is that we will NEVER think something about an idea and not have it reflected in our public statements.

If we no longer think a recommendation is worth following, we will simply remove the recommendation. Always. Immediately.

This is a hard and fast rule and a matter of integrity.

We believe in taking responsibility and accountability.

If we no longer like an idea, then we will remove the idea from our recommendations.

Beyond our responsibility to our readers, though, this is also just good investing practice.

Every day you should ask yourself on each of your positions – do you still like it today?

If you don’t, get out of it.

While this sounds good, we are reminded of the famous Warren Buffet quote, “Investing is simple, but not easy.”

The reality, though, is that you don’t have to live in a situation of what they call “cognitive dissonance.” This is where you feel or think one thing and do another.

The only boss over your money is YOU.

If you want to change it, you can and you don’t have to worry about what anyone thinks about it except yourself.

Now, there is one proviso here…

IF you embrace our idea of constant reflection on your existing positions along with action to reflect your views AND you find yourself constantly churning your holdings, then perhaps you should reconsider your process.

One of the reasons why the answer to the question of whether we still like an idea is so simple for us is that our process is built in such a way that very little of what happens will change our minds.

We try to find ideas that are essentially immune to most of the short-term factors that we can’t handicap.

This means that – while we are active traders when we need to be – our process is one where we don’t make that many active trades.

One final rule.

We think it is a good process that whenever you have a stock or a position where you find yourself obsessing over it constantly to either reduce or eliminate it.

Our experience has been that whenever a position takes up 90% of our mental energy, it almost never translates into profits.

HX Daily Redux

Most Expensive Market Ever

This time last year, many investors were pointing out that the US stock market was trading at the very high end of its historical valuation range. In their view, this was a major concern.

In this note below, we shared our DIFFERENT view and with the S&P 500 +16% year-to-date we feel pretty good with our analysis!

Enjoy the note...

A little more than a month ago, we published a controversial note about some research authored by Goldman Sachs. You can read that note here.

It was a note written by their Chief Market Strategist (and my old friend) David Kostin.

In the note, he stated that the stock market might only see a +3% annual return over the next decade. Accounting for an inflation rate of +2%, this would mean only a +1% REAL annual return over the next ten years.

This compares to an average annual return of +11.2% over the last ten years with an inflation rate of +1.9%. That works out to +9.3% REAL return over the period. This is similar to what we have seen for most of the past few decades.

Recently, Bank of America came out with a similar report. Their estimate is even more dire with them expecting a +0% return. You can read about it here.

These reports have received much attention and generated justifiable concern amongst investors.

These are smart analysts working at major firms, and they have some powerful math behind their views.

As we discussed in our previous discussion about the Goldman report, their math is primarily based on "mean reversion." This is the theory that returns and valuations eventually return to long-term averages.

We gave several reasons in that previous report why there may be a rising mean. This means they could be right about the direction, but not by the same magnitude.

Recently, we have also seen many skeptics talking about the stock market's valuation. Here is a chart from a recent Wall Street Journal article…

This metric is Warren Buffett’s favorite measure of valuation and is called the “Cyclically Adjusted Price-to-Earnings” ratio or “CAPE” for short.

This is a variation of the most popular valuation metric, the "price-to-earnings" ratio. This is the stock price divided by the earnings per share or the "EPS."

The CAPE adjusts earnings for inflation and looks at an average over the past ten years. This smooths out the data and reduces the impact of economic fluctuations.

The version we shared from the Wall Street Journal article shows that the current stock market is more expensive than before the 1929 stock market crash. We are not quite at the same level as the 1999 Internet Bubble, but we are getting close.

This is probably the single metric shared the most when discussing the intermediate-term concerns about the stock market.

What do we think of it and the “Lost Decade” thesis?

Well, many of our thoughts are in that previous note we referenced at the start of this report.

Today, though, we wanted to share a couple of other perspectives.

The first is what we have learned to be the primary driver of stock prices over the last three decades of trading and investing – earnings growth and revisions.

Those familiar with our process have heard this many times, but if a company is growing and beating numbers, the stock almost always goes up.

This translates itself to the overall stock market. If most stocks are growing and beating numbers, the overall stock market goes higher.

The valuation never changes that direction.

It may influence how much higher they go or how fast they go higher. In the short term (weeks and months), it may affect the direction, but over a year or longer, it does NOT matter.

If the S&P 500 sees earnings growth and flat(ish) to positive earnings revisions, then the stock market will be up in a year. Maybe up a lot, maybe up a little. Maybe up sooner, maybe up later. It will, however, be up.

This means that the absolute key to understanding the stock market in the intermediate term (one year or longer) is the direction of earnings.

We would go so far as to say that we think it is entirely valid to IGNORE the valuation of the overall stock market and ONLY focus on the direction of earnings.

A stock market that is cheap and sees numbers go down a lot will still go down. Maybe not by as much, but still go down. We have seen it before.

A stock market that is expensive and sees numbers go up a low will still go up. Maybe not as much, but it still goes up. We have seen it before.

Ignore the noise about the “V” word (valuation) and focus on following the earnings to understand the path of the stock market. 

Market Wizard’s Wisdom

In Memory of a Legend: The Wisdom of Art Cashin

A year ago we lost Wall Street legend and CNBC regular Art Cashin. On the anniversary of his passing, we wanted to share our thoughts on this Wall Street original...

There are interesting dividing lines in the Wall Street community.

Some "purist" investors say they avoid listening to the media. They argue that it is a distraction that takes away from their pursuit of value and returns.

These investors are almost always long-term investors. They would include great investors like Warren Buffett. The vast majority of them aren’t so great.

On the other hand, in my three decades of investing professionally, I have never met an investor who devours the media voraciously and is not at least good. Many of them are great.

These are the investors who want every single piece of information available in the market. They trust their acumen and skill to determine what is useful and what is not. They are good enough to tune out the "noise" and hear the "song."

This has always been my philosophy. Instead of "protecting" myself from information because it will distract me from my process, I want everything out there. Everyone has their own process, but real professionals can make better decisions with more information.

As a result of this approach, I have had the cable TV news channel CNBC on in the background for thirty years now. It has been the soundtrack of my life.

As the years have passed, the CNBC regulars have genuinely felt like a family to me. I have probably heard their voices as much as any other humans in my life.

Last week, we lost one of their great commentators – the market legend Art Cashin.

Art as the Director of Floor Operations on the New York Stock Exchange (NYSE) for the large brokerage firm UBS Financial. He became a member of the NYSE back in 1964 at the ripe old age of 23 years old. This means he was on the ground there for sixty years!

I never had the opportunity to meet him, but I know many people who knew him. Every single person I have heard speak about him only spoke in the most glowing terms.

What I did know was his ability to turn a phrase. He was as "old school" as old school gets, and his comments during market volatility were both pithy and wise.

Today, we will share some of our favorite quotes from Art, along with our insights on his thoughts.

Rest in Peace, sir. Thank you for the years of wisdom!

His most famous quote is…

This is one that I wish every investor would tattoo on the back of their hand.

At HX Research, we talk all the time about how humans are biologically programmed to be stimulated by negative information much more than positive information. It always sounds "smart" to prophesize doom. It is just a terrible way to make money.

Also, as Art says in his quote, will we be able to do much if it ever happens?

Art had some great quotes, but he was more of a storyteller.

We thought the best way to pay tribute to him was to share one of our favorite stories from him.

This is a story about the Wall Street concept of “price discovery.” This is how the market – through the interactions of buyers and sellers – finds a price to transact.

There have been thousands of pages of academic research written on the subject, but we think Art’s story is the best version we have ever read.

We have quoted this from a great CNBC article about him, which you can read here.

Here is the story…

To explain price discovery, Cashin liked to tell the story of the time the jeweler Charles Lewis Tiffany tried to sell an expensive diamond stickpin to John Pierpont Morgan.

Tiffany, Cashin said, knew that J.P. Morgan loved diamond stickpins, which he used to put in his tie. One day, the jeweler sent a man around to Morgan’s office with an envelope and a box wrapped in gift paper. Morgan opened the envelope, and in it was a message from Tiffany: “My dear Mr. Morgan, I know of your great fascination with diamond stickpins. Enclosed in this box is an absolutely exquisite example. Since it is so exquisite and unusual, its price is $5,000.”

In those days, Cashin noted, $5,000 was north of $150,000 in present dollars.

The note continued: “My man will leave the stickpin with you and will return to my office. He will come back tomorrow. If you choose to accept it, you may give him a check for $5,000. If you choose not to accept it, you may give him the box back with the diamond stickpin.”

The next day, Tiffany’s man came back to see Morgan.

Morgan presented him with the box rewrapped in new paper, along with a note, which said, “My dear Mr. Tiffany, as you’ve said, the stickpin was magnificent. However, the price seems a bit excessive. Instead of $5,000, enclosed you will find a check for $4,000. If you choose to accept that, you may send the pin back to me, and if not, you may keep the pin and tear up the check.”

The man returned to Tiffany, who read the note and saw the offer for $4,000. He knew he could still make money on the offer, but felt the pin was still worth the $5,000 he was asking.

The jeweler said to the man, "You may return the check to Mr. Morgan and tell him I hope to do business with him in the future." Tiffany then took the wrapping off the box, opened it up and found not the stickpin, but a check for $5,000 and a note that said, "Just checking the price."

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].