Investors Have Become Unbelievably Bearish On Stocks

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This is Porter & Co.’s Sunday Investment Chronicles. Every week, the Porter & Co. research team pores over thousands (and thousands) of articles, reports, social media posts, analyses, regulatory filings, and anything else we can get our hands (and eyes) on to understand what’s happening in the world of investing and finance – and to uncover the most original, compelling, and double-head-fake ideas…

… and we curate the best of those here. We do it all the old fashioned way: Hours of reading and brainpower (no AI curation here). We read everything – for you.

In Case You Missed It

On Saturday morning before last – February 22, that is – Porter (in his own words) “jumped out of bed like a kid on Christmas” because it was the day that Warren Buffett’s Berkshire Hathaway (BRK) released its shareholder letter and annual report. Buffett’s letter to shareholders has for decades been essential reading for anyone who invests… and this year was no different. That afternoon Porter held a live webinar for Partner Pass members during which he dissected the report. Partner Pass members can view a replay here.

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On the first day of the workweek, Porter delved into Buffett’s biggest investment mistake: Berkshire Hathaway Energy. Over the past two and a half decades, Berkshire has invested close to $100 billion into highly regulated energy companies, with a deliberate focus on wind and solar generation. And the returns have been absolutely abysmal: He’d have done better investing in Treasuries. And Buffett’s best investment?… Moody’s, shares of which Berkshire received in 2000 when it was spun off from long-time Berkshire holding Dun & Bradstreet. 

How good?… 40% annually for 25 years… Porter wrote,

That’s the greatest single investment I’ve ever heard of, given the constraints that it involved a large amount of capital (over $100 million), over a long period of time (25 years) into a large and well-known business.”

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In Wednesday’s Daily Journal, Porter explained that “the stock market is a rigged game that they cannot win”… and that most people should never own stocks – not ETFs, individual stocks, index funds, or any other stocks. It’s perhaps an unusual position for an investment research company to argue… but as Porter explains, the vast bulk of stock market returns over time accrue to a tiny minority of shares (Pareto’s Law, often also called the 80/20 rule, is alive and well in financial markets. And what’s more, investors generally wind up doing exactly the wrong thing at the wrong time…).

Virtually everyone who claims to be a “buy-and-hold investor” is actually a “buy-and-fold investor.” They love to brag about the stocks they own – none of which were purchased and held for longer than the five-to-seven-year average market cycle, because: they always sell at the bottom.”

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So what should you do? Porter explained on Friday… keep reading…

On Thursday, in an update for Porter & Co.’s Distressed Investing, senior analyst Marty Fridson explained that the Distress Ratio – the percentage of bonds in the ICE BofA U.S. High Yield Index yielding 10 percentage points or more above default-risk-free U.S. Treasury rates – in January hit its lowest month-end level in around two years, of 3.7%… well below the 12.7% historical average. 

But the good news – for supply-starved high-yield investors, at least – is that that trend is changing. As of late February, the measure had reached 4.1%, and is likely heading higher, because the Credit Tightness measure – which is highly correlated with the Distress Ratio – has been rising.

It all adds up to a likelihood that distressed-debt investors will have a significantly wider array of bonds to choose from before very long,” Marty explains.

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In this week’s The Big Secret On Wall Street update, we made the case for market leadership to shift away from the U.S. stock market…

We see two key reasons why [soon we could see] the start of the unwind of the American exceptionalism trade, at least in the near term: the coming decline in the U.S. trade deficit and ever-expanding federal government budget deficits.”

What it adds up to is, as we explained, “… a growing risk of U.S. economic and earnings growth coming in below the lofty expectations currently priced into the U.S. stock market.”

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And on Friday…Porter explained what investors should be buying instead of stocks: An asset class that is safer… more predictable… less volatile… and the best-kept secret in the world of finance… and that’s distressed bonds. As Porter wrote…

If you want to make the greatest investments of your life, I strongly suggest buying a subscription to Distressed Investing or joining us as a Partner Pass member… Go here to learn more and to make yourself part of this great opportunity to build immense wealth.”

The Best Things We Read Last Week

Out of the hundreds of sources of investment, finance, and economics news and insight we regularly review – our Bloomberg terminal, hedge-fund letters, annual reports, the financial news media, Securities and Exchange Commission (“SEC”) filings, investment newsletters, newspapers, X (Twitter) threads, conferences, podcasts, and more – here’s what we’ve read that we think you might find interesting.

(Note: Quotes, transcripts, and excerpts are generally reproduced as they appear in the original.)