Category: Investing

NVIDIA will have to spend $1 trillion of its market cap on employee retention?

by philg

NVIDIA is worth over $3 trillion and has approximately 30,000 employees. The company could be quickly overtaken by the competition, though, if all of the employees quit. No problem, right? Just pay every employee $1 million per year for the next ten years and nobody will quit. That would cost only $300 billion. Most of NVIDIA’s employees are in California where the personal income tax rate on successful people is close to 50 percent (federal plus state). Each employee would realize only $500,000 in after-tax spending power if paid $1 million pre-tax. Suppose that the average NVIDIA employee is already worth $20 million. He/she/ze/they wouldn’t rationally keep coming to work every day for the next ten years unless spending power could be roughly doubled. That would require giving every employee about $40 million in pre-tax compensation over the next ten years (presumably most of this would be via stock grants that would dilute existing public investors). That’s a $1.2 trillion cost to prevent employees from “calling in rich”.

Does the fact that NVIDIA has already made nearly all of its employees so rich that they can afford to retire comfortably (for some, moving away from California might be necessary) impair NVIDIA’s likely long-term value to outside investors?

Who could conceivably overtake NVIDIA, you might ask? The Intel Gaudi line doesn’t seem to have caught on. Amazon (“Trainium”), Google (“TPU”), and some startups are all going after the H100 market that is responsible for most of NVIDIA’s revenue (the desktop gamers have been reduced to insignificance). Here’s a story on Google’s potential self-sufficiency:

Amazon and Google don’t sell chips, but instead sell time on their chips via their cloud services which is, presumably, what most customers want. So NVIDIA can’t be complacent and let its employees wander off to either pleasant retirements or startups where there is a realistic chance of making significant money.

Maybe this overhanging need to pay already-rich employees crazy high compensation is priced into NVIDIA stock, just as my Church of Efficient Markets pastor says. Yet I have doubts…

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Are America’s rich people betting on the rich becoming more concentrated and isolated?

by philg

“The Ultra Wealthy Are Riding Out the Market Chaos in Luxury Real Estate” (WSJ):

Despite a chill in the overall housing market, ultraluxury home sales in areas like New York, South Florida and Los Angeles are accelerating as the wealthy buyers bet on real estate’s long-term value. Since February, the number of homes sold for $10 million or more has surged in major markets nationwide, according to an exclusive analysis by The Wall Street Journal. Between Feb. 1 and May 1, sales at that price point in Palm Beach, Fla., surged 50% from the same period last year, while sales in Miami-Dade County jumped 48.5% year-over-year, according to public records and local multiple listing service data. In the luxury ski destination of Aspen, Colo., sales jumped 43.75% in that same period, followed by Los Angeles County at 29% and Manhattan at 21%.

When President Trump’s tariffs were first announced, some wealthy buyers tapped the brakes and backed out of deals. In recent weeks, however, real-estate observers have been surprised to see a wave of big-ticket sales across the country.

The largest was the $225 million sale of a residential compound in Naples, Fla., in late April, the country’s second-most expensive home sale ever recorded. The seller was tied to the DeGroote family of Canada, property records show. The same week, billionaire David Hoffmann paid $85 million for a waterfront property nearby.

Home buyers at lower price points, by contrast, are holding off on buying and selling amid the chaos, agents said. For Miami homes below $20 million, for example, listing prices have dropped 10% to 20% since the start of the trade war, said agent Danny Hertzberg of Coldwell Banker.

“The most bullish buyers seem to be the highest-net worth buyers,” said Hertzberg, who knows of at least three Miami homes in contract to sell for $40 million or more. “The rest of the market is soft—frozen in some aspects—whereas the top of the market is accelerating in the number of sales and prices.”

The estimates of construction costs don’t seem right:

Hoffmann, an activist investor, already owned a smaller home in Naples but was searching for a larger compound in the area for five years. “This wasn’t a spur of the moment thing,” he said. The $85 million house, which measures about 17,200 square feet with eight bedrooms, ticked all the boxes in terms of design, size, quality and location. He is also in contract to buy the adjacent property with a guesthouse, bringing the total purchase price to just over $100 million. The two properties had been listed for a combined $125 million.

Hoffmann said he has diverse investments, including a “significant” amount of money in the stock market, but isn’t worried about short-term fluctuations. Moreover, he felt he got a good deal on the Naples home, since it would cost about $110 million to build today.

Even at $1,000 per square foot, a 17,200-square-foot-house would cost only $17 million to build.

Especially in higher-end neighborhoods of South Florida, a physical house is seen as a depreciating asset that will require a bulldozing or a gut rehab after 20 years. In my brain, the only ways that it could make sense to consider such an asset an “investment” are (1) interest rates are near 0 percent and it is easy to get a 90-95 percent mortgage, (2) an expectation that the land underneath will become much more valuable. Interest rates are not close to 0 percent anymore. The only reason that land would rise dramatically in price is if rich Americans decide that they need to cluster together even more tightly.

(See the classic 1997 “A Long Run House Price Index: The Herengracht Index, 1628–1973” in which real estate doubled in value… over 345 years; “The Amsterdam rent index: The housing market and the economy, 1550–1850” (2012) is similarly discouraging regarding appreciation potential beyond whatever is happening in the larger economy; a 2002 paper by Gregory Clark (of The Son Also Rises fame) found that constant-quality rents actually did rise substantially in England between 1550 and 1909.)

Why should we care? Rich Americans control our political parties, especially the Democrats (The Nation). If the rich are concentrated in just a handful of neighborhoods they have less reason to care about what happens to the rest of us. It might be rational to support filling the U.S. with Tren de Aragua members if you are assured that you will never encounter one.

Some porn from the WSJ (the $51 million Palm Beach, Florida house that Bren Simon, widow of the real estate tycoon Mel Simon, recently bought):

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My 10:12 am call today with a professional investor

by philg

I was chatting this morning with a friend who is a retired professional investor, having been previously involved in the management of $billions (not as the ultimate fund manager, but in a pretty senior role). A staunch Democrat and an active trader of his own portfolio (using exotic techniques such as “selling premium”, shorting a leveraged ETF while being long the unleveraged index, etc.), he was predicting doom and gloom for the U.S. economy due to Republican incompetence and stupidity. The stock market would continue to go down and we would suffer a depression. He cited the example of George W. Bush ladling out $700 billion to Wall Street in 2008 because “it was the right thing for the American People” and contrasted to Donald Trump, who wasn’t even trying to do anything right for Americans. I disputed that “Americans” was a meaningful term because the owner of an apartment building has different interests than the renter of an apartment. More substantially, I took the position that someone, maybe us, would blink first and mostly everything would return to the previous status quo. Therefore, I argued there was no need to do anything other than perhaps invest any available cash into the S&P 500.

The call in which my friend implicitly advised me to sell everything began at 10:12 am. What happened later in the day? NBC:

President Donald Trump said Wednesday he was pausing higher targeted tariffs for 90 days for most countries, a stunning reversal in his trade war that has sent markets reeling.

Trump wrote on social media just before 1:30 p.m. that he came to the decision because more than 75 trading partners didn’t retaliate and have reached out to the United States to “discuss” some of the issues he had raised.

(The S&P 500 was up 9.52 percent today.)

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Market is tanking or merely mean-reverting?

by philg

A Ukrainian immigrant friend has been (understandably) expressing rage at Donald Trump for wanting to shut down U.S. support of Ukraine’s military. He also recently texted us that he was enraged with Trump’s tariffs (that never actually happen? I can’t keep track) tanking the stock market. As an index investor who worships at the Church of the Efficient Market Hypothesis I don’t trade and, therefore, don’t check the market.

Not having previously checked, I proposed the following:

Compare to June 1, 2024 so that we filter out some of the noise (back in June the market thought that we’d have continuity with Genocide Joe)

I don’t think we can count the market’s optimistic run-up when it looked like Trump was going to win

Then I looked at a one-year chart:

The Google says that we’re up

adjusted for inflation, perhaps not

5643/5283 [the March 10 price divided by the June 3, 2024 price] compared to around June 1 that’s up 7%

actual inflation (not the government’s fake number) is 4%/year (3% in 9 months)? so we’re up about 4% real in 3/4s of a year, which means the market is on track to deliver a 5% real return (more like 6% if we accept the government 3% annual inflation stat)

that’s not too different from normal (7.5 percent real annual return over the past 20 years using the government’s understated inflation figures, so probably closer to 6 percent if we adjust for inflation by looking at the stuff that an investor might want to buy (houses in decent neighborhoods and upscale vacations, not DVD players at Walmart))

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How did our coronapanic investing ideas work out?

by philg

Five years ago… Investing in the time of plague?

Thought experiment: What stocks will go up in response to the coronavirus plague?

One idea: Comcast and similar cable TV stocks. If people are stuck at home they won’t mind paying for premium channels and will be less likely to cut the cord.

Second idea: airlines and hotel stocks. “Buy on bad news” is the theory here.

Some ideas from readers in the comments:

  • Oil ETFs and/or Exxon/Mobil (XOM)
  • Valero (VLO) for diesel fuel
  • telephone stocks (Verizon?)
  • an index fund of Japanese pharma companies
  • carnival cruise stock
  • short Boeing and Airbus (BA, EADSY)

Let’s see if my ideas are reliably terrible. Comcast is about flat today (dramatically lower, if adjusted for Bidenflation) than it was five years ago while the S&P 500 has roughly doubled:

How about Hilton (HLT) as a proxy for the hotel industry? It has outperformed the S&P 500.

For airlines, JETS seems to be the ETF that holds U.S. airline stocks. It hasn’t done great.

Reader ideas? XOM and CCL (Carnival cruises) would balance each other out:

Conclusion: it is difficult to beat the index.

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Art as a bad investment (1970s lithographs)

by philg

My mom had a first-rate art history education, was an accomplished artist herself, and had a fine eye for talented work by others. How did the art that she collected do as an investment? One example is “Elijah Ascending to Heaven” by “Shalom of Safed” (Shalom Moskovitz) in 1973. The index card in her file says that she paid $315 for it in 1980 (maybe that was even the wholesale price). Adjusted to post-Biden dollars, that’s $1,280 today. The current retail price of this work seems to be 650 Bidies (RoGallery). I.e., the return on investment over 45 years was worse than -50 percent (perhaps closer to -80 percent because the owner would have to sell it to a retailer).

(This is not to say that the rich didn’t get richer. The lithographs of the most famous and expensive 1970s artists, such as Andy Warhol, have appreciated, I think. The art that was accessible to middle class Americans in the 1970s has taken a dive, though, I’m pretty sure.)

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Rudy Giuliani would still be rich if he’d moved to Florida, bought a house and universal life insurance, and created a Nevada trust

by philg

Happy National Florida Day, celebrated every year on January 25 to commemorate the founding of Florida becoming a state on… March 3, 1845. (CBS makes no attempt to explain the apparent discrepancy.) Let’s check in with someone who should have paid more attention to National Florida Day…

“Giuliani, Slow to Give Up His Belongings, Tests Patience of Court” (New York Times, January 3, 2025):

After several missed deadlines and extensions, Rudolph W. Giuliani, the former mayor of New York, could be found in contempt of court on Friday for failing to deliver assets worth $11 million to two poll workers he defamed after the 2020 presidential election.

If he is held in contempt, he could face steep penalties, including jail time.

Mr. Giuliani, 80, was set to appear in federal court in Lower Manhattan to justify the stalled handover of some of his most prized possessions, including a penthouse apartment in Manhattan, a collection of Yankees memorabilia, luxury watches and a vintage Mercedes-Benz convertible. (It is unclear whether Mr. Giuliani will appear in person; his lawyers have indicated that he might attend the hearing remotely, citing health problems.)

The transfer was originally scheduled to take place in October, as a down payment on a $148 million judgment that he was ordered to pay to two Georgia election workers, Ruby Freeman and her daughter, Shaye Moss. Mr. Giuliani had claimed, without evidence, that the women had helped steal the presidential election from Donald J. Trump more than four years ago.

After a lifetime of work, the guy was on track to be destitute, with all of the money that he earned going to a couple of election workers in Georgia whom nobody had ever heard of and who nobody today has apparently heard of (the NYT didn’t think it worth mentioning their names). His two children (Wikipedia) were on track to inherit nothing (though maybe indirectly they would because their mom was divorced from their father in 2001).

Giuliani tried to salvage about $3 million in home equity via a foxhole conversion to Floridianism on July 15, 2024 (a primary residence in Florida cannot be acquired by a creditor). Perhaps this was a factor in a settlement (NYT, Jan 16) where he managed to cling to at least some portion of his former wealth.

What could Giuliani have done as soon as he got sued? Or, indeed, at any time during the trial that wiped him out?

  • sold all real estate outside of Florida
  • consolidated all real estate equity into a single no-mortgage primary residence (“homestead”) in Florida (he likes Palm Beach and his maximum estimated net worth was $50 million so he could have easily found a single house to absorb all of his real estate wealth)
  • sold all financial assets and personal property and split the proceeds into a life insurance policy for himself and a Nevada trust for his heirs

(A universal life policy can be tapped into while the insured is still alive and it can function essentially like a high-fee mutual fund account that has the advantage of no taxation of dividends and no taxation of capital gains when it finally pays out (the capital gains exemption is of more value when the insurance policy is held by an irrevocable trust; any investment positions held personally and not sold during a person’s lifetime will “step up” in basis on death anyway).

Florida State Constitution (which also prevents a state personal income tax from being dreamed up by a righteous legislature), Article X, Section 4:

(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:

A relevant statute:

222.14 Exemption of cash surrender value of life insurance policies and annuity contracts from legal process.—The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.

(222.21, “Exemption of pension money and certain tax-exempt funds or accounts from legal processes”, may also be relevant)

Why a Nevada trust? Steve Oshins explains it better than I can in a lot of scenarios. Florida appears to offer many of the advantages of Nevada for a conventional trust (not a “domestic asset protection trust” that is “self-settled” (the grantor is also the beneficiary)), but it favors beneficiaries to the point that litigation becomes much more likely than with a Nevada, New Hampshire, or South Dakota trust. A beneficiary can sue because he/she/ze/they is unhappy about a trustee’s decision, e.g., to pay some other more virtuous beneficiary more, and not run afoul of a “no contest” clause. Nevada, as well as some other states, are more likely to consider the grantor’s intent as primary. All of that said, a Florida trust for his kids should have been protected from his plaintiffs.

It is kind of surprising to see such poor planning from a person who is a lawyer and who has been surrounded by lawyers. If the jury verdict had gone the other way, Giuliani wouldn’t have given up anything other than some commissions and the right to continue paying New York State and New York City income taxes. The cobbler’s children have no shoes?

So… let’s remember on National Florida Day that Florida is a place where a person can keep much or most of what he/she/ze/they has earned even if positioned for insolvency in the typical state. (One type of predator against whom Florida law is useless: a divorce, alimony, or child support plaintiff! In those situations, having a Nevada DAPT and actually living in Nevada is the solution.)

Background, from state-sponsored NPR:

From state-sponsored PBS, Giuliani can’t use the bankruptcy process to retain enough for a meager personal lifestyle:

When Giuliani filed for bankruptcy, he listed nearly $153 million in existing or potential debts. That included nearly $1 million in state and federal tax liabilities, money he owes lawyers and millions more in potential judgements in lawsuits against him. He estimated at the time he had assets worth $1 million to $10 million.

In his most recent financial filing in the bankruptcy case, he said he had about $94,000 in cash at the end of May and his company, Guiliani Communications, had about $237,000 in the bank. He has been drawing down on a retirement account, worth nearly $2.5 million in 2022. It had just over $1 million in May.

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New Year’s Resolution: Sell the index funds?

by philg

Happy New Year to everyone! Let’s consider a New Year’s resolution to look at our investments…

“Wave Goodbye To the Stock Market’s Historic Run, Goldman Sachs Says” (Investopedia):

Analysts at Goldman Sachs on Monday forecast the S&P 500’s average annual return over the last decade of 13% will shrink to just 3% in the next 10 years.

Goldman analysts forecast the S&P 500 will return an average of just 3% a year in the next decade, a far cry from the 13% average annual return of the last 10 years. That would rank in the bottom decile of comparable periods in the last century. It also puts the odds that stocks fail to outpace inflation at about 33%.

So why the pessimism? One of the primary causes for Goldman’s concern is the market’s extreme concentration, which by their measure is near its highest level in 100 years. Concentration of this magnitude, the analysts say, makes the performance of the S&P 500 overly reliant on the earnings growth of the index’s largest constituents.

The 10 largest stocks in the S&P 500 currently account for about 36% of the index, far higher than at any other time in the last 40 years. These stocks have swelled in size in large part because of their exceptional earnings growth over the last two years. The Magnificent Seven—Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG; GOOGL), Amazon (AMZN), Meta Platforms (META), and Tesla (TSLA)—more than doubled their earnings on a year-over-year basis in the first quarter of 2024.
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History shows, however, that it’s extremely difficult to sustain earnings growth at that clip. Just 11% of S&P 500 companies since 1980 have maintained double-digit sales growth for 10+ years, according to a Goldman analysis. A microscopic share (0.1%) has sustained 50%+ margins for a decade.

What’s the alternative if you don’t have a direct phone connection to God to tell you what individual stocks to buy?

However, growth is expected to pick up for the “Other 493,” which are forecast to post double-digit earnings growth over the next five quarters, significantly narrowing the gap between those companies and the Mag Seven.

The market’s extreme concentration and the difficulty of sustaining earnings growth are two key reasons Goldman expects the equal-weight S&P 500 index to outperform the more widely tracked capitalization-weight, or aggregate, version over the next decade.

Historically, the equal-weight index tends to outperform the aggregate index, but the last 10 years have been a different story. The aggregate index has outperformed the equal-weight by 3 percentage points a year since 2014.

Goldman expects the pendulum to swing back in favor of the equal-weight index, which their model suggests will outperform by 8 percentage points annually through 2034, its most dramatic outperformance since at least 1980. The size of the outperformance may seem extreme, the analysts note. “However, the equity market has also rarely been as concentrated as it is now.”

The current record outperformance for the equal-weight index is 7%, which it achieved in the decades ending in 1983 and 2010. These two 10-year stretches, Goldman points out, each began when the market was at peak concentration, as it may be today.

How would it work to put together an equal-weight portfolio? Just find a zero-commission broker and buy $1000 of each of 500 stocks (total value: enough to buy a meal at Five Guys a few years from now). It would require a lot more trading for rebalance, though, than the market-weight S&P 500 because the market-weight index adjusts automatically when one component stock rises or falls. The trading could lead to tax inefficiency that would wipe out the theoretical superiority of equal weight.

One could also let someone else do the trading, and somehow this Invesco ETF (RSP) seems to have figured out how to eliminate what you’d expect to be capital gains from all of the trading.

Past medium-term performance doesn’t seem to be great for equal weight:

Perhaps from letting the Mag 7 stocks run wild, the straight S&P (light/bright blue bar) seems to have outperformed, but if we go back 21 years to the fund’s inception (2003), the equal weight index has done a little better than the S&P 500 index (on the third hand, the ETF’s relatively high expense ratio of 0.2% will wipe out quite a bit of that small superiority).

Do we feel confident enough in the market power and dominance of the biggest companies in the S&P 500 that we think they can keep growing?

What about other indices? The NASDAQ-100 is now partly Bitcoin because they brought in MicroStrategy, a Bitcoin account selling at a bit premium to the value of the underlying Bitcoins (WSJ). And there is a lot of overlap by market cap with the S&P 500 (e.g., Apple, NVIDIA, Microsoft, Amazon, Alphabet). Maybe a simpler way to avoid the concentration risk in the S&P 500 would be to buy a midcap or smallcap fund.

And how about a little humility/honesty as an early New Year’s resolution? “He Lost 35% Ignoring 2024’s Biggest Trades: ‘I Am Not Good at What I Am Doing’” (WSJ):

In early December, Richard Toh, the chief executive and investment officer for the Singapore-based hedge-fund firm Kenrich Partners, sent a four-page letter to investors.

“I have come to the realization that I am not good at what I am doing but I guess some of you may have sensed that already,” he wrote. “I am sorry I have let you down.”

“I pretty much missed all the major themes in the last two years,” Toh wrote. “I was hopelessly out of sync with the market, buying when I should be selling and selling when I should be buying. We got whipsawed several times this year even as we got some facts correct.”

“I learned from that episode that sometimes the best investments are precisely the ones you cannot explain and probably made no sense. It also told me I am getting too old,” he wrote.

(There are so many people to whom I could legitimately write “I am not good at what I am doing” that I don’t know where to start…)

Separately, soon we will need to say goodbye here in Jupiter to our mayor’s personal Christmas light display (no keffiyeh as part of the crèche, as the Pope had):

Happy New Year’s Eve, everyone!

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How is Zoom stock worth less today than before coronapanic?

by philg

Some folks are using Zoom stock as an example of the pain that some Americans would suffer if the Democrats’ plan to tax unrealized capital gains were implemented. They posit a prescient investor who paid $100 for the stock just as coronapanic was unfolding, then got taxed based on the $337/share price at the end of 2020, and just held onto the stock for the ride back down below $100 (remember that the loss in real dollars is even more severe; adjusted for purchasing power, the $100 paid in 2020 had a purchasing power of closer to $200 today, e.g., for a house):

Today’s topic is not the wisdom of forcing successful Americans to pay their fair share, but on how the Zoom price today can be lower than the Zoom price before coronapanic. Zoom was worth $92 per share in August 2019, for example, before SARS-CoV-2 had infected even a single human, with or without a cloth mask to protect him/her/zir/theirself.

Given that Zoom was a curiosity in 2019 and is something that hundreds of millions of people today still use regularly, how can the company be worth less?

Let’s also consider the purportedly efficient market and the purported wisdom of crowds of investors. Zoom had potential, so it was worth a lot in 2019. What would have been an impossible dream for Zoom investors? How about governors all around the U.S. making it illegal for people to meet in person (except at liquor and marijuana stores in California, Massachusetts, etc.)? U.S. state and local governments did more for Zoom than investors could ever have hoped for and yet the company still hasn’t lived up to the expectations of 2019.

How did the investors of 2019 get it so wrong?

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How will NVIDIA avoid a Google-style Vesting in Peace syndrome?

by philg

NVIDIA is the world’s most valuable company (P/E ratio of 75; compare to less than 40 for Microsoft), which also means that nearly every NVIDIA employee is rich. A lot of people slack off when they become rich. Google ended up with quite a few “vesting in peace” workers who didn’t contribute much. It didn’t matter because it was too challenging for anyone else to break into the search and advertising businesses. But suppose that another tech company assembles a group of not-yet-rich hardware and software people. Hungry for success, these people build some competitive GPUs and the biggest NVIDIA customers merely have to recompile their software in order to use the alternative GPUs that are marketed at a much lower price.

How can NVIDIA’s spectacular success not lead to marketplace slippage due to an excessively rich and complacent workforce? Is the secret that NVIDIA can get money at such a low cost compared to competitors that it can afford to spend 2-3X as much on the next GPU and still make crazy profits? I find it tough to understand how Intel, which for years has made GPUs inside its CPUs, can’t develop something that AI companies want to buy. Intel has a nice web page explaining how great their data center GPUs are for AI:

Why can’t Intel sell these? Are the designs so bad that they couldn’t compete with NVIDIA even if sold at Intel’s cost?

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