The Emperor's New Clothes

Welcome to the first edition of the Brian Apple Investment Newsletter.

"The Emperor’s New Clothes"

In 1837, Hans Christian Andersen published the classic folktale about a vain emperor whose foolish ego allows his subjects to see everything—and how he unwisely spent his money.

As I survey the investing landscape today, I can't help but draw parallels. We have a Federal Reserve sitting on $7 trillion worth of bonds acquired during the Great Financial Crisis and COVID, with its leader, Jerome Powell, famously saying in 2020, "We're not even thinking about thinking about raising rates," while his 2% inflation target slips away. The 40-year bond bull market, which started with the US 10-year Treasury note yielding 15.75% in September 1981 and dropped to just 0.5% in August 2020, is finally over.

ESG policies—environmental, social, and governance—although well-intentioned, have led to a decade of capital misallocation in energy markets. Germany, for instance, shut down zero-carbon nuclear power plants to rely on windmills, solar panels (considered more righteous than nuclear by these climate elitists), and Russian natural gas. After this mismatch with physics, their energy prices are through the roof, and the crown jewel of German engineering, the auto industry, is packing up and leaving. If only they could simply turn on a windmill.

Passive investing, once my favorite recommendation to friends and family, has become its own worst enemy. When I learned about passive index investing in a college finance class in 1997, passive investments made up only 4-5% of the market. The allure of sitting back, achieving market returns, avoiding hefty fees of 1-2% plus commissions, and being assured of getting market returns was irresistible—not just for me, but for everyone. Today, passive investments comprise between 45-50% of the market. The tail started wagging the dog years ago, pushing the largest stocks to staggeringly high P/E ratios. This topic is far too complex to cover in a single newsletter, but it’s crucial that every investor understands what’s happening.

I suspect Warren Buffett shares some of my concerns. He has liquidated half of his favorite stock, Apple, and is building Berkshire Hathaway’s highest cash position in over 30 years. In an upcoming newsletter, I'll detail some reasons I think Warren is making these moves. With the stock market at high valuations by any metric, inflation yet untamed, a skittish bond market, and the greatest investor of all time willing to pay taxes to generate cash, I don’t think we should ignore him.

For the record, I have no idea when the little boy shouting the truth, just like in Andersen’s famous folktale, will suddenly force the crowd to listen. Markets can defy gravity for long periods, and this may continue for years. However, for those approaching or in retirement, I believe caution is definitely warranted. I'll do my best to unravel these and other topics in the coming weeks and months. Thank you for joining me on this journey.