I started the month on a trip to Latin America, just as the tariff story hit my newsfeed and the market reacted with a sell off that knocked more than $9 trillion in market cap for global equities in the next two days. The month was off to a bad start, and tariffs remained the lead story for much of the month, contributing to both its biggest down days (with stories of trade war escalation) and to the biggest up days (with news of relief from the fight). To add to the volatility, there was talk midway through the month of replacing Jerome Powell as the Fed Chair, and assorted news adding to uncertainty about the direction of the economy. An observer reading just the news stories and asked to guess what the market did during the month would probably have bet on stocks falling steeply, but he or she would have lost that bet, because markets managed to surprise us all again, ending the month almost where they began. Equities: Storm Clouds gather (and dissipate)!     It would be an understatement to describe equity markets in April 2025 as volatile, with the equity indices going through stomach wrenching up and down movements intraday and across days, as investors struggled to price in a world of tariffs, trade wars and policy uncertainty. The journey that the indices went through during the course of the month has been extraordinary. Each of the indices lost close to 10%  in the first two days of the month, went deeper into the hole in the second week of the month, but by the end of the month, they had each found their way back to almost where they started the month at, with the S&P 500, NASDAQ and the MSCI world index all within 1% of their start-of-the-month levels.     As I noted in my post right after the first couple of days of this month, where I framed the market crisis around tariffs, the indices sometimes obscure markets shifts that are occurring under the surface, and that looking at all publicly traded stocks on an aggregated basis provides a more complete picture. I will start by looking at the regional breakdown of what the month delivered in terms of change in market cap, in both dollar and percentage terms: The crisis may have been birthed in the United States, but as has been the case with market crises in this century, it has spread across the world, with disparate impacts. There are truly no standouts in either direction, with China being the worst performing region, in terms of percentage change in dollar value, down 3.69%, and India and Latin America tied for best performing, up 3.57%.  These are dollar returns, and since the US dollar came under selling pressure during the course of the month, the local currency returns were worse, especially in markets, like the EU, where the Euro gained about 5% in the courser of the month.     At the start of the month, as has been the case for much of the last decade, the focus was on technology, partly because of its large weight in overall equity value at the start of 2025, and partly because of the punishment meted out to tech stocks during the first quarter of the year.  Focusing just on US equities, technology companies, which accounted for 29.4% of the overall market capitalization of all US companies at the start of 2025, lost $2.34 trillion (about 13.19%) in market capitalization in the first quarter of 2025. In the first few days of April, that trend continued as technology initially led the rout, losing an additional $1.78 trillion, but by the end of April, tech had made at least a partial comeback: As you can see, technology ended the month as the second best performing sector, up 1.67% for the month, and in spite of the handwringing about their poor performance, their share of the market cap pie has barely changed after the first four months of 2025. While the first quarter continues to weigh the sector down, as was the case in 2022, the obituaries written for technology investing may have been premature.     Staying in the weeds, I also looked at the push and pull of growth versus value, by breaking US equities down into deciles based on earnings to price ratios and assessing their performance leading into April and in April 2025 alone: As you can see, while there is no clearly discernible pattern across deciles of US stocks based upon earnings to price ratios, breaking down US stocks into a top and bottom half, based upon the ratio, yields the conclusion that while high PE stocks had a bad start to the year, losing 10.9% of their value in the first quarter, they made a comeback in April, up 1.74% for the year,  while low PE stocks were down 2.22% for the month. That pattern of a reversal in April 2025 of trends that had been forming in the first quarter of 2025 shows upon in other proxies for the value versus growth tussle: Looking at companies broken down by market capitalization into deciles, you find that larger cap companies outperformed small cap stocks during April,  Breaking down stocks based on dividends, dividend paying stocks and companies buying back stock underperformed non-cash returning stocks, indicating that there was no flight to safety in April.     Finally, I classified companies based upon their stock price performance in 2024 to see if what we are seeing in 2025 is just a correction of overreach in 2024. After all, if that is the case, we should see the stocks that have performed the best in 2024 be the ones that have taken the most punishment this year: As you can see, momentum returned in force in April, with the best performing stocks in 2024 up 0.76% during the month, while the worst performing stocks of 2024 were down 5.31% for the month. In fact, the year-to-date numbers for 2025 indicate that momentum remains in the driver's seat, extending a long period of outperformance.      In sum, the market stresses in April 2025 seems to have pushed the market back into its 2024 ways, after a first quarter that promised reversal, as technology, growth and momentum all made a comeback in the last three weeks of April. The performance of the Mag Seven, which represent a combination of all three forces (large, high growth and technology), in April provides a tangible measure of this shift: The Mag Seven have had a bad year to date, losing $2.6 trillion in market capitalization, but they made a comeback from the depths to finish April at about the same market cap that they had at the start of the month, recovering almost all of the $1.55 trillion that they lost in the first week of the month.     In short, not only did equities recover in the last three weeks of April 2025, but there seems have been a shift in sentiment back the forces that have borne markets upwards for the last few years, with technology, growth and momentum returning as market drivers. Of course, three weeks is a short time, but this is a trend worth watching for the rest of this year. The Rest of the Market: Swirling Winds?     As equities careened through April 2025 between panic and delirium, the other asset classes were surprisingly staid, at least on the surface, starting with the US treasuries. Unlike other crises, where US treasuries saws funds flow in, pushing down yields and pushing up prices, treasury rates remained relatively stable through much of April: Not only did rates remain almost unchanged across the maturity spectrum, but they were stable on a week-to-week basis. The yield curve, downward sloping for much of the last two years,  is now u-shaped, with 3-month rates and 2-year rates higher than 5-year rates, before reverting back to higher longer term (10-year and 30-year rates). Coming from the camp that we read too much economic significance into yield curve slopes and dynamics, I am reluctant to draw big conclusions, but some of this can be attributed to expectations of higher inflation in the near term. There is another force at play in this crisis that has not been as visible in past ones, at least in the US treasury market, and that is concerns about the trustworthiness of the US government Though this is still an early indicator, that can be seen in the sovereign CDS market, where investors pay for insurance against default risk, and where the US CDS spread has risen in April: The sovereign CDS spread for the US has risen about 38% during the course of this month, and the interesting part is that much of that rise happened in the last three weeks of the month, and during the first week, when equities were collapsing. The rise in perceptions of US default risk is more likely to have been precipitated by the threat to fire Jerome Powell, and by extension to the independence of the Fed as an institution. While that threat was withdrawn, the sovereign CDS spread has stayed high, and it will be worth watching whether it will come back down or whether some permanent damage has been done to US treasuries as a safe haven. As some of you who follow my thinking on riskfree rates may know, I argue that the riskfree rate in a currency is not necessarily the government bond rate in that currency, and that the default spread has to netted out from the government bond rate two get to a riskfree rate, if the sovereign in question is not viewed as default-free. Building on that principle, I may soon have to revisit my practice of using the US treasury rate as the riskfree rate in US dollars and net out a default spread for the US from that rate to get to a riskfree rate.     During April 2025, commodity prices were also on the move, and in the graph below, I look at oil prices as well as an overall commodity index during the month:  In the first third of the month, oil prices, in particular, and commodity prices, in general, joined equities, as they moved down, but in the last part of the month, they delinked, and stayed down, even as stock prices bounced back up. To the extent that the demand for commodities is driven by real economic growth, that would suggest that at least in the near term, the tariffs that precipitated the crisis will slow down global economies and reduce demand for commodities.      The concerns about central banking independence that triggered the surge in the US sovereign CDS spread also played out in currency markets, where the US dollar, already weakened in the first quarter, continued its decline in April. In the graph below, I look at the dollar-euro exchange rate and an index measuring the strength of the dollar against multiples currencies. The dollar continued its decline in April, down about 3% against a broad basket of currencies, and more than 5% against the Euro.      Finally, I looked at two other investment classes - gold and bitcoin - for the same reasons that I brought them into the discussion at the start of April. They are collectibles, i.e., investments that investors are drawn to during crisis periods or when they lose faith in paper currencies and governments: Download data Gold had a good month in April, up about 5.3%, and hitting $3.500 towards the end of the month, but Bitcoin did even better rising almost 14.12% during the course of the month. That said, the fact that financial asset markets (equity and bond) recovered over the second part of the month made this a month where collectibles were not put to their test as crisis investments, and the rise in both can be attributed more to the loss of trust that has driven  the sovereign CDS spread up and the US dollar down. Risk and Co-movement     Early in April, I argued that the one number that would track the balance between greed and fear in markets would be the price of risk in markets, and I resolved to estimate that price every day, through April, for both equity and bond markets. With equity markets, the price of risk is the equity risk premium, and at least  in my estimation process, it is a forward-looking number determined by the level of stock prices and expected cash flows. In the table below, I report on my estimates of the equity risk premium for the S&P 500 every trading day in April, in conjunction with the VIX, and equity volatility index that should be correlated: Download day-to-day data After rising above 5% in the first third of the month, the equity risk premium decreased in fits and starts over the rest of the month to end at almost the same value (4.58%) as at the start of the month (4.59%). In parallel, the VIX soared in the first few days of the month to peak at 52.33 on April 8, and then decreased over the rest of the month to a level (24.70) close to where it was at the start of the month (22.28).     In the bond market, the price of risk takes the form of default spreads, and these spreads followed a similar path to the equity risk measures: Download data The default spread on high yield bonds surged, rising by more than 1% between the start of the month and April 7, before declining, but unlike the equity risk measures, the bond default spreads did end the month at levels higher than at the start, indicating at least at this point that near term concerns about the economy and the ensuing default risk have not subsided.     As a final exercise, I looked at the correlation in price changes across investment classes - stocks, treasuries, investment-grade and high-yield corporate bonds, commodities, gold and bitcoin: Download data With the caveat that this is just 22 trading days in one month, it does yield some preliminary results about co-movements. First, stock and treasury bond prices moved together much of the month, not something that you would expect during a crisis, when bond prices gain as stock prices fall. Second, while both gold and bitcoin prices moved with stocks, gold prices movements were more closely tied to stock price movements, at least during the month. In sum, the movement across asset markets affirms our conclusion from looking at company-level data that this was more a month of asset reprising than panic selling or buying.     In sum, if I were to summarize what the data is pointing me towards, here are the general conclusions that I would draw, albeit with a small sample: The market movements through much of the month were less driven by panic and more by investors trying to reprice companies to reflect a world with more trade barriers and tariffs and political turmoil. While equities, in the aggregate, ended the month roughly where they started the month, a shift in sentiment seemed to occur in the last three weeks of the month, as technology, growth and momentum, three forces that seemed to be in retreat in the first quarter of 2025, made a come back. With US treasuries, there was little movement on the rates, but under the surface, there were shifts  that could be tectonic in the long term. There was clearly a drop in trust in the US government and its institutions, which played out in rising sovereign CDS spreads and a declining dollar, and trust once lost can be difficult to gain back. The investment classes that are most vulnerable to the real economy, i.e.. commodities and higher yield corporate bonds, were down for the month, indicating a slowing down of global economic growth. In the coming months, we will see whether the last three weeks of April were an aberration or the start of something bigger. Lessons Learned     Every market meltdown carries pain to investors, but that pain is often spread unevenly across these investors, with the variation driven as much as by what they held coming into the crisis, as it is by how they behaved in response to the sell off. I am not sure April 2025 falls into the crisis column, but it did feel like one early in the month, and as I look back at the month, I come back to three market characteristics that stood out. Market resilience: In the last five years, markets have repeatedly not only got the big trends right, but they have also shown far more resilience than any expert group. I would wager that if you had given a group of macro economists or market strategists just the news stories that came out during the course of the month and asked them to guess how they would play out in market reaction, almost none of them would have guessed the actual outcome (of flat markets). At the time of COVID, I argued that one reason for market resilience is that market influence has become diffuse, with social media and alternative sources of information supplementing and often replacing the traditional influencers - the financial press, media and investment talking heads, and market movements are less driven by large portfolio managers exhibiting herd behavior and more by disparate groups of traders, with different motives, models and patterns.  Market power: A key reason for the turnaround in markets during April was the administration's decision to walk back, reverse or delay actions that the market reacted to strongly and negatively. The "liberation day" tariffs that triggered the initial sell off have largely been put on hold or suspended, and the talk about replacing the Fed Chair was walked back quickly the week after it was made. In short, an administration that has been impervious to Wall Street journal editorials, warnings from economists and counter threats from other governments has been willing to bend to market selling pressure. Market unpredictability: As markets rose and fell during the course of the month, the debate about the value added by active investing kicked into full gear. I heard quite a few advocates of active investing argue that it was during times like this (volatility and crisis) that the "sage counsel" and "timely decisions" of wealth or fund managers would protect investors on the downside. I would suggest the opposite, and am willing to bet that the extent of damage that April did to investor portfolios was directly proportional to how much time they spent watching CNBC and listening to (or reading) what market experts told them to do. On a personal note, I stuck to my resolution early in the crisis to use it to stay true to my investment philosophy. As someone who stinks at market timing, I made no attempt to buy and sell the market through the month, perhaps leaving a great deal of money on the table, or more likely, saving myself just as much from getting the timing wrong. In the middle of April, I talked about three strands of  contrarian investing, and in that post, I put myself  in the opportunistic contrarian camp. I did use the mid-month sell off to add BYD, a stock that I like, to my portfolio, when its price dipped below my limit price ($80). Palantir and Mercado Libre (my two other limit buys) came close but not low enough to break through my limits, but I am willing to wait, revisiting my valuations along the way.     I do have some portfolio maintenance work that I need to do in the coming weeks, especially on the six of the seven Mag Seven stocks that remain in my portfolio (Tesla is out of my portfolio and Nvidia is at a quarter of my original holding). As these companies report their first quarter earnings, I plan to revisit my valuations from last year, when in the face of mild to moderate over valuation, I chose to maintain my holdings. As in prior years, I will post my assessments of value and my hold/sell judgments, but that has to wait because I do have more immediate priorities. First, as a teacher, with the semester end approaching, I have a stack of grading that has to get done. Second, as a father, I am looking forward to my daughter having her first child next week, and the market and my portfolio take a distant second place to getting acquainted with my new granddaughter. YouTube Video My Posts (from April 2025) Anatomy of a Market Crisis: Tariffs, Markets and the Economy! Buy the Dip: The Draws and Dangers of Contrarian Investing Data Links Day-to-day numbers (ERP, default spreads and asset prices)

When markets are in free fall, there is a great deal of  advice that is meted out to investors, and one is to just buy the dip, i.e., buy beaten down stocks, in the hope that they will recover, or the entire market, if it is down.  "Buying the dip" falls into a broad group of investment strategies that can be classified as "contrarian", where investors act in contrast to what the rest of the market is doing at the time, buying (selling) when the vast majority are selling (buying) , and it has been around through all of market history. There are strands of research in both behavioral finance and empirical studies that back up contrarian strategies, but as with everything to do with investing, it comes with caveats and constraints. In this post, I will posit that contrarian investing can take different forms, each based on different assumptions about market behavior, and present the evidence that we have on the successes and failures of each one. I will argue that even if you are swayed intellectually by the arguments for going against the crowd, it may not work for you, if you are not psychologically attuned to the stresses and demands that contrarian strategies bring with them. Contrarianism - The Different Strands     All contrarian investing is built around a common theme of buying an investment, when its price goes down significantly, but there are wide variations in how it is practiced. In the first, knee-jerk contrarianism, you use a bludgeon, buying either individual companies or the entire market when they are down, on the expectation that you will benefit from an inevitable recovery in prices. In the second, technical contrarianism, you buy beaten-up stocks or the entire market, but only if charting or technical indicators support the decision.  In the third, constrained contrarianism, you buy the stocks that are down, but only if they pass your screens for qualify and safety. In the fourth, opportunistic contrarianism, you use a price markdown as an opportunity to buy companies that you have always wanted to hold, but had not been able to buy because they were priced too high. 1. Knee-jerk Contrarianism     The simplest and most direct version of contrarian investing is to buy any traded asset where the price is down substantially from its highs, with the asset sometimes being an individual company, sometimes a sector and sometimes the entire market. Implicit in this strategy is an absolute belief in mean reversion, i.e.,  that what goes down will almost always go back up, and that buying at the beaten down price and being willing to wait will therefore pay off.     The evidence for this strategy comes from many sources. For the market, it is often built on papers (or books) that look at the historical data on what equity markets have delivered as returns over long periods, relative to what you would have made investing elsewhere. Using data for the United States, a  market with the longest and most reliable historical records, you can see the substantial payoff to investing in equities: Download historical data No matter what time period you use for your time horizon, stocks deliver the highest returns, of all asset classes, and there some who look at this record and conclude that "stocks always win in the long term", with the implication that you should stay fully invested in stocks, even through the worst downturns, if you have a reasonably long time horizon. These returns to buying stocks become greater, when you buy them when they are cheaper, measured either through pricing metrics (low PE ratios) or after corrections. There are two problems with the conclusion. The first is that there is selection bias, where using historical data from the United States, one of the most successful equity markets of the last century, to draw general conclusions about the risk and returns of investing in equities will lead you to underestimate equity risk and overestimate equity returns. The second is that, even with US equities, an investor who bought stocks just before a major downturn would have to wait a long time before being made whole again. Thus, investors who put their money in stocks in 1929, just ahead of the Great Depression, would not have recovered until 1954.      With individual stocks, the strongest backing for buying the dip comes from studies of "loser" stocks, i.e., stocks that have gone down the most over a prior period. In a widely cited paper from 1985, DeBondt and Thaler classified stocks based upon stock price performance in the prior three years into winner and loser portfolios, with the top fifty performers going into the "winner" portfolio, and the bottom fifty into the "losers portfolio", and estimated the returns you could have made on each group in the following city months: DeBondt and Thaler (1985) As you can see, the loser portfolio dramatically outperforms the winner portfolio, delivering about 30% more on a cumulative basis than the winner portfolio in the thirty six months after the portfolios are created, which DeBondt and Thaler argued was evidence that markets overreact. About a decade later, Jegadeesh and Titman revisited the study, with more granular data on time horizons, and found that the results were reversed, if you shorten the holding period, with winner stocks continuing to win over the first year after portfolio creation.  Jegadeesh and Titman (1993) The reversal eventually kicks in after a year, but over the entire time period, the winner portfolio still outperforms the loser portfolio, on a cumulative basis. Jegadeesh and Titman also noted a skew in the loser portfolio towards smaller market cap and lower-priced stocks, with higher transactions costs (from bid-ask spreads and price impact). As other studies have added to the mix, the consensus on winner versus loser stocks is that there is no consensus, with evidence for both momentum, with winner stocks continuing to win, and for reversal, with loser stocks outperforming, depending on time horizon, and questions about whether these excess returns are large enough to cover the transactions costs involved.     Setting aside the mixed evidence for the moment, the biggest danger in knee-jerk contrarian investing at the market level is that buying the dip in the market is akin to catching a falling knife, since that initial market drop can be a prelude to a much larger sell off, and to the extent that there was an economic or fundamental reason for the sell off (a banking crisis, a severe recession), there may be no near term bounceback. With individual stocks, that danger gets multiplied, with investors buying stocks that are being sold off to for legitimate reasons (a broken business model, dysfunctional management, financial distress) and waiting for a market correction that never comes.      To examine the kinds of companies that you would invest in, with a knee-jerk contrarian investing strategy , I looked at all US stocks with a market capitalization exceeding a billion dollars on December 31, 2024, and found the companies that were the biggest losers, on a percent basis, between March 28 and April 18 of 2025: You will note that technology and biotechnology firms are disproportionately represented on the list, but that is the by-product of a bludgeon approach. 2. Technical Contrarianism     In technical contrarianism, you start with the same basis as knee-jerk contrarianism, by  looking at stocks and markets that have dropped significantly, but with an added requirement that the price has to meet a charting or technical indicator constraint before becoming a buy. While there are many who consign technical analysis to voodoo investing, I believe that charting patterns and technical indicators can provide signals of shifts in mood and momentum that drive price movements, at least in the near term. Thus, you can view technical contrarianism as buying stocks or markets when they are down, but only if the charts and technical indicators point to a shift in market mood.     One of the problems with testing technical contrarianism, to see if it works, is that even among technical analysts, there seems to be no consensus as to the best indicator to use, but broadly speaking, these indicators can be based on either price and/or volume movements. They range in sophistication from simple measures like relative strength (where you look at percentage price changes over a period) and moving averages to complex ones that combine price and volume. In recent decades, investors have added pricing in other markets to the mix, with the VIX (a traded volatility index) as well as the relative pricing of puts and calls in the options market being used in market timing. In sum, all of these indicators are directed at measuring fear in the market, with a "market capitulation" viewed as a sign that the market has bottomed out.      With market timing indicators, there is research backing up the use of VIX and trading volume as predictors of market movements, though with substantial error. Source: S&P As the VIX rises, the expected return on stocks in future periods goes up, albeit with much higher volatility around these expected returns. It is ironic that some of the best defenses of technical analysis have been offered by academics, especially in their studies of price momentum and reversal. Lo, Wang, and Mamaysky present a fairly convincing defense of technical analysis from the perspective of financial economists. They use daily returns of stocks on the New York Stock Exchange and NASDAQ from 1962 and 1996 and employ sophisticated computational techniques (rather than human visualization) to look for pricing patterns. They find that the most common patterns in stocks are double tops and bottoms, followed by the widely used head and shoulders pattern. In other words, they find evidence that some of the most common patterns used by technical analysts exist in prices. Lest this be cause for too much celebration among chartists, they also point out that these patterns offer only marginal incremental returns (an academic code word for really small) and offer the caveat that these returns may not survive transaction costs. 3. Constrained Contrarianism     If you are in the old-time value investing camp, your approach to contrarian investing will reflect that worldview, where you will buy stocks that have dropped in value, but only if they meet the other criteria that you have for good companies. In short, you will start with a list of beaten up stocks, and then screen them for high profitability, strong moats and low risk, hoping to separate companies that are cheap from those that deserve to be cheap.     As a constrained contrarian, you are hoping to avoid value traps, every value investor's nightmare , where a company looks cheap on a pricing basis (low PE, low price to book) and proceeds to become even cheaper after you buy it. The evidence on whether screening helps avoid value traps comes largely from studies of the interplay between proxies of value (such as low price to book ratios) and proxies for quality, including measures for both operating/capital efficiency (margins and returns on capital) and low risk (low debt ratios and volatility). Proponents of quality screens note that while value proxies alone no longer seem to deliver excess returns, incorporating quality screens seems to preserve these excess returns.  Research Affiliates, an investment advisory service, looked at returns to pure value screens versus value plus quality screens and presents the following evidence on how screening for quality improves returns: Research Affiliates Study The evidence is supportive of the hypothesis that adding quality screens improves returns, and does so more for stocks that look cheap (low price to book) than for expensive stocks. That said, the evidence is underwhelming in terms of payoff, at least on an annual return basis, though the payoff is greater, if you factor in volatility and estimate Sharpe ratios (scaling annual return to volatility).     While much of the research on quality has been built around value and small cap investing, the findings can be extrapolated to contrarian investing, with the lesson being that rather than buy the biggest losers, you should be buying the losers that pass screening tests for high profitability (high returns on equity or capital) and low risk (low debt ratios and volatility). That may provide a modicum of protection, but the problem with these screens is that they are based upon historical data and do not capture structural changes in the economy or disruption in the industry, both of which have not yet found their way into the fundamentals that are in your screens.     To provide just an illustration of constrained contrarianism, I again returned to the universe of about 6,000 publicly traded US stocks on April 18, 2025, and after removing firms with market capitalizations less than $100 million (with the rationale that these companies will have more liquidity risk and transactions costs), I screened first for stocks that lost more than 20% of their market capitalization between March 28 and April 18, and then added three value screens: A PE ratio less than 15, putting the stock in the bottom quintile of US stocks as of December 31, 2024 A dividend yield that exceeded 1%, a paltry number by historical norms, but ensuring that the company was dividend-paying in 2024, a year in which 60% of US stocks paid no dividends A net debt/EBITDA ratio of less than two, dropping it into the bottom quintile of US companies in terms of debt load The six companies that made it through the screens are below: I am sure that if you are a value investor, you will disagree about both the screens that I used as well as my cut offs, but you are welcome to experiment with your own screens to find bargains. 4. Opportunistic Contrarianism     In a fourth variant of contrarian investing, you use a market meltdown as an opportunity to buy companies that you have always wanted to own but could not because they were over priced before the price drop, but look under priced after.  The best place to start an assessment of opportunistic investing is with my post on why good companies are not always good investments, with the first being determined by all of the considerations that go into separating great businesses from bad businesses, including growth and profitability, and the second by the price you have to pay to buy them. In that post, I had a picture drawing the contrast between good companies and good investments: Put simply, most great companies are neutral or even bad investments, because the market prices them to be great. A year ago, when I valued the Mag Seven stocks, I argued that these were, for the most part, great businesses, with a combination of growth at scale, high profitability and deep moats, but that at the prices that they were trading  they were not great investments.  I also argued that even great companies have their market travails, where for periods of time, investors lose faith in them and drive their prices down not just to value, but below. It happened to Microsoft in 2014, Apple in 2017, Nvidia in 2018, Tesla at multiple times in the last decade, and to Facebook, at the height of the Metaverse fiasco. While those corrections were caused by company-specific news stories and issues, the same process can play out, when you have significant market markdowns, as we have had over the last few weeks.      The process of opportunistic contrarianism starts well before a market correction, with the identification of companies that you believe are good or great businesses: At the time that you first value them, you are likely to find them to be over valued, which will undoubtedly be frustration. You may be tempted to play with the numbers to make these companies look undervalued, but a better path is to put them  on your list of companies you would like to own, and leave them there. During a market crisis, and especially when investors are marking down the prices of everything, without discriminating between good and bad companies, you should revisit that list, with a caveat that you cannot compare the post-correction price to your pre-crisis valuation of your company. Instead, you will have to revalue the company, with adjustments to expected cash flows and risk premiums, given the crisis, and if that value exceeds the price, you should buy the stock.  Contrarian Investing: The Psychological Tests!     In the abstract, it is easy to understand the appeal of contrarian investing. Both behavioral and empirical research identify the existence of herd behavior in crowds, and point to tipping points where crowd wisdom becomes crowd madness. A rational decision-maker in the midst of animal spirits may feel that he or she has an advantage in this setting, and rightly so. That said, buying when the rest of the market is selling takes a mindset, a time horizon and a stronger stomach than most of us do not have. The Mindset: Investing against the market will not come easily to those who are easily swayed by peer pressure, since they will have to buy, just as other investors (the peer group) will be selling, and often in companies that the market has turned against. There are  some who march to their own drummers, willing to take a path that is different from the rest, and these are better suited to being contrarians. The Time Horizon: To be a contrarian, you don't always need a long time horizon, since correlations can sometimes happen quickly, but you have to be willing to wait for a long period, if that is what is necessary for the correction. Relatively few investors have this capacity, since it is determined as much by your circumstances (age, health and cash needs) as it is by your personality. The Stomach: Even if your buy decision is based on the best thought-through contrarian investing strategies, it is likely that in the aftermath of that decision, momentum will continue to push prices down, testing your faith. Without a strong stomach, you will capitulate, and while your decision may have been right in the long term, your investment will not reflect that success. As you can see, the decision on whether to be a contrarian is not just one that you can make based upon the evidence and theory, but will depend on who you are as a person, and your makeup.      I have the luxury of a long time horizon and the luck of a strong stomach, for both food and market surprises. I am not easily swayed by peer pressure, but I am not immune from it either. I know that buying stocks in the face of market selling will not come easily, and that is the reason that I initiated limit buys on three companies that I have wanted to have in my portfolio, BYD, the Chinese electric car maker, Mercado Libre, the Latin American online retail/fintech firm, and Palantir, a company that I believe is closest to delivering on thee promise of AI products and services. The limit buy kicked in on BYD on April 7, when it briefly dipped below $80,  my limit price, and while Palantir and Mercado Libre have a way to go before they hit my price limits, the crisis is young and the order is good until canceled! YouTube Video

I will start with a couple of confessions. The first is that I see the world in shades of gray, and in a world where more and more people see only black and white, that makes me an outlier. Thus, if you are reading this post expecting me to post a diatribe or a tribute to Trump, tariffs or Tesla, you are likely to be disappointed. The second is that much of my work is in the micro world, where I look at companies and their  values, and the work that I do on macro topics or variables is to help me in that pursuit. Thus, my estimates of equity risk premiums, updated every month, are not designed to make big statements about markets but more to get inputs I need to value companies. That said,  to value companies today, I have no choice but to bring in the economics and politics of the world that these companies inhabit. The problem with doing so, though, is that with Trump and tariffs on the one hand, and Mush and DOGE on the other, it is easy to be reactive, and to let your political leanings drive your conclusions. That is why I want to step back and look at the two larger forces that have brought us to this moment, with the first being globalization, a movement that has shaped economics and markets for much of the last four decades, but that has now, in my view, crested and is facing pushback, and the other being disruption, initiated by technology start-ups in the 1990s, and extended to lay waste to the status quo in many  businesses in the decades since, but now being brought into the political/government arena. Globalization – The Rise, Effects and Blowback     Globalization has taken different forms through the ages, with some violent and toxic variants, but the current version of globalization kicked into high gear in the 1980s, transforming every aspect of our lives. I am no historian, but in this section, I will start with a very short and personal history of how globalization has played out in my classroom, examine its winners and losers, and end with an assessment of how the financial crisis of 2008 caused the movement to crest and create a political and economic backlash that has led us to today. A Short (Personal) History of Globalization     The best way that I can think of illustrating the rise of globalization is to talk about how it has made its presence felt in my classroom over the last four decades. When I started my teaching journey at the University of California at Berkeley in 1984, business education was dollar-centric, with business schools around the world using textbooks and cases written with US data and starring US companies. My class had a sprinkling of European and Japanese students but students from much of the rest of the world were underrepresented. The companies that they went to work for, after graduation, were mostly domestic in operations and in revenues, and multinationals were more the exception than the rule, with almost all of them headquartered in the United States and Europe.      Today, business education, both in terms of location and material, has become global, with European and Asian business schools routinely making the top business school list, and class materials reflecting this trend. My classes at NYU often have more students from outside the United States than from within,  and very few will go to work for entities with a purely domestic focus. Many of these hiring firms have supply chains that stretch across the world and sell their products and services in foreign markets. As businesses have globalized, consumers and investors have had no choice but to follow, and the things we buy (from food to furniture) and the companies that we invest in all reflecting these global influences.  The Winners from Globalization     As consumers, companies and investors have globalized, there have clearly been many who have benefited from its rise. Without claiming to be comprehensive, here is my list of the biggest winners from globalization.  China: The biggest winner from globalization has been China, which has seen its economic and political power surge over the last four decades. Note that the rise has not been all happenstance, and China deserves credit for taking advantage of the opportunities offered by globalization, making itself first the hub for global manufacturing and then using its increasing wealth to build its infrastructure and institutions. To get a measure of China’s rise, I look at its GDP, relative to GDP from the rest of the world over the last few decades:  Source: World Bank China's share of global GDP increased ten-fold between 1980 and 2023, and its centrality to global economic growth is measured in the table below, where I look at the percentage of the change in global GDP each decade has come from different parts of the world:  Between 2010 and 2023, China accounted for almost 38% of global economic growth, with only the United States having a larger share, though the winnings for the US were on a larger base and are more attributable to the other global force (disruption) that I will highlight in the next section. Consumers: Consumers have benefited from globalization in many ways, starting with more products to choose from and often at lower prices than in pre-globalization days. From being able to eat whatever we want to, anytime of the year, to wearing apparel that has become so cheap that it has become disposable, many of us, at least on the surface, have more buying power. Global Institutions : While the World Bank and the IMF predate the globalization shift, their power has amped up, at least in many emerging markets, and the developed world has created its own institutions and  agreements (EU and NAFTA, to  name just two) making it easier for businesses and individuals to operate outside their domestic borders. In parallel, International Commercial Courts have proliferated and been empowered to enforce the laws of commerce, often across borders. Financial Markets (and their centers): Over the last few decades, not only have more companies been able to list themselves on financial markets, but these markets has become more central to public  policy. In many cases, the market reaction to spending, tax or economic proposals has become the determinant on whether they get adopted or continued. As financial markets have risen in value and importance, the cities (New York, London, Frankfurt, Shanghai, Tokyo and Mumbai) where these markets are centered have gained in importance and wealth, if not in livability, at the expense of the rest of the world. Experts: We have always looked to experts for guidance, but globalization has given rise to a new cadre of experts, who are positioned to identify what they believe are the world’s biggest problems and offer their solutions  in forums like Davos and Aspen, with the world’s policy makers as their audience.  The Losers from Globalization     When globalization was ascendant, its proponents underplayed its costs, but there were losers, and that list would include at least the following:  Japan and Europe: The graph that shows the rise of China from globalization also illustrates the fading of Japan and Europe over the period, with the former declining from 17.8% of global GDP in 1995 to 3.96% in 2023 and the latter seeing its share dropping from 25.69% of global GDP in 1990 to 14.86%. You can see this drop off in the graph below: While not all growth from globalization is zero-sum, a significant portion during this period was, with economic power and wealth shifting from Europe and Japan to newly ascendant economies. Consumers, on control: I listed consumers as winners from globalization, and they were, on the dimensions of choice and cost, but they also lost in terms of control of where their products were made, and by whom. To provide a simplistic example, the shift from buying your vegetables, fish and meat from local farmers, fishermen and butchers to factory farmers and supermarkets may have made the food more affordable, but it has come at a cost. Small businesses: While there are a host of other factors that have also contributed to the decline of small businesses, globalization has been a major contributor, as smaller businesses now find themselves competing against companies who make their products thousands of miles away, often with very different cost structures and rules restricting them. Larger businesses not only had more power to adapt to the challenges of globalization, but have found ways to benefit from it, by moving their production to the cheapest and least restrictive locales. In one of my data updates for this year, I pointed to the disappearance of the small firm effect, where small firms historically have earned higher returns than large cap companies, and globalization is a contributing factor. Blue-collar workers in developed markets: The flip side of the rise of China and other countries as manufacturing hubs, with lower costs of operation, has been the loss of manufacturing clout and jobs for the West, with factory workers in the United States, UK and Europe bearing the brunt of the cost. While the job losses varied across sectors, with job skills and unionization being determining factors, the top line numbers tell the story. In the United States, the number of manufacturing jobs peaked at close to 20 million in 1979 and dropped to about 13 million in 2024, and manufacturing wages have lagged wage growth in other sectors for much of that period.  Democracy: In my view, globalization has weakened the power of democracy across the world. The fall of the Iron Curtain was greeted by optimists claiming the triumph of democracy over authoritarianism and the dawn of a new age of democratic freedom. That promise has largely been dashed, partly because the biggest winners from the globalization sweepstakes were not paragons of free expression and choice, but also because voters in democracies were frustrated when they voted for change, and found that the policies that followed came from a global script. The Economist, the newsmagazine, measures (albeit with their own biases) democracy in the world, and its findings in its most recent update are troubling. Not only does the world tilt more authoritarian than democratic in 2024, the trend line indicates that the world is becoming less democratic over time. While there are other forces (social media, technology) at play that may explain this shift as well, the cynicism that globalization has created about the capacity to create change at home has undoubtedly contributed to the shift away from democracy. I believe that globalization has been a net plus for the global economy, but one reason it is in retreat  is because of a refusal on the part of its advocates to acknowledge its costs and the dismissal of opposition to any aspect of globalization as nativist and ignorant.  The 2008 Crisis and its Aftermath     Coming into this century, the march of globalization seemed unstoppable, but the wave crested in 2008, with the financial market crisis. That crisis exposed the failures of the expert class, leading to a loss of trust that has never been recovered.  While the initial public responses to the financial crisis were muted, the perception that the world was still being run by hidden (global) forces, unelected and largely unaccountable to anyone, has continued, and I believe that it has played a significant role in British voters choosing Brexit, the rise of nationalist parties in Europe, and in the elections of Donald Trump in the United States. Trump, a real estate developer with multiple international properties, is an imperfect spokesperson of the anti-globalization movement, but it is undeniable that he has tapped into, and benefited from, its anger. While he was restrained by norms and tradition in his first term, those constraints seem to have loosened in this second go around, and he has weilded tariffs as a weapon and is open about his contempt for global organizations. While economists are aghast at the spectacle, and the economic consequences are likely to be damaging, it is not surprising that a portion of the public, perhaps even a majority, are cheering Trump on.     To those who are nostalgic for a return to the old times, I don't believe that the globalization genie can go back into the bottle, as it has permeated not only every aspect of business, but also significant portions of our personal lives. The world that will prevail, if a trade war plays out, will be very different than the one that existed before globalization took off. China, the second largest economy in the world today, is not returning to its much smaller stature, pre-globalization, and given the size of its population, it may be able to sustain its economy and grow it, with a domestic market focus. While investors are being sold the India story, it is worth recognizing that India will face much more hostility from the rest of the world, as it tries to grow, than China did during the last few decades. For Europe and Japan, a combination of an aging populations and sclerotic governments limit the chances of recovery, and for the United States, the question is whether technology can continue to be its economic savior, especially if global markets become more difficult to access. Disruption – Origins and Extensions     In the world of my youth, disruption was not used as a compliment and disruptors were consigned to the outside edges of society, labeled as troublemakers or worse. That has changed in this century, as technology evangelists have used disruption as a sword to slay the status quo and offer, at least, in their telling,  more efficient and better alternatives. The Disruptor Playbook     I have written about disruption in earlier posts, and at the risk of repeating myself, I will start with a generalized description of the playbook used by disruptors to break up the status quo. Find a business to disrupt: The best businesses to disrupt are large (in terms of dollars spent on their products/services), inefficient in how they make and sell these products, and filled with dissatisfied players, where no one (or at least very few) is happy. For the most part, these businesses have made legacy choices, which made sense at the time they were made, have long outlived their usefulness, but persist, because systems and practices have been built around them, and changes are fought by the beneficiaries of these inefficient systems. Target their weakest links: Legacy businesses have a mix of products and services, and it is inevitable that some of these products are services have high margins and pay for other products that are offered at or below cost. Disruptors go after the former, weaning away unhappy customers by offering them better deals, and in the process, leaving legacy businesses with a less profitable and viable product mix.   Move quickly and scale up: Speed is of the essence in disruption, since moving quickly puts status quo companies at a disadvantage, as these companies not only take more time to respond, but must weather fights within their organizations, often driven by politics and money. With access to significant capital from venture capital, private equity and even public investors, disruptors can scale up quickly, unencumbered by the need to have well formed business models or show profits at least in the near term. Break rules, ask for permission later: One feature shared by disruptive models, albeit to varying degrees, has been a willingness to break rules and norms, knowing fully well that their status quo competitors will be more averse to doing so, and that the rule makers and regulators will take time to respond.  There is no alternative: By the time the regulators or legal system catches up with the disrupters, they aim to have become so ascendant, and the status quo so damaged, that there is no going back to the old ways. In the last three decades, we have seen this process play out in industry after industry, from the retail business (with Amazon), the music business (with Apple iTunes first and Spotify later), the automobile business (with Tesla) and advertising (with Google and Facebook), to name just a few. Disruption's Winners and Losers     The obvious winners from disruption are the disruptors, but since many of them scaled up with unformed business models, the payoff is less in the form of profits, and more in terms of their market capitalizations, driven by investors dazzled by their potential. That had made the founders of these businesses (Bezos, Musk and Zuckerberg) not only unbelievably wealthy, but also given them celebrity status, and created a host of winners for those in the ecosystem, including the disruptors' employees and investors. As these disrupted businesses prioritized scaling up over profitability, consumers benefited as they received products and services, at bargain-basement prices, sometimes below cost.      The clearest loser from disruption is the status quo. As legacy companies melt down, in terms of profitability and value, the damage is felt in concentric circles, with employees facing wage cuts and job losses, and investors seeing write downs in their holdings  The peripheral damage is to the regulatory structures that govern these businesses, as the rule breakers became ascendant, leaving rule makers impotent and often on the side lines. To the extent that these regulations and rules were designed to protect the environment and the public, there are side costs for society as well.     In short, disruption may have been a net positive for society, but there are casualties on its battlefield. In the battle for the global economic pie, the fact that so much of the disruption has originated in the United States, aided both by access to a capital and a greater tolerance for rule-breaking, has helped the United States maintain and even grow its share of global GDP. In practical terms, this has manifested in the soaring market capitalizations of the biggest technology companies, and it is their presence that has allowed the United States to ward off the decline in economic power and market cap that you have seen in much of the rest of the developed world. Disruption goes macro         For much of its history, disruption has been restricted to the business space and it has had only limited success when directed at systemic inefficiencies in less business-driven settings. Health care clearly meets all of the criteria for a good disruption target, consuming 20% of US GDP, with a host of unhappy constituencies (doctors, patients, hospitals and payers). However, attempts at disruption, whether it be from Mark Cuban’s pharmaceutical start-up or from Google and Amazon’s health care endeavors, have largely left the system intact. I have described education, at the school and college level, as deserving of disruption for more than two decades, but notwithstanding tries at online education, not much has changed at universities (yet).     Can entire governments be disrupted? After all, it is hard to find anyone who would describe government organizations and systems as efficient, and the list of unhappy players is a mile long. The pioneers of government disruption have been in Latin America, with El Salvador and Argentina being their venues. Nayib Bukele, in El Salvador, and Javier Milei, in Argentina, have not just pushed back against the norms, but have reveled in doing so, and they were undoubtedly aided by the fact that the governments in both countries were so broken that many of their citizenry viewed any change as improvement. As we watch Elon Musk and DOGE move at hyper speed (by government standards), break age-old systems and push rules and laws to breaking point, I see the disruption playbook at play, and I am torn between two opposing perspectives. On the one hand, it is clear the US government has been broken for decades and tinkering at its edges (which is what every administration has done for the last forty years) has accomplished little to reduce the dysfunctionality of the system (and the deficits and debt that it creates). On the other, though, disrupting the US government is not the same as disrupting a business, since there are millions of vulnerable people (social security, Medicare and veteran care) whose lives rest on government checks, and a break in that process that is not fixed quickly could be catastrophic. There is a middle ground here, and unless DOGE finds it quickly, this disruption story will have lots of casualties. Market and Micro Effects     As I have wrestled with the barrage of news stories in the last few weeks, many with large consequences for economies and markets, I keep going back to what this means for my micro pursuits, i.e., analyzing how companies make decisions on investing, financing and dividends and what the values of these companies are. It is still early in that process, and there is much that I still don’t know the answer to, but here the ways I see this playing out. In markets     There are two key inputs that are market-driven which affect the values of every company. The first is interest rates, across the maturity spectrum, since their gyrations will play out across the market. In the graph below, I look at US treasury rates and how they have moved since the Trump election in early November: The ten-year US treasury rate has declined from 4.55% on Election Day (November 5)  to 4.27% on March 13, 2025, but since that treasury rate is driven of expectations about inflation and real economic growth, Trump supporters will attribute the decline to markets anticipating a drop in inflation in a Trump administration and Trump critics suggesting that the rate drop is an indicator of a slowing  economy and perhaps even a recession. The yield curve has flattened out, with the 10-year rate staying higher than the 2-year rate, pushing that very flawed signal of economic recession into neutral territory.      The other number that I track is the equity risk premium, which at least in my telling, is a forward-looking number backed out of the market and the receptacle for the greed and fear in markets.  In the table below, I show my estimates of the implied equity risk premium for the S&P 500 at the start of every month, since January 2024, and on March 14, 2025. The equity risk premium at the start of March was at 4.35%, surprisingly close to the 4.28% on Election Day, but that number has jumped to 4.68% in the first two weeks of March, indicating that uncertainty about tariffs and the economy is undercutting the resilience that the market has shown so far this year. In my view, the pathway that the equity risk premium takes for the rest of the year will be the key driver in whether equities level off, continue to decline or make a comeback. If equity risk premiums continue to march upwards, driven by increased uncertainty and the potential for trade wars, stock prices will drop, even if the economy escapes a recession, and adding a recession, with the damage it will create to expected earnings, will only make it worse. In one of the first posts I wrote this year, I looked at US equities, and valued the S&P 500 at 5262, putting it about 12% below the index level (5882) at the start of the year. Even with the drawdown in prices that we have seen through March 10, the index remains above my estimated value, and while that value reflected what I saw at the start of the year, what has happened in the last few weeks has lowered the fair value, not raised it. In companies     Changes in interest rates and risk premiums will affect the valuations of all companies, but assuming that the tariff announcements and government spending cuts will play out over the foreseeable future, there will be disparate effects across companies. I will draw on a familiar structure, where I trace the value of a company to its key drivers: By narrowing our focus to the drivers of value, we can look at how company exposure to trade wars and DOGE will play out: 1. Revenue growth: On the revenue growth front, companies that derive most or all of their revenues domestically will benefit and companies that are dependent on foreign sales will be hurt by tariff wars. To assess how that exposure varies across sectors, I look at the percentage of revenues s in each  sector that companies in the S&P 500 get from foreign markets: Based on revenues in 2023 Collectively, about 28% of the revenues, in 2023, of the companies in the S&P 500 came from foreign markets, but technology companies are most exposed (with 59% of revenues coming from outside the country) and utilities least exposed (just 2%)  to foreign revenue exposure. It is also worth noting that the larger market cap companies of the S&P 500 have a higher foreign market revenue exposure than smaller market cap companies. On the DOGE front, the attempts to cut costs are likely tol hit healthy care and defense, the two businesses that are most dependent on the government spending, most directly, with green energy, a more recent entrant into the government spending sweepstakes, also on the cutting block. 2. Operating  margins: A company that gets all of its revenues from the domestic markets can still be exposed to trade wars, if its production or supply chains is set in other countries. The data on this front is far less visible or reported than revenue data and will require more company-level research. It is also likely that if the attempts to bring production back to the United States come to fruition, wages for US workers will increase, at least in the longer term, pushing up costs for companies. In short, a tariff war  will lower the operating margins for many firms, with the size of the decline depending on their revenues,  3. Reinvestment: To the extent that companies are altering their decisions on where to build their next manufacturing facilities, as a result of tariff fears or in hope of government largesse, there should be an effect on reinvest, with an increase in reinvestment (lower sales to capital ratios) at businesses where this move will create investment costs. Looking across businesses, this effect is likely to be more intense at manufacturing companies, where moving production is more expensive and difficult to do, that at technology or service firms. 4. Failure risk: Since 2008, the US government has implicitly, if not explicitly, made clear its preference for stepping in to help firms from failing, especially if they were larger and the cost of failure was perceived as high. It is not clear what the Trump administration's views are on bailing out companies in trouble, but may initial read is that government is less likely to jump in as a capital provider of last resort.      There is another way in which you can reframe how the shifts in politics and economics will play out in valuation. I have long argued that every valuation is a bridge between stories and numbers, and that to value a company, you have a start with a business story for the company, check to make sure that it is possible, plausible and probable, and connect the story to valuation inputs (revenue growth, margins, reinvestment and risk). Staying with that structure, I have also posited that the value of a company can sometimes be affected by its political connections or by the government acting as an ally or an adversary, making the government a key player in the company's story. While that feature is not uncommon in many emerging market companies, when analyzing US and European companies, we had the luxury, historically, of keeping governments out of company stories, other than in their roles of tax collectors and regulators. That time may well have passed, and it is entirely possible that when valuing US companies now, you have to bring the government into the story, and in some cases, a company's political connections can make or break the story.     The company where you are seeing the interplay between economics and politics play out most visibly right now is Tesla, a company that has had a rollercoaster history with the market. In 2024, its stock soared, especially so after the election, but it has now given up almost of its gains, almost entirely because of its (or more precisely, Elon Musk's) political connections. I revisited my Tesla valuation from January 2024, when I valued the stock at $182, triggering a buy in my portfolio when the stock price dropped to $170. In the intervening year, there were three developments that have affected the Tesla narrative: A rethiinking the "electric cars are inevitable" story: For the last few years, it has become conventional wisdom that electric cars will eventually displace gas cars, and the question has been more about when that would happen, rather than whether. In 2024, you saw second thoughts on that narrative, as hybrids made a comeback, and the environmental consequences of having millions of electric cars on the road came into focus. To the extent that Tesla's value has come from an assumption that the electric car market will be huge, this affects end revenues and value. The rise of BYD as a competitor for electric cars: Since its founding, Tesla has dominated the electric car business, and legacy car makers have struggled to keep up with it. in 2024, BYD, the Chinese electric car company, sold more electric cars than Tesla for the first time in history, and it is clearly beating Tesla not just in China, but in most Asian markets and even in Europe, with lower prices and more choices. Put simply, it feels like Tesla has its first real competitor in the electric car business. The politicization of the Tesla story: There has been a backlash building from those who do not like Musk's political stances and it is spilling over into Tesla's sales, in Europe and the United States. As long as Musk remains at the center of the news cycle, this is likely to continue, and there is the added concern, even for Tesla shareholders who agree with Musk's politics, that he is too distracted now to provide direction to the company.  These developments have made me more wary than I was last year on the end game for Tesla. While I do believe that Tesla will be one of the lead players in the electric car market, the pathway to a dominant market share of the electric car market has become rockier, and it seems likely that the electric car market will bifurcate into a lower-priced and a premium market, with BYD leading in the first (lower priced) market, especially in much of Asia, and Tesla holding its own in the premium car market, with a clear advantage in the United States. I remain skeptical that any of the legacy auto companies, notwithstanding the money that they have spend on electric cars and the quality of these cars, will challenge the newcomers on this turf. My updated valuation for Tesla is below: Download Tesla valuation (March 2025) My estimate of value for Tesla stands at about $150 a share, about $30 less than my value last year, and about $70 below its stock price. As an investor, I have been wary of taking a position in BYD, because of its Chinese origins and the presence of Beijing as a player in its story, but given that Tesla is now a political play, it may be time to open the door to the BYD investment, but that will have to wait for another post. The Bottom Line     While it is easy to blame market uncertainty on Trump, tariffs and trade wars for the moment, the truth is that the forces that have led us here have been building for years, both in our political and economic arenas. In short, even if the tariffs cease to be front page news, and the fears of an immediate trade war ease, the underlying forces of anti-globalization that gave rise to them will continue to play out in global commerce and markets. For investors, that will require a shift away from the large cap technology companies that have been the market leaders in the last two decades back to smaller cap companies with a more domestic focus. It will also require an acceptance of the reality that politics and macroeconomic factors will play a larger role in your company assessments, and create a bigger wild card on whether investments in these companies will pay off. YouTube Video Links Valuation of Tesla in March 2025

In my ninth (and last) data post for 2025, I look at cash returned by businesses across the world, looking at both the magnitude and the form of that return. I start with a framework for thinking about how much cash a business can return to its owners, and then argue that, in the real world, this decision is skewed by inertia and me-tooism. I also look at a clear and discernible shift away from dividends to stock buybacks, especially in the US, and examine both good and bad reasons for this shift. After reporting on the total cash returned during the year, by public companies, in the form of dividends and buybacks, I scale the cash returned to earnings (payout ratios) and to market cap (yield) and present the cross sectional distribution of both statistics across global companies. The Cash Return Decision     The decision of whether to return cash, and how much to return, should, at least in principle, be the simplest of the three corporate finance decisions, since it does not involve the estimation uncertainties that go with investment decisions and the angst of trading of tax benefits against default risk implicit in financing decisions. In practice, though, there is probably more dysfunctionality in the cash return decision, than the other two, partly driven by deeply held, and often misguided views, of what returning cash to shareholders does or does not do to a business, and partly by the psychology that returning cash to shareholders is an admission that a company's growth days are numbered. In this section, I will start with a utopian vision, where I examine how cash return decisions should play out in a business and follow up with the reality, where bad dividend/cash return decisions can drive a business over a cliff.  The Utopian Version     If, as I asserted in an earlier post, equity investors have a claim the cash flows left over after all needs (from taxes to debt payments to reinvestment needs) are met, dividends should represent the end effect of all of those choices. In fact, in the utopian world where dividends are residual cash flows, here is the sequence you should expect to see at businesses: In a residual dividend version of the world, companies will start with their cash flows from operations, supplement them with the debt that they think is right for them, invest that cash in good projects and the cash that is left over after all these needs have been met is available for cash return. Some of that cash will be held back in the company as a cash balance, but the balance can be returned either as dividends or in buybacks. If companies following this sequence to determine, here are the implications: The cash returned should not only vary from year to year, with more (less) cash available for return in good (bad) years), but also across firms, as firms that struggle on profitability or have large reinvestment needs might find that not only do they not have any cash to return, but that they might have to raise fresh capital from equity investors to keep going.  It also follows that the investment, financing, and dividend decisions, at most firms, are interconnected, since for any given set of investments, borrowing more money will free up more cash flows to return to shareholders, and for any given financing, investing more back into the business will leave less in returnable cash flows.      Seen through this structure, you can compute potential dividends simply by looking for each of the cash flow elements along the way, starting with an add back of depreciation and non-cash charges to net income, and then netting out investment needs (capital expenditures, working capital, acquisitions) as well as cash flow from debt (new debt) and to debt (principal repayments).  While this measure of potential dividend has a fanciful name (free cash flow to equity), it is not only just a measure of cash left in the till at the end of the year, after all cash needs have been met, but one that is easy to compute, since every items on the list above should be in the statement of cash flows.     As with almost every other aspect of corporate finance, a company's capacity to return cash, i.e., pay potential dividends will vary as it moves through the corporate life cycle, and the graph below traces the path: There are no surprises here, but it does illustrate how a business transitions from being a young company with negative free cash flows to equity (and thus dependent on equity issuances) to stay alive to one that has the capacity to start returning cash as it moves through the growth cycle before becoming a cash cow in maturity. The Dysfunctional Version     In practice, though, there is no other aspect of corporate finance that is more dysfunctional than the cash return or dividend decision, partly because the latter (dividends) has acquired characteristics that get in the way of adopting a rational policy. In the early years of equity markets, in the late 1800s,  companies wooed investors who were used to investing in bonds with fixed coupons, by promising them predictable dividends as an alternative to the coupons. That practice has become embedded into companies, and dividends continue to be sticky, as can be seen by the number of companies that do not change dividends each year in the graph below: While this graph is only of US companies, companies around the world have adopted variants of this sticky dividend policy, with the stickiness in absolute dividends (per share) in much of the world, and in payout ratios in Latin America. Put simply, at most companies, dividends this year will be equal to dividends last year, and if there is a change, it is more likely to be an increase than a decrease.     This stickiness in dividends has created several consequences for firms. First, firms are cautious in initiating dividends, doing so only when they feel secure in their capacity to keep generate earnings. Second, since the punishment for deviating from stickiness is far worse, when you cut dividends, far more firms increase dividends than decrease them. Finally, there are companies that start paying sizable dividends, find their businesses deteriorate under them and cannot bring themselves to cut dividends. For these firms, dividends become the driving force, determining financing and investment decisions, rather than being determined by them. This is, of course, dangerous to firm health, but given a choice between the pain of announcing a dividend suspension (or cut) and being punished by the market and covering up operating problems by continuing to pay dividends, many managers choose the latter, laying th e pathway to dividend madness. Dividends versus Buybacks      As for the choice of how to return that cash, i.e., whether to pay dividends or buy back stock, the basics are simple. Both actions (dividends and buybacks) have exactly the same effect on a company’s business picture, reducing the cash held by the business and the equity (book and market) in the business. It is true that the investors who receive these cash flows may face different tax consequences and that while neither action can create value, buybacks have the potential to transfer wealth from one group of shareholders (either the ones that sell back or the ones who hold on) to the other, if the buyback price is set too low or too high.         It is undeniable that companies, especially in the United States, have shifted away from a policy of returning cash almost entirely in dividends until the early 1980s to one where the bulk of the cash is returned in buybacks. In the chart below, I show this shift by looking at the aggregated dividends and buybacks across S&P 500 companies from the mid-1980s to 2024: While there are a number of reasons that you can point to for this shift, including tax benefits to investors, the rise of management options and shifting tastes among institutional investors, the primary reason, in my view, is that sticky dividends have outlived their usefulness, in a business age, where fewer and fewer companies feel secure about their earning power. Buybacks, in effect, are flexible dividends, since companies, when faced with headwinds, quickly reduce or cancel buybacks, while continuing to pay dividends: In the table below, I look at the differences between dividends and buybacks: If earnings variability and unpredictability explains the shifting away from dividends, it stands to reason that this will not just be a US phenomenon, and that you will see buybacks increase across the world. In the next section, we will see if this is happening.     There are so many misconceptions about buybacks that I did write a piece that looks in detail at those reasons. I do want to reemphasize one of the delusions that both buyback supporters and opponents use, i.e., that buybacks create or destroy value. Thus, buyback supporters argue that a company that is buying back its own shares at a price lower than its underlying value, is effectively taking an investment with a positive net present value, and is thus creating value. That is not true, since that action just transfers value from shareholders who sell back (at the too low a price) to the shareholders who hold on to their shares. Similarly, buyback opponents note that many companies buy back their shares, when their stock prices hit new highs, and thus risk paying too high a price, relative to value, thus destroying value. This too is false, since paying too much for shares also is a wealth transfer, this time from those who remain shareholders in the firm to those who sell back their shares.  Cash Return in 2024     Given the push and pull between dividends as a residual cash flow, and the dysfunctional factors that cause companies to deviate from this end game, it is worth examining how much companies did return to their shareholders in 2024, across sectors and regions, to see which forces wins out. Cash Return in 2024     Let's start with the headline numbers. In 2024, companies across the globe returned $4.09 trillion in cash to their shareholders, with $2.56 trillion in dividends and $1.53 trillion taking the form of stock buybacks. If you are wondering how the market can withstand this much cash being withdrawn, it is worth emphasizing an obvious, but oft overlooked fact, which is that the bulk of this cash found its way back into the market, albeit into other companies. In fact, a healthy market is built on cash being returned by some businesses (older, lower growth) and being plowed back into growth businesses that need that capital.     That lead in should be considered when you look at cash returned by companies, broken down by sector, in the table below, with the numbers reported both in US dollars and scaled to the earnings at these companies: To make the assessment, I first classified firms into money making and money losing, and aggregated the dividends and buybacks for each group, within each sector.  Not surprisingly, the bulk of the cash bering returned is from money making firms, but the percentages of firms that are money making does vary widely across sectors. Utilities and financials have the highest percentage of money makers on the list, and financial service firms were the largest dividend payers, paying $620.3 billion in dividends in 2024, followed by energy ($346.2 billion) and industrial ($305.3 billion). Scaled to net income, dividend payout ratios were highest in the energy sector and technology companies had the lowest payout ratios. Technology companies, with $280.4 billion, led the sectors in buybacks, and almost 58% of the cash returned at money making companies in the sector took that form.     Breaking down global companies by region gives us a measure of variation on cash return across the world, both in magnitude and in the type of cash return: It should come as no surprise that the United States accounted for a large segment (more than $1.5 trillion) of cash returned by all companies, driven partly by a mature economy and partly by a more activist investor base, and that a preponderance of this cash (almost 60%) takes the form of buybacks. Indian companies return the lowest percentage (31.1%) of their earnings as cash to shareholders, with the benign explanation being that they are reinvesting for growth and the not-so-benign reason being poor corporate governance. After all, in publicly traded companies, managers have the discretion to decide how much cash to return to shareholders, and in the absence of shareholder pressure, they, not surprisingly, hold on to cash, even if they do not have no need for it. It is also interesting that buybacks seems to be making inroads in other paths of the world, with even Chinese companies joining the party. FCFE and Cash Return     While it is conventional practice to scale dividends to net income, to arrive at payout ratios, we did note, in the earlier section, that you can compute potential dividends from financial statements, Here again, I will start with the headline numbers again. In 2024, companies around the world collectively generated $1.66 trillion in free cash flows to equity: As you can see in the figure, companies started with net income of $6,324 billion, reinvested $4,582 billion in capital expenditures and debt repayments exceeded debt issuances by $90 billion to arrive at the free cash flow to equity of $1.66 trillion. That said, companies managed to pay out $2,555 billion in dividends and bought back $1,525 billion in stock, a total cash return of almost $4.1 trillion.     As the aggregate numbers indicate, there are many companies with cash return that does not sync with potential dividends or earnings. In the picture below, we highlight four groups of companies, with the first two focused on dividends, relative to earnings, and the other two structured around cash returned relative to free cash flows to equity, where we look at mismatches. Let's start with the net income/dividend match up. Across every region of the world, 17.5% of money losing companies continue to pay dividends, just as 31% of money-making companies choose not to pay dividends. Using the free cash flows to equity to divide companies, 38% of companies with positive FCFE choose not to return any cash to their shareholder while 48% of firms with negative FCFE continue to pay dividends. While all of these firms claim to have good reasons for their choices, and I have listed some of them, dividend dysfunction is alive and well in the data.     I argued earlier in this post that cash return policy varies as companies go through the life cycle, and to see if that holds, we broke down global companies into deciles, based upon corporate age, from youngest to oldest, and looked at the prevalence of dividends and buybacks in each group: As you can see, a far higher percent of the youngest companies are money-losing and have negative FCFE, and it is thus not surprising that they have the lowest percentage of firms that pay dividends or buy back stock. As companies age, the likelihood of positive earnings and cash flows increases, as does the likelihood of dividend payments and stock buybacks. Conclusion     While dividends are often described as residual cash flows, they have evolved over time to take on a more weighty meaning, and many companies have adopted dividend policies that are at odds with their capacity to return cash. There are two forces that feed this dividend dysfunction. The first is inertia, where once a company initiates a dividend policy, it is reluctant to back away from it, even though circumstances change. The second is me-tooism, where companies adopt cash return policies to match  their peer groups, paying dividends because other companies are also paying dividends, or buying back stock for the same reasons. These factors explain so much of what we see in companies and markets, but they are particularly effective in explaining the current cash return policies of companies. YouTube Data Updates for 2025 Data Update 1 for 2025: The Draw (and Danger) of Data! Data Update 2 for 2025: The Party continued for US Equities Data Update 3 for 2025: The times they are a'changin'! Data Update 4 for 2025: Interest Rates, Inflation and Central Banks! Data Update 5 for 2025: It's a small world, after all! Data Update 6 for 2025: From Macro to Micro - The Hurdle Rate Question! Data Update 7 for 2025: The End Game in Business! Data Update 8 for 2025: Debt, Taxes and Default - An Unholy Trifecta! Data Update 9 for 2025: Dividend Policy - Inertia and Me-tooism Rule! Data Links Dividend fundamentals, by industry (US, Global, Emerging Markets, Europe, Japan, India, China) Cash return and FCFE, by industry (US, Global, Emerging Markets, Europe, Japan, India, China)