Welcome back to the Joseph Carlson Show.
On today's episode we have a lot of news to get to.
The big thing that investors want for 2024 is return to the
long lost normalcy. Wouldn't that be nice?
Things going back to normal? Not having so much craziness in
the market, The Wall Street Journal even highlights what
this normalcy looks like. An economic backdrop of moderate
inflation and middle of the road interest rate policies.
No more stimulus fueled meme stock craziness.
Now we don't want to get greedy. Most investors I know aren't
wishing for 24% returns like we got in 2023.
We just want reasonable and sustainable rise in stocks
powered by improved corporate earnings.
That's what investors want for 2024.
Well, I hate to be the bearer of bad news, but in this episode
that's the role I'm going to play.
I'll be explaining why this return to normalcy is very
unlikely and why all the data and statistics show how unlikely
it is. Now, of course, we have a lot of
other news to get to. Apple for examples, down 3% on
the day. That's a pretty big pullback for
Apple. It came after a downgrade from
Barclays. They have a lot of concerns for
Apple. I'll be going down and
addressing these concerns is an Apple shareholder that's held
the stock for five years. We also have some important and
funny news about Disney. The time has finally come.
Mickey Mouse is now officially public domain.
That means that Disney no longer has exclusive copyright over
Mickey Mouse over that IP. Mickey, Minnie, Tiger and Mac
the Knife are old enough that they're now officially public
domain and Disney can do nothing about other people using these
icons. So we know that other content
creators can now use Mickey and Minnie this IP any way they
want. And they are.
Immediately after this announcement, there is another
announcement that Steamboat Willie, the horror film, has
been announced. And that's not all.
They're not just making slasher films, they're also making video
games featuring Mickey Mouse in the most disturbing ways
possible. So be looking at what this means
for Disney. How does this impact the
company? Does it really affect them
negatively? How should we think about this
as investors? And then finally, it's been long
enough we're finally going back to Tick Tock to get our
investment and wealth building advice, this time from someone
highlighting the differences between the stock market and
sports betting. There's a lot more money to be
made in sports betting than there is in the stock market.
We'll take a look at his suggestion and see if there's
really more money to be made in sports betting than the stock
market. So we have a lot to get to in
this episode. Let's go ahead and jump in.
The first thing that needs to be addressed is investors
expectations. We all know that we had a decent
year in 2023. The S&P 500 was up 24%.
The NASDAQ was up a lot more if you invested in high quality
compounders. You also had a great return in
2023. So investors have done well last
year. We're happy about the results
and many of us just want to have a decent year this year.
We just want things to go smoothly.
We're not going to be greedy. We don't hope for the same
outcome as 2023, but we want a normal year in 2024.
Well, this is where investors get into trouble.
My dad always told me the definition of misery is the
difference between expectations and reality.
And that is the same in investing.
If you have different expectations than reality, you
can find yourself having a very difficult time.
So by gauging your expectations, you can actually have a more
enjoyable and even better outcome in investing.
And right now I feel like a lot of investors may not have the
right expectations for 2024. They say the wish list includes
an economic backdrop of moderate inflation in middle of the road,
interest rate policies, seemingly modest aspirations
that would still mark a change from both the recent rate surge
and the stimulus fueled meme stock craziness that preceded
it. Few think the S&P 500 can match
the 24% gain from 2023, which essentially erased all 2022
losses. What investors really want is a
reasonable, sustainable rise in stocks powered by improved
corporate earnings. That doesn't seem that
unrealistic, and it doesn't seem that greedy.
They're just saying investors want stocks to rise in line with
their free cash flow and with their earnings per share.
It seems like after all this chaos we've endured for the past
five years, we should have a return to normalcy.
It's long overdue, but unfortunately the data says
otherwise. This chart shows the S&P 500's
returns by year, every single year, going back to before 1950.
The red bars going down are negative years, representing how
much the S&P 500 fell that year. The green bars are representing
the gains the S&P 500 made that year.
So this chart gives us a nice visual representation of the
market going back a very long period of time.
And from this we can draw some conclusions.
First of all, investors are hoping for a return to normalcy.
If you asked most investors what they consider a normal return in
the market, most of them would say a 7 to 10% return.
That is the average of the S&P 500.
Over decades of time, most investors consider their
earnings go up five or 6%, dividends get paid, buybacks get
bought and stocks gain about 10% in value per year.
Well, let's go ahead and take a look at the historical data
here. Now we can look back through the
years and highlight all the years that we get this normal
return somewhere between 7 to 10%.
For the sake of argument, I'll even expand this to 1 to 10%.
Any year we get above 1% and below 10%, we can consider that
a normal market return. This is after all what investors
are looking for. If we add up all the years in
the stock market over this past 70 years that we get this one to
10% return, that is 14 years out of 7014 / 70 is 20%.
So 20% of the time in the stock market we get normal returns,
which means that 80% of the time we get abnormal returns.
That seems like a little bit of a predicament, right?
How can 80% of the time something happens over a 70 year
period be abnormal? How can 20% of the time be
normal? This flips the entire question
on its head. What investors are really asking
for is for this 20% outcome, the unlikely outcome investors are
wanting hoping for, expecting the abnormal thing to happen.
In reality, the normal thing for the stock market is to have
either above 10% returns, double digit returns or negative
returns. It is unlikely, in fact it's the
huge minority of cases that you get that nice seven to 10%
return that we hear about South frequently.
So the problem here is expectations.
We've heard over and over again that the market averages a 10%
return, which means many investors believe that you're
going to get around a 10% return per year or worse yet that a 10%
return is normal. The data in the history shows
the complete opposite. Getting around that 7 to 10% is
incredibly unlikely. Even years where the market
returned to 1 to 10% is only 20% of the historical returns.
This tells us that the abnormal, the crazy returns in the S&P 500
of going up double digits 20%, thirty percent, or the crazy
returns where we have negative years, this is normal.
These ranges below 0 and above 10% are the normal range for the
S&P 500. This is what investors should be
expecting to have happen 80% of the time.
Another way of saying this is that you should expect the
unexpected and that the abnormal outcome is more normal than the
so-called normal outcome. This means that looking at My
Portfolio, I should have expectations of 80% chance that
I'll have double digit returns or go in the negative.
That's what history tells us. Of course, it would be nice if
the economic backdrop moderated, if interest rates normalized, if
things like the Teamstock craziness ended.
All of that would be preferable. But investors should not expect
any of this to happen. The normal state of the world
and of the economy is to have abnormal events happen.
In 2023, we had many so-called abnormal events happen.
Silicon Valley Bank going under war, breaking out in the Middle
East, Interest rates rising rapidly.
All of this chaos is seemingly unexpected and abnormal.
Well, the truth is, if you highlight any of these years, if
you go back through history and look at any time point, all of
these time periods, people are going through similar
circumstances. They weren't the same.
In fact, every single time it's different.
But the constant here, the thing that's common across all stock
market history and all of world history is constant change,
unexpected events and chaos. That is the normal state of the
world and the stock market. So can we predict with
precision, accuracy what's going to happen this year?
Of course not. None of us know what's going to
happen. But what we should be expecting
is further chaos for things to be abnormal, which is the normal
for the 80% chance that the market goes up above 10% or
below 0 and we lose money. If we have these expectations
ahead of time, it makes it less painful, makes it more
tolerable. When we're in these
circumstances, if we set our expectations correctly, if we
expect the unexpected, we'll have a much more enjoyable time
investing. Now moving on, we have news that
has caused Apple to sell off. Apple's one of my longest held
holdings. I've held it since the very
beginning of My Portfolio. I've made some significant gains
in this holding. It's been a great one so far.
It's currently down at 3 1/2% after the news that Barclays has
downgraded the stock and they've written about their concerns for
Apple. So I want to go through the
concerns and give some input as a long term investor of this
company. Barclays noted that the latest
sales checks showed softness in the iPhone 15 sales in China and
developed markets. There was more strength in
emerging markets but not enough to compensate.
They also said growth in services such as the App Store
will slow this year. They say, quote the continued
period of weak results coupled with multiple expansion is not
sustainable and that is true. Apple has been flat in their
earnings for a long period of time, even having declining
earnings while the multiple has gone up.
For example, if we use Qualtrum to look at Apple's earnings per
share over time, you can see if we zoom in over the past five
years that the earnings per share shot up a lot.
In 2020, we had a nice jump right here.
Everybody went out and bought their new iPads and IMAX and and
every Apple product as they got the stimulus.
But then since that bump up from 2020, things have been
relatively flat, even down a little bit.
The earnings per share are not growing for Apple.
On top of that, they say, we also believe 2024 will bring
more service risk to light. This is something that I've
highlighted with Apple's business.
The crown jewel of the company is the service business.
Now there's a lot of different lines of business.
We can look at the Mac, the wearables, the iPad, the iPhone.
But if we cross all of these out and we just focus on the
services here, this is the most high margin part of their
business. This is the insurances, the
subscriptions and that toll booth sitting on the busy Rd.
which is the Apple App store, all of the transactions run
through that are incredibly high gross margins for Apple.
They've grown the services from around $10 billion per quarter
to around $22 billion per quarter.
So we've seen substantial growth in their high margin services
over the past few years, but they're now saying that that's
going to slow down. Barclays noted that the App
Store sales look to have a 10% decrease from a year earlier in
the fourth quarter. They see them decelerating by
the third quarter of this year. And while we're looking at these
fundamentals of the App Store slowing down, services being at
risk, the earnings per share being flat and the revenue
barely growing, we also contrast that with the astronomical rise
that Apple shares had in 2023. Ale rose almost 50 O.
We had a massive multiple expansion with the fundamentals
staying relatively flat. A lot of times I criticize banks
for down grading stocks when it's not deserved, but in this
case I think they have a valid reason.
They have a valid argument. We can look at some of the
fundamentals here. We look at the revenue and the
revenues basically flat for the past two years.
The EBITDA also looks very similar.
We had a massive spike in EBITDA in 2020 and then it's completely
flat since then. The free cash flow of the
company also looks very similar. We see the same spike that
happened around 2020 and then the free cash flow has been
mostly the same sense there and we see the same thing in their
earnings per share notice right here, the massive spike in their
earnings per share in a single quarter, it literally doubled
and then since then it's been basically flat.
So now investors don't know what to expect.
Looking at Apple, we see a company that's trading at a
relatively high PE ratio, 29 is not a low PE for Apple.
The free cash flow yield looks a lot better at 3.4%.
We exclude stock based comp, it's at 3%, but Apple has traded
as high as 4 to 5% throughout its history.
So it doesn't look either extremely expensive right now or
extremely cheap. The big problem with Apple is
that it's not growing. Now for me personally, this may
be unsurprising, but I'm not going to be selling my Apple.
I don't necessarily think that Apple's the Best Buy in the
market today. I'm not buying more of it, but I
also don't think it's worth selling at this point.
As long as their marketplace in their Moat stays intact, I'll
continue to hold this company. I'll sell the company when I
start to see issues with the Moat and durability of its
future. But as of right now, I see most
of these concerns as temporary ones.
Slight multiple expansion and earnings per share slowing down
are things that can change very quickly.
So I believe Barclays has valid concerns but temporary concerns.
Now moving on, we have some exciting news and concerning
news for Disney shareholders. The time has finally come after
nearly a century. The iconic figure Mickey Mouse
is officially public domain, meaning that Disney's graphs of
this intellectual property, their ownership of it, their
ability to enforce copyright of their exclusive use of it has
ended. They no longer have exclusive
rights to this icon as well as Mini Tiger and Mac the knife.
Now this is a big deal in and of itself because Disney's known as
one of the most litigious companies in protecting their
IP. If you use Disney Content Disney
IP without permission, you'll be quickly met with a copyright
notice. Disney's one of the most strict
companies with using their content or IP, but after a
certain amount of time, the copyright lapses and becomes
public domain. Now, there are a few caveats
here. For ongoing characters like
Mickey Mouse, copyright law is particularly complicated.
The public domain version of the character does not include
significant design changes made in later works like The
Sorcerer's Apprentice, Mickey or Fantasia 1940.
And you can't produce a work that falsely represents itself
as a Disney production or a piece of official merchandise
since Mickey Mouse is also registered Disney trademark.
So there is some caveats here. You can't use the new Mickey
Mouse like The Apprentice or Fantasia, but I don't think
that's a big deal. Mickey Mouse looks roughly the
same as he did 100 years ago. The Mickey Mouse Airs look
roughly the same as they did 100 years ago, and this green lights
everyone to be able to have access to this IP to sell under
the name of Mickey Mouse. They can't pretend to be Disney
while doing it, but they can sell Mickey Mouse now.
I think this brings a lot of issues for Disney.
Disney makes a fortune to this day by selling Mickey Mouse
merchandise, and now they're competing with other people
selling Mickey Mouse merchandise.
The other people can't pretend to be Disney.
They can't put the Disney trademark or logo or the Disney
approval on it, but they still can sell Mickey Mouse.
So now Disney's going to have a harder time competing with IP
that was formally exclusively theirs.
Another thing that Disney has to be worried about is negative
brand equity. How will this impact their
brand? To see Mickey Mouse used in
disturbing ways, there's already an untitled horror comedy based
on Mickey Mouse's cartoon debut. In it, a sadistic mouse will
torment a group of unsuspecting fairy passengers.
Production is set to begin in spring.
There's also a new trailer released today for a game called
Infestation 88. Thanks.
For coming out, we got a bit of an infestation here at the
storage facility. I thought it was just rodents,
but. There's something else.
You can see the shadow of Mickey's ears in here.
There's. Nests.
They're everywhere. Tried to take care of it
ourselves, but things have escalated.
Exterminators are our last hope. Please help us before.
It took approximately 10 hours from the release of Disney's IP
Mickey Mouse to public domain to have games like this be
presented. 10 hours total. Now, of course, that's not all.
There's even more movies being announced, more trailers being
released. This one's called Mickey Mouse
Trap. Put the phone.
Down, please. I'd like a dude.
I've already stopped.
Gina, turn it around please. Now of course, these are mostly
low budget indie projects and they're probably not going to be
massive successes, but this does show what people intend to do
with Disney's formerly exclusive IP.
It'll be interesting to see ultimately the impact this has
on Disney stock from an investment perspective.
I can't see these indie projects and small budget games having a
major impact on Disney overall. It's funny, it's silly.
And I think most of the people playing or even building these
games do like Disney and they like Mickey Mouse.
That's part of the reason they're doing it.
They're just having fun with an iconic character in a different
setting is always something interesting to see.
I think the bigger issue Disney's facing is now people
can monetize the sale of Mickey Mouse merchandise directly, and
that's a bigger issue for Disney as they make a lot of money
selling that merchandise. But either way, it'll be
interesting to see how this impacts the company.
Now, moving on, we finally have to get back to TikTok investing
advice. This time, it's someone
highlighting the difference between the stock market versus
sports. Bet he's going to show us a
better way to make money than the stock market.
When you're betting on sports, you know the team, you know the
players, you know the point spread and you get paid right
after the game on the stock market.
Do you really know these companies?
Do you know the day-to-day operations?
Do you even know where the company's at?
Do you know who's running the company?
No you don't. Now I'm going to pause it there.
He brings up an interesting contrast here.
He says. When you're betting on sports
betting, you know everything about the teams and the
statistics and the payouts. But then he goes through the
stock market and asks the same questions.
We know these companies. Do you know the day-to-day
operations? Do you know the day-to-day
operations of the company? Now when I'm asked this
question, I think the answer should be yes.
If you're invested in companies, you should know their day-to-day
operations. Do you even know where the
company's at? You should definitely know where
the company's located. That should be one of the first
things you find out. Do you know who's running the
company? You should absolutely be
familiar with the leadership of the company, the type of
executives that run it, the CEO, what their goals are, what their
ambitions are, and what their history is.
No you don't. Now he says no, you don't.
But I believe the answer should be yes to every one of those
questions. All those questions he posed to
stock market investors are things that you can easily get.
In fact, all of those are pretty simple things to answer.
Just want you guys to really think about it.
If you're going to invest, there's a lot more money to be
made in sports betting than there is in the stock market.
And I know there's going to be guys that come in and put
comments on making tons of money in in the stock market.
Well, you obviously aren't betting sports, because if you
were and you were to compare the two, I can show you how to make
a lot more money betting sports than you're getting in the stock
market. So there you have it, the stock
market versus sports betting. What does he have to back up
these huge claims of the stock market being a worse investment
vehicle, a worse wealth creation tool than sports betting?
Well, the big evidence, like most of these videos is trust me
bro, so you can trust them if you want.
That's all for this episode. See you in the next one.