“Let’s start with what I’d tell a 25-year-old to not do with investment capital,” answered the CIO. He’d been asked how our youth should invest for 10-15yrs.
“I’d tell them to not blindly follow their parents and grandparents as they pay ever higher multiples for a shrinking pool of equity assets,” he continued.
In 1982 when Baby Boomers were coming of age, they paid a 6.6x Shiller price-to-earnings ratio for the S&P 500. By 1990 when the median Baby Boomer was 35-years-old, they had bid the Shiller PE to 16.5x. That same year, Baby Boomers owned 33% of all US real estate assets by value. Fast forward to 2020, the median Millennial is 31-years-old and they own just 4% of US real estate assets.
If they scrape together a few bucks after paying down student loans, they must pay a 31.3x Shiller PE multiple to buy the S&P 500.
“To win a game, play to your strengths, exploit your opponent’s weakness,” said the CIO. “As people age their creativity slips away. Their imagination withers. Their risk appetite fades. Their ambition dwindles. Their drive slides. And this leaves them incapable of reimagining the world, let alone building that future,” he said.
“But as people age, they do accumulate capital. And recognizing that this is their only remaining competitive advantage, they unsurprisingly lobby for policies that enhance its value.”
Baby Boomers are the wealthiest cohort in all human history. They’ve shifted the game’s rules to entrench their interests. Which has both limited competition for their companies and artificially shrunk the pool of investable equity assets.
“There’s too much capital in the world today relative to too few equity assets. 25-year-olds should not pay a 31.3x Shiller PE to buy their grandparent’s equities. They should play to their strengths and fight to build new companies that unseat established ones. Creating new equity assets to ease the acute shortage.”
By Eric Peters, CIO of One River Asset Management