Individual investors are likely to know only Warren Buffett or Peter Lynch, but Seth Klarman of Baupost, at the age of 34, left a famous book called "Margin of Safety" and was named the next Buffett by Buffett himself. Warren Buffett has been telling hopefuls for decades not to fool around and just buy index funds, because he said there are only a handful of managers who can beat the market over the long term. And Seth Klarman was one of those handful of managers.

He rarely appears in the media, but he appeared on CNBC. The anchor emphasized that they had a hard time getting him on the show. But what came out of his mouth made individual investors feel gloomy.

• The past 15 years have been a time when everything was a bubble, thanks to historically low interest rates.
• There are more and more smart competitors in the Public market, and more information is being released to the public. So there is less and less to eat.
• In this situation, we are focusing more on the Private market to find alpha. Similarly, we are focusing more on the global market than the U.S. market.
• Of course, there are still opportunities in the Public market if you look carefully, but the market is becoming more efficient, so opportunities are disappearing faster than before.For example, Meta. They say that when Meta's stock price fell below $100, it was a great buying opportunity. But at that time, it was a time when everyone was saying that Meta was finished.
• Regarding Warren Buffett's claim that we should not invest directly but buy index funds, he acknowledges that there are advantages in that transaction costs are close to zero and it does not underperform the market. Therefore, he says that there is no problem with buying index funds from a long-term perspective for ordinary investors who cannot conduct very sophisticated analysis.
• But the problem is 1) Most people start investing when the market is near its peak. This is because there is a lot of public interest in investment at that time. 2) The bigger problem is that they enter near the top and leave near the bottom. This is because most people cannot endure all the gloomy talk they hear when the market is near its bottom. So, they end up entering at the wrong time and leaving at the wrong time, so even index funds fail.Therefore, it means that only those who can do it consistently without worrying about it can succeed in investing in index funds. But because of human nature, there are not many people who have such traits. So, in the end, whether it's active investing or passive investing, only a few people succeed in investing.

I'm going to be really tough and just invest consistently in the index? The problem is that the return will still be lower than in the past. Who says so? The Fed.

What's over? The good times for corporate profits and stock investment over the past 30 years are over. There's nothing but down from now on.Who says so? Michael Smolyansky. What kind of guy is he?

He received his Ph.D. in Finance from New York University in 2015. Currently, he is a senior economist at the Fed.

From 1989 to 2019, the real return on the S&P 500 index was 5.5% over 30 years, significantly exceeding GDP growth (2.5%). Why? 1) Interest rates were low, and 2) corporate tax rates were low. But there is almost no chance that it will be lower in the future.

The ratio of interest expense and corporate taxes to operating profit, which was 52% in 1989, fell to 27% in 2019. Can it fall further?

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It's hard. The 10-year U.S. Treasury yield was 1.9% in December 2019, but it was 7.9% in 1989. The effective corporate tax rate for non-financial companies was 15% in 2019, but it was 34% in 1989.

Therefore, even under the very optimistic assumption that interest rates and corporate tax rates remain at the 2019 lows, corporate earnings can only increase as much as operating profits.

But looking at the figures from 1962 to 2019, operating profit growth has lagged behind GDP growth (except for the pandemic, which is a very exceptional case).

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Conclusion: The real return on U.S. stocks is unlikely to exceed 2% in the future. This is one-third of the level of the past 30 years before the pandemic.

From 1989 to 2019, the average annual real operating profit growth rate was 2.2%, lagging behind GDP growth (2.5%). But net income growth was 3.8%. That's because of the decline in interest expense and corporate tax rates.

To reduce interest expense, leverage needs to be lowered, which requires costs. 1) Increasing capital dilutes shareholder value, and 2) repaying debt reduces shareholder returns. Both are bad for shareholders.

If profits don't increase, wouldn't it be good if the valuation went up? For multiple increases, 1) the risk-free rate needs to decline, 2) the risk premium needs to decline, 3) profit estimates need to increase, or 4) shareholder returns need to increase. But in 2019, all four of these items peaked, so there is very little chance of improvement in the long term.

Therefore, multiples will be lucky to stay at 2019 levels. Interest expense and corporate taxes will also be lucky to stay at 2019 levels. Then the real return on stocks will be the same as the operating profit growth rate. So what's the operating profit growth rate? At best, it's at the level of GDP growth. That's why it's hard to exceed 2% in the future. Of course, all of these are based on overly optimistic assumptions, so if any one of them breaks down, returns will be worse.

What is the conclusion? Positiveness is not wishful thinking, but accepting reality as it is.