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401(K) THE GREAT AMERICAN TRAGEDY

There isn’t a parent in the world that doesn’t feel compelled to get it financially right for their children. I have discovered that my breathing purpose is to leave my children and their children's generation a blueprint for financial success, and the legacy capital to build anything they imagine.

It is with this passion that comes true inspiration for this week’s newsletter.

“If you only knew…what you know now…back then.”

401(K) The Great American Tragedy

The educational system has failed Americans severely, by leaving out the financial component in early stage education.

John D. Rockefeller founded the General Education Board in 1902, which favored vocational training over liberal arts, higher academic, and professional roles. Whether part of the grand design is to control the working class, by pushing them into the factory mindset, or not, one thing is for certain…if you lack the education about money, it is virtually impossible to grow it.

The fact that most American workers come in contact with investments through their employer primarily, leaves them at a great disadvantage.

• Number one–they lack the knowledge or education to pick the right plans.

• Number two–they drastically under fund their 401k, almost guaranteeing a retirement not worth having.

To understand why, let’s jump into the historical time machine. Dating as far back as 13 BC, the Roman emperor, Caesar Augustus, offered Roman legionnaires a retirement package worth roughly 13 times their annual salary. This benefit was available after serving 20 years in a Roman legion and five years of military reserves.

American Express was the first private sector company to offer a pension plan in 1875. Pension plans grew in popularity in the 1900s, and by 1970, 45% of the private sector’s employees were covered by defined benefit plans.

Pension plans lost their steam once the IRS Revenue Act of 1978 was introduced into the tax code, provision section 401k. So much so that only 15% of the private sector offers pension plans today while 86% of state and local government employees have access to a defined benefits plan. The Revenue Act of 1978 cleared the pathway for the 401k as we know it today.

Wall Street sold it as a benefit and a way to build a secure retirement, and businesses manipulated the narrative as a way to shift the burden of retirement off their balance sheets and onto the American worker. The only problem was the American worker had no clue, while to the ego and greed it sounded like they would have total control…nothing x nothing = nothing.

Let’s do the math. There are approximately 346 million people in the United States. According to the Bureau of Labor Statistics, the participation rate is 62.6%, which is all employed and unemployed individuals seeking work. As of October 2024, there are approximately 209,089,300 working age individuals. The percentage of the population that was employed in October 2024 was 60.2%.

Now the sad part is out 71.5 million, only 14% or 10,010,000 people are maxing out their plans annually. The current max contribution for those under the age of 50 is $23,000, and for those 50 or above, the max is $30,500, which includes a one time catch up payment of $7500. Also, your employer may match 100% up to 3%, or 50% up to 6% of your contribution. See your plans for the actual amounts.

The problem is…most people can’t afford to max out, not that they even know to do so, based on the data.

According to Forbes, the average 401k balance at the retirement age of 65 is $279,997, which equates to $1,555 per month over a 15 year period, and that’s if they manage it correctly. And even if they do, it still won’t be enough to survive the cost of living and inflation.

And that's not the worst part. The retirement vehicle that you are entrusting your later stages of life to is slowly syphoning away your retirement, 1.5% at a time. A simple 1.5% expense ratio fee in a fully maxed out 401k, compounded over forty years, comes out to $1.3 million; however, between $1.3 million in fees and your ordinary income tax level, you would be lucky to walk away with $3.6 million (assuming a 35% tax bracket).

Investing in a low cost Exchange Traded Fund, like the Vanguard VOO, with a .03% expense ratio would carry $948,957.75 in fees over the same 40 year period. Since the VOO tracks the S&P 500, which has an average 10.6% over the last 100 years - if the track record extends over another 40 years, the outcome is dramatically better…$14,555,519.65 less fees ($948,957.75) and taxes ($4,762,296.66) equates to $8,844,275.24 at the assumption of a 35% ordinary income tax rate.

Now, that’s only if they offer it and you buy it in your 401k.

Now let’s say your employer offered a Roth 401k, and you made the same 23k contributions in VOO after taxes over 40 years, and received the same performance–$14,555,519.65 less the 948,957.3 expense ratio fee; the remaining $13,606,562.45 would be tax free…a drastic (3.7X) difference as compared to your traditional 401k, if you can find the victory in consistency.

DELL EARNINGS REPORT CARD…AI BUYERS BEWARE

Just because you feel the stock market is your oyster doesn’t mean you should buy everything in it. Contrary to popular belief, the stock market is not a casino, and it’s definitely not an all-you-can-eat buffet.

As a new investor, making your first profit in a stock can feel as enchanting as being bitten by a super bug and waking up a trader super hero. But don’t quit your day jobs just yet; there is a huge difference between profitable trade and a profitable trader, and an even bigger difference between a trader and a long term investor.

A short term trader looks for a profitable trade in the absence of other fundamentals, but a long term investor attempts to analyze the long term fundamental prospects of the company before taking a position, both looking for a similar outcome.

But what happens when long term prospects are built on a bridge of stilts, and the market participants push a narrative that escapes the raw fundamentals, and the math ain’t mathin’?

Take for instance DELL Technologies. Dell reported earnings of $2.15 per diluted share, beating on the bottom line, but missing on the top line with $24.37 billion in revenue versus the street estimates of $24.65 billion.

Dell’s top line revenue grew by 10% year-over-year and their bottom line earnings per share grew by 14% year-over-year; however, they disappointed on the guidance to the tune of roughly a billion dollars and sold off 12.25%, down $17.36 falling to $124.38 a share on Thanksgiving eve.

The question I get often is, What do you think of Dell? My answer is simple…I don’t invest in companies that rely on other companies to be a dominant player, i.e. NVDA.

When I invest in a company, I invest in the leadership first. Although Michael Dell has built a fine company, they went private in 2013 because they were experiencing an overwhelming PC competitive landscape, and they needed to transition and figure out cloud computing, data storage, and enterprise solutions. The pressure of being a public company wouldn’t allow them to restructure and simultaneously meet the demands of Wall Street.

They took five years, reorganized, and a refurbished Dell went public again December 28, 2018; an old company with a new coat of paint.

Since 2018, Dell’s revenue and company performance haven’t exactly blown the cover off the ball:

Gross margins for the fiscal 3rd quarter was 22.3%, down 1.4%, and sequentially from the 2nd quarter 23.7%, due to an AI optimized server mix and competitive pricing environment.

This says they are competing for position, but they are not the dominant player.  The proof is in the shrinking margins.

Now if we are looking at the data, just in terms of revenue growth, you have to ask yourself, what type of premium would you pay for a company growing their revenue by 10% on an annual basis?

Dell sits at a current PE of 22 times earnings–the highest earnings estimates for full year fiscal 2026, according to Yahoo Finance is $11.11, which puts their forward PE at 11.20 times earnings.

This would be considered undervalued in an institution’s eyes, if we’re strictly talking PE ratios, but based on the percentage of free cash flow to revenue generation, debt to equity, and the reliance on AI to be their next vertical of growth ,it’s a pass to me.

Now some may disagree, and that’s perfectly fine. It's their money; but I need a company that’s going to grow for 20 years, not four quarters. And even with their backlog growing 50% plus in the third quarter, they still missed on guidance, which to me speaks volumes in the short term.

Just listen to the earnings conference call. The juxtaposition between analysts asking questions and questioning on the call, was eye opening.

Most of the questioning centered around the PC refresh cycle, their sequential decline in AI revenue, and future AI expectations, which spoke to the high reliance on NVDA’s Blackwell offering in the fourth quarter.

This makes it a hard pass for myself; but if you look at how institutions ran the company as an AI darling, you would have thought they were NVDA’s main supplier for all things data center.

While I don’t doubt they will play a major role in the AI movement, this is what an AI bubble looks like bursting, because it ran in anticipation of lofty revenues instead of tangible numbers.

I was on the street when the Dotcom bubble burst and this is a familiar sound that left everyone on the earnings call screaming, “Show Me The Money!”

DATA IS THE ONLY THING THAT MATTERS…

Last week the PCE (Personal Consumption Expenditures) numbers came in-line, indicating no big surprise in the direction of inflation.

The PCE report is a key economic index watched closely by policy makers (FOMC), economists, and Wall Street in terms of the direction of inflation, as it measures the changes in the prices paid by individuals for goods and services, and the overall behavior and health of the consumer on a monthly basis.

The PCE’s importance directly relates to inflation, and influences the direction the FOMC will vote on interest rates.

The PCE, coupled with the JOLTS report, tie directly into the Feds Dual Mandate of stable pricing, low unemployment, and low inflation (2%).

The JOLTS report, which breaks down as the Job Opening Labor Turnover Survey, measures job openings, hires, layoffs, and quits in the economy. This directly ties into the unemployment number and wages, which has a direct impact on inflation.

If there are too many job openings, this means businesses will have to raise wages to attract talent, which then means consumers will have more money to spend–and when you have more consumer demand chasing low supply, you get inflation.

When witnessed in 2021 and 2022, when there is a tight labor market, meaning fewer job openings, there is less competition for workers; therefore, wages may decrease causing less spending in the economy.

This can cause business activity to slow and the economy to contract, sending the unemployment numbers higher and potentially throw the economy into a recession.

This is why the market is constantly on Fed watch. The Street is now pricing in less than a 60% chance that the Feds will lower rates in December.

I believe because of their mandate for stable pricing, we will see a cut in December, to achieve their goal of 4.25-4.50 by year end. Plus, I foresee a continuation into the New Year as they march towards their goals of 3.00%-3.25% by year end 2025.

As the pressure is on the American consumer more than the numbers suggest, households are dealing with higher costs across the board: shelter in terms of high rent, high food prices, insurance, and energy.

Mortgage rates have been sticky as well due to the fear of higher deficits and tariffs threats by the incoming administration, which could potentially cause inflation. This has been more pronounced in the 10 year bond yields moving higher as mortgage rates have persisted, while Feds continue to lower rates in November, signaling inflationary concerns.

AI, THE NEXT INDUSTRIAL REVOLUTION

It is an absolute fact that each Industrial Revolution has made the problem solvers absolutely wealthy, and it will be no different with AI. To further understand the magnitude of AI’s impact, let’s take a walk through history.

Before the first Industrial Revolution, there were micro industries called cottage industries. They were early-stage entrepreneurs working out of their homes and family businesses producing goods such as textiles, pottery, and woven products, before the advent of factories.

This all changed during the rise of factories and mechanization, as mass production made it difficult to compete on pricing. The creation of railroads, steamboats and industrialization through factories impacted shipping, pricing, and travel. The first Industrial Revolution lasted 80 years (1740 to 1860) and made men like John D. Rockefeller, Andrew Carnegie, J.P. Morgan, and Isambard Kingdom Brunel, very wealthy. A key factor in the duration of the first Industrial Revolution was the incremental advancement in technological improvements and innovations in textile, steamboats and iron production.

This caused the shift from an agrarian economy to an industrial economy, which took significant investment, infrastructure development. and shift in labor practices,
as no momentous change happens overnight. The second Industrial Revolution was from 1870 to 1914 and ushered in the development of electricity, the combustion engine, and advancement in steel production (Bessemer Process).

New industries formed, such as the chemical and automotive industries. Henry Ford achieved mass production by revolutionizing the assembly line. This reduced cost, increased efficiency, and made goods more accessible to the public.

The second Industrial Revolution increased globalization as countries became more interconnected through trade. The beneficiaries of wealth were the usual suspects: JP Morgan, Andrew Carnegie, John D. Rockefeller, and a few freshmen like Henry Ford, Cornelius Vanderbilt, George Westinghouse, and Charles M Schwab. The second Industrial Revolution lasted 45 years as it took time for each innovation to be implemented and refined within industries.

The third Industrial Revolution or digital revolution lasted between 1960 and 2010; this is where we saw the shift from mechanical and analog to digital technologies,
and the widespread use of computers, digital electronics, and software. Notable names such as Michael Dell, Steve Jobs, Bill Gates, Mark Zuckerberg, Jeff Bezos emerged as the winners.

The third Industrial Revolution took 50 years because of technical evolution, market adoption, globalization, technical integration, economic cycles, cultural shifts, and the emergence of the internet.

Now here’s how we connect the dots. We are in the middle of the fourth Industrial Revolution and at the start of the AI install base. According to Jensen Huang, there is $1 trillion of data center infrastructure that needs to be transferred over from coding to machine learning. This race for AI dominance is in full swing with the four horsemen leading the pack (Amazon, Microsoft, Google, Meta).

Capex spend for 2024 is expected to finish around $240 billion and increase to better than a quarter of a trillion dollars in 2025, as all players involved recognize the behemoth of an opportunity before them.

Now keep in mind, the three previous Industrial Revolution’s lasted 80 years, 45 years, and 50 years, respectively. AI could be the single most transformative technology we have ever encountered. So, how much time should be given for a cultural shift, mass adoption, infrastructure, technical integration, and globalization? Not to mention, we have to solve the electrical gigawatt and data center equation. If one is a student of history, it could take decades, so for analysts to expect immediate fruit from Capex spending early state, it is not only premature but lacks historical perspective.

In the words of Mark Twain, “History doesn’t repeat itself, but it often rhymes.”

One thing is clear, the capital investment needed to shift an entire paradigm is enormous, and Big Tech understands this opportunity.

The importance of AI is so understated as it is only the beginning of a global spend to build out capacity and infrastructure in each hemisphere.

IDC estimates we could hit a $20 trillion economic impact by 2030.

Jensen Huang stated that AI is not just a tool, it’s a skill, so new industries will be created.

This speaks to the cultural shift that has existed in every single Industrial Revolution as people are forced to adapt or potentially lose their livelihood.

The profit in AI is in those companies who sell the picks and shovels and those who increase their productivity.

So if you strip out all basic tasks and replace them with AI, this will enable companies to apply human capital towards revenue generating activities; therefore, increasing both the top (Revenue) and bottom line (Earning Per Share).

Now, add this process to every single company globally, and then ask yourself how long will this take to implement, get the point?

I MEANT TACTICS NOT TARIFFS GUYS….

 Thank you for reading and again please like, comment and share with your tribe

Kevin Davis Founder Investment Dojo and Author of The C.R.E.A.M. Report

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