Comebacks, Inflation, and Trigger-nometry.
By: Devan Robinson
"Objectively, correct valuation doesn't exist. The exact same stock at the exact same price can be expensive for one person and cheap for the other, and this can be a correct statement for both investors.
" -LibertyRPF (my favorite daily read)
Comebacks
How did my latest cancer scans go?
I'll leave it to the great poet Arnold Schwarzenegger:
And boy-oh-boy is this sucker bleeding.
After months of cancer seeming invincible, our relentless chemo-missiles might just be working. After seven long rounds of chemo this cancer is finally bleeding. In my world that means we can kill it.
Cancer is a wildly complicated thing; strangely enough we still don't really know what I have.
I don't care.
Here's why: punch any opponent enough times and they will fall. It doesn't matter who they are, everyone has a limit. It's one of those timeless laws of the universe.
No surrender. I'll make my own odds. We're through the stem cell transplant at this point, and I'd say the odds are looking up.
Inflation?
Inflation is the topic du jour after a spicy November read of 6.8%. Seen below at the US Bureau of Labor Statistics website:
BLS is a great website for doing your own primary research. Primary sources are always better than filtered information.
Is inflation here to stay?
I don't think so, but I'm also no expert. My track record on predicting macro-issues is less than stellar.
For a decade, I've wasted a lot of brain cells trying to predict big macro-trends such as inflation.
It's not that it isn't important, it is. It's just that it doesn't matter to me.
I can't control it. I'm much more interested in what I should own if there was persistent inflation.
How does inflation impact the stock market?
Ben Carlson has a great piece on this topic. He took all the years of high-inflation reads and averaged out their stock market returns. The result?
In years of high-inflation the stock market averages 9.4%. Essentially right in line with the long-term return of stocks.
According to the data, inflation essentially doesn't have a material impact on the market. Why is that the case? It's actual pretty intuitive when we think it through:
Who pays the inflation? You and I. Who doesn't? Big corporations.
Dollar Tree is now the $1.25 Tree. Businesses pass inflation onto the customer, so of course it doesn't really impact the market much.
If inflation persists, how do I best position for it?
First:
The single best investment against inflation is investing in yourself. Education, starting a business, earning promotions, etc.
Who never worries about inflation? The woman in the office who's constantly being promoted. The dentist or lawyer or business in town that dominates their market.
Betting on yourself successfully shields you from a lot of life's money-woes.
Second:
((THIS IS NOT INVESTMENT ADVICE. These are theoretical ramblings and not a prescription. I've got enough problems in my life right now; I don't need someone claiming I told them to leverage to the hilt.))
My ultimate inflation portfolio would look something like this:
- Stocks and lots of them. Particularly large-dominant companies with durable pricing power such as the S&P 500. If you want to get really specific, tilt the portfolio towards value stocks. Large-cap stocks are probably the best inflation hedge there is.
- Leveraged bare-bones rental real estate. Rentals that require very little maintenance & repairs. Real estate can be a great inflation hedge as long as it doesn't require a ton of R&R. If the property requires a ton of R&R, your bottom line won't stand up against inflation. Go look at the price of a 2x4 at Home Depot and you'll see what I mean.
- A gigantic, low fixed-rate mortgage. If inflation persists, a low fixed-rate is one of the all-time great American life-hacks.
- On that same note, essentially all the fixed-rate debt you can get your hands on.
What do I NOT want to own during inflation?
- Lots of cash. Let's imagine a world where we have persistent 6% inflation. $1 million in cash would be losing $60,000 in purchasing power per year. If high-inflation sticks around for any sustained length of time, your wealth starts shrinking pretty quickly.
- Fixed-income. Most bonds will under perform during periods of inflation. There are a few exceptions like inflation-protected securities. Mostly we will use bonds to maintain against inflation, not out perform it.
The bottom line is, you probably want to be more aggressive with your portfolio than you normally would. Again, this is not my professional and individualized investment advise you receive as a client at Fairlead Financial; a blog post doesn't replace your yearly portfolio balances and meetings with me!
Trigger-nometry
A decade ago, I was absolutely convinced we were entering an inflationary period.
We were deep into the Great Recession. Our nation's debt levels had soared to records we'd never seen before. Partisanship was worse than I'd ever seen it. And the Federal Reserve was printing money like it was free.
I mean...inflation had to be coming right? It was obvious.
Well...no. I wasn't just wrong; I was dead wrong. Not only was there no inflation, it became a monumental struggle for the Fed to push inflation to just 2%.
There were plenty of clues for me along the way but I was pretty oblivious. For example, none of this printed money seemed to hit my bank account. It was a glaringly obvious clue but I'm a natural ding-dong.
Probabilistic thinking is one of the best traits you can develop as an investor. I like to call it trigger-nometry. Parsing the world with probability. Get good at trigger-nometry and nothing in life will make you easier money. For example, March 2020 was a nice paycheck when you, or your advisor, realized COVID wasn't the end of civilization. During the trade-wars, it paid handsomely to crunch the numbers and realize the tariffs being thrown around weren't actually that material.
Trigger-nometry allows you to have conviction in your financial plan and hold, or buy, when you need to.
I love history; we all know this. I enjoy it, but it's also incredibly useful in life.
There's always this growing sentiment out there that times are as bad as they've ever been.
History nerds laugh at this.
It's not that things aren't a mess, it's that the world has always been a mess. It's the default state. The world isn't crazier now than it's ever been, it's simply history. The world wasn't actually better when you were a kid, you were simply a kid. Everything was better when you were a kid.
History relentlessly marches forward yet we always forget we're in it.
I think about this a lot whenever I come across doomsday market predictions.
If inflation is here to stay, it will create heartache for many. No bones about it.
This is also a time use your trigger-nometry, zoom out a bit, and consider what is happening:
- booming consumer buying
- booming financial markets
- booming company earnings
- booming household wealth
- booming manufacturing
- cratering unemployment claims
- cratering household debt service
As my wonderful father used to tell me, the world hasn't ended yet.
Thanks for reading; Merry Christmas and Happy Holidays to all my wonderful people.
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