Jason Zweig of the Wall Street Journal shared some insightful observations and advice with those of us concerned about the effects inflation will have on our investments. In commenting on the accuracy of the experts (aka the Wall Street establishment) forecasts regarding inflation, he makes the following observations:
“The more Wall Street agrees that a forecast is inevitable, the more likely the future is to repudiate it.”
“Analysts, economists, and other forecasters are no better at predicting inflation than at predicting anything else: They stink at it. As then-chairman of the Federal Reserve Alan Greenspan noted in 1999, estimates of future inflation—including those by the Fed itself—“have been generally off,” and even changes in inflation that were “doggedly forecast” never occurred.”
(note: in support of his observation that they stink at forecasting, Zweig points to a study done by Federal Reserve Bank of Philadelphia on the low level of accuracy in the last fifty years of inflation forecasting)
Regarding the salience of their advice relative to their forecasts he points out that:
“Gold, for instance, has sometimes failed to keep up with rises in the cost of living for decades on end. (It’s down almost 5% this year even as inflation worries have spread.)”
“Nor are energy stocks or commodities a foolproof tool… Consumer prices rose in 1998, 2001, 2008, 2014, 2015, 2018, and 2020—and yet energy stocks and commodities lost money in all those years, according to Dimensional Fund Advisors, an investment firm in Austin, Texas. In four of those years, both of those purported hedges lost more than 10%.”
So what does he suggest we do with our portfolios when inflation is looming? The same thing that we should do in “normal” times – actually have a diversified portfolio of stocks that is, by design aiming to outpace inflation in terms of its total real return (capital gains plus dividends minus inflation). I should note that for the highly risk-averse among us who are concerned only with the preservation of capital, TIPS (Treasury Inflation Protected Securities) are something he points out as a totally acceptable place to invest. For the rest of us, it’s a range of equities (see the sector chart below). In doing so, we should be prepared to accept short-term volatility on the way to long-term growth.
Thing Two
Farrell's 10 Rules
Bob Farrell is a Wall Street investing legend who, beginning in the 1950s and lasting for several decades, pioneered the use of technical analysis and psychology (investor sentiment) to better understand how stock prices would behave. Over that time he shared many nuggets of wisdom about what he'd observed. Below are what became known as his 10 Rules:
Markets tend to return to the mean over time
Excesses in one direction will lead to an opposite excess in the other direction
There are no new eras — excesses are never permanent
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
The public buys the most at the top and the least at the bottom
Fear and greed are stronger than long-term resolve
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Bear markets have three stages — sharp down, reflexive rebound, and a drawn-out fundamental downtrend
When all the experts and forecasts agree — something else is going to happen
Bull markets are more fun than bear markets
When the going gets tough in the stock market, which it undoubtedly will eventually, remember these rules and also remember there are people who can help you work through those tough times in a systematic way when your resolve weakens and you want to cut and run.
Thing Three
Just A Thought
“Victimhood happens when you allow contributing factors in your life to become the determining factors of your life”- Myron Golden
