THE S&P 500 STOCKS are up roughly 100% since March 2020’s market low. I’m 100% clueless about how much longer this remarkable run will last. But I’m 100% confident that, when the next downturn comes, many investors will rush for the exit, fearful that their stock holdings will soon be worth little or nothing.
Which brings me to one of the most important investment concepts: intrinsic value.
No, intrinsic value isn’t a simple notion and,
OPEN AN ECONOMICS textbook, and you’ll find this fundamental principle: When the money supply expands—that is, when the government prints more money—higher inflation is often the result. This topic has, for good reason, been on investors’ minds lately. Since the pandemic began, the Federal Reserve has increased the money supply by several trillion dollars.
Is higher inflation inevitable? I see five possible answers to this question:
1. Yes, of course. Between 2010 and 2020,
ON SEPT. 11, 2001, I spent an hour and a half standing on a crowded subway train two blocks from the World Trade Center. During that time, both towers collapsed. No smoke came shooting down the subway tunnel. The earth didn’t noticeably shake. There were no deafening noises. Instead, we were just another subway car packed with disgruntled passengers, muttering about the perils of public transport.
It was only when the train backed up to Penn Station in midtown Manhattan that we learned what had happened that day.
FROM THE TIME I started covering Washington as a reporter in 1980, politicians have been condemning the federal budget deficit. Ronald Reagan was running for president that year. He excoriated his opponent, President Jimmy Carter, for increasing the federal debt by—brace yourself—$55 billion in 1979. These days, that wouldn’t pay a week’s bar tab for Uncle Sam.
With the sole exception of Bill Clinton, every president for 40 years has added to the federal debt,
THE RAGING DEBATE of 2021 is whether the inflation we’ve been experiencing this year will be transitory or more permanent. The Federal Reserve’s official stance is that the spike in inflation is a perfect storm of pent-up demand, supply-chain disruptions and year-over-year comparisons that are “inflated” relative to 2020’s pandemic-induced deflation, and eventually will revert to more normal levels.
Recent hotter than expected inflation data—including the consumer price index (CPI), producer price index (PPI),
ARE THERE TIMES when a near 100% international stock allocation makes sense? I believe there are—and that today is just such a moment.
Never in my life have I had such a low allocation to U.S. stocks. My overall portfolio is 60% stocks and 40% bonds. But the stock portion is comprised of just 15% U.S., with the remainder held in international stocks, split evenly between emerging and developed markets.
I realize that’s unorthodox.
I HAVE TO ADMIT IT, I’m one of those guys who likes to hide money. I have cash hidden in a couple of places in my house and even in the garage. And I’m not talking about a few dollars. I probably have more than $3,000 in denominations large and small tucked in envelopes. I also have a jar of coins.
You might ask, “Why in the world would someone have so much cash lying around the house?” I keep it on hand in case of an emergency.
IT MIGHT SEEM LIKE an obscure academic question: Do stocks truly follow a random walk or can we count on them reverting to the mean? Depending on which side we favor in this debate, it can make a huge difference to how we invest—and to our confidence as investors.
Like me, many HumbleDollar readers have most or all their investment dollars in index funds. A key reason we invest this way: It’s impossible to predict which stocks will shine because they follow a random walk.
IMAGINE A MARKET genie offered you the choice between knowing the stock market’s return next year or the stock market’s average return over the next 10 to 15 years. Which would you choose?
I’m guessing that most people would prefer to know how the stock market will do next year. After all, that seems like more actionable information, plus who has the patience to wait a decade or longer? But for those with an investing time horizon of more than 10 years—the vast majority of us—knowing the stock market’s return over the next decade or longer is far more valuable information.
AN MIT PROFESSOR named Edward Lorenz published a paper in 1972 titled Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?
It was a catchy title. Though Lorenz didn’t mean it literally, the basic idea was that events in the physical world are highly interconnected—more so than they might appear.
The world of investments is similarly interconnected in ways that aren’t always visible. Just like the weather,
THE ECONOMY IS recovering and the stock market has recovered. The pandemic isn’t over, but it seems we’re past the worst, at least in the U.S. Feeling better? Take a deep breath, take a step back—and think about the past two decades.
Since early 2000, we’ve had three major stock market declines, or roughly one every decade:
In 2000-02, the S&P 500 tumbled 49%, excluding dividends. The first leg down was triggered by the bursting of the dot-com bubble.
IN RECENT MONTHS, there’s been a lot of handwringing about the stock market. Thankfully, we seem to be on the back end of the pandemic, but things remain far from perfect in the economy. Millions are still unemployed. And the government has had to spend trillions to get us through, adding to a federal debt that was already enormous.
Today, the economy is far more fragile than it was pre-COVID. And yet the stock market just keeps cruising to new all-time highs.
IS THIS A TIME to be fearful? In Berkshire Hathaway’s 1986 annual report, Warren Buffett wrote, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Make no mistake: There’s plenty of greed on display right now, whether it’s bitcoin, nonfungible tokens, Robinhood traders, GameStop or special purpose acquisition companies. All of this has some observers talking of a market bubble. Indeed, I suspect much of this nonsense “will end in tears,” a phrase my mother often used when trying to control her four rambunctious children.
IN THE ONGOING battle between those who believe that the stock market is in a bubble and those who don’t, you may have heard mention of something called CAPE, short for cyclically adjusted price-earnings ratio. Among market indicators, it has the strongest track record in predicting future market returns.
What does the CAPE ratio say about today’s market? It’s flashing red. According to CAPE, the U.S. stock market is more overpriced today than it has been at any time since the 2000 market peak.
ARE FINANCIAL markets in a bubble? It’s a question I’ve never liked. I believe stocks and bonds are fairly valued most of the time, which means it’s extraordinarily difficult to beat the market averages and our best bet is to buy index funds.
But at the same time, during my adult life, there have been three key occasions when markets lost touch with reality: Japanese stocks and real estate in the late 1980s, technology stocks in the late 1990s and housing in the mid-2000s.
