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Musings Report 2022-46 11-12-22 Investing in Treacherous Waters
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For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Investing in Treacherous Waters
I confess to liking the double-entendre of "Investing in Treacherous Waters": imagine being able to trade shares (or options/futures) in Treacherous Waters, Inc.
That could be the trade of the decade, as Treacherous Waters will dominate the market.
The other meaning is that any investment will be cast into Treacherous Waters, and so our investment strategy must adapt accordingly.
My first global context is to first and foremost "invest in yourself": invest in forms of capital that cannot lose value (for example, skills and experience) and assets that are not dependent on fluctuations in valuations for their utility.
For example, my tools retain their utility regardless of their current market value, and so does my house as shalter and yard to grow food. Whether the value drops to $1,000 or soars to $1 million, the house provides shelter and the yard provides food.
In other words, the mindset of speculation--buy low and sell high to accumulate as much money as possible--is not the only investment context to consider.
My second global context is that speculative winners--assets that rise sharply in value--will increasingly be targets for "windfall" and/or wealth taxes, as well as capital controls, such as limits on selling.
If you log a 500% gain, then paying a wealth tax is a small price to pay for such a handsome gain. But such enormous gains will very likely be far more scarce going forward as speculative bets become net drains on capital and speculators withdraw because their gambling chips are gone or they realize they better conserve what capital is still left.
My third global context is that simple bets on sectors may not provide the easy, stable returns that characterized the past 40 years.
Those who rotated into "hot sectors" and cashed out when everyone else jumped in did very well.
The mindset is still ubiquitous. Many are calling for a commodity super-cycle that will deliver reliable gains to anyone investing in energy/commodities for years or decades to come.
I'm less confident that such simple trend-following sector bets will work as well going forward, for several reasons. One is that artificial scarcities tend to be followed by gluts that crush valuations.
Another is I anticipate more asymmetries within sectors. In other words, a rising tide may not raise all boats.
As per last week's quote from Nassim Taleb: "Finance has three simple rules: maintain a clear mind, figure out asymmetries, never talk to idiots."
Setting the third bit of advice aside, let's focus on asymmetries. These can be called "winners take most" in shorthand.
Put another way, the winners in each sector may garner the majority of the gains within the sector, as the winners have figured out a strategy to navigate treacherous waters.
Those pursuing old strategies will either lose (despite the rising tide) or reap meagre gains.
The most successful investors / speculators will dig into companies, looking for asymmetries in financial assets, expertise, management, etc.--the traditional tools of stock pickers.
Buying index funds and ETFs to ride the tide higher might not work as well going forward.
My fourth global context is that speculations in assets with no real-world utility such as NFTs have run their course and the gains will flow to companies producing real-world goods/services with essential utility.
This may be seen as part of the re-industrialization / reshoring / friendshoring of North America in particular, though this will be a global trend.
My fifth global context is that one tool to discern productive asymmetries is to seek what the wealthy value.
Real estate and housing is one example. The global housing bubble is finally popping, and house valuations have a long way to drop to reach historic trendlines.
That said, enclaves with all the attributes valued by the wealthy--safety, good schools and healthcare, local sources of energy and food, beautiful sceenry and distance from decaying urban cores--will drop less, or could even retain their value due to the relative scarcity of places that meet these high standards.
My sixth global context is the value of maintaining a low profile that doesn't telegraph your wealth, what's known as the "gray person" strategy: blend in with neighbors, drive average vehicles, avoid any ostentation. Blend into the background so no one will look at you twice.
My seventh global context is to invest in trusted personal networks, producing essentials others will value and invest time and energy in your community of family, friends, neighbors, small enterprises and other local connections.
These have value that cannot be assessed with a market price. As I've said many times, what's truly valuable is priceless, as it has no price and cannot be bought.
Trust and integrity are high on the list of what cannot be bought, and these are assets we should all leverage as the investing waters become increasingly treacherous.
Best Thing That Happened To Me This Week
Our young neighbor collected canned goods that have passed their expiration dates for an informal group that distributes them to those willing to take the canned goods.
You've probably read that there is little actual science behind these expiration dates. Canned goods can last many years beyond the somewhat arbitrary expirations dates on the labels.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Bitcoin, Currencies, and Fragility (Taleb's "black paper")
Households and Nonprofit Organizations; Total Liabilities and Net Worth $162 trillion (US)
Real M2 Money Stock (US)
Yuja Wang,Joshua Bell Beethoven Kreutzer
"Crossroads" 1968 live at Fillmore Auditorium
The US artisan revolution: how the simple life came in from the margins
What a Young Philosopher Discovered More Than 200 Years Ago About Nature
Wealth taxation: The Swiss experience
"Every increase of needs tends to increase one’s dependence on outside forces over which one cannot have control and therefore increases existential fear." E. F. Schumacher
Thanks for reading--
charles |
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