I want to take a step back from talking about current events because the short-term trends likely won’t affect the long-term trends in a major way. Debt isn’t disappearing and our politicians haven’t suddenly grown brains. I don’t want to get bogged down in useless day-to-day analysis along the lines of “unemployment claims went down by 0.1% so the American economy is back and stocks will automatically rise in the U.S.” This is such a myopic way to view the markets and the world in general. The long-term trends are king, and as I’ve said many times before, the long-term trends are much easier to predict than short-term trends.
I felt like writing about what it takes to be a successful investor and impart some of the lessons I’ve learned over the years. To start, let me just say that I haven’t even come close to learning all there is to learn about investing. I know I have a long way to go and this keeps me hungry to always stay curious, always question, and always try to find an edge. Anyway, here are some of my thoughts.
Open-Mindedness and Mental Flexibility
In investing as in life, it is very rare to find someone who is willing to change their views- even in the face of compelling evidence. Most of the great investors I know of are very open-minded. It therefore came as no surprise to me when some of the greatest investors turned bullish on gold. Einhorn, Soros, Paulson, Burry, Tudor Jones. What do these people have in common besides being great investors and investors in gold? All of them are not considered gold bugs. Some, in fact, viewed gold in a negative light. Nonetheless, all these great investors were willing to change their beliefs when the fundamentals changed. They are open-minded.
I can’t even count the number of times I’ve changed my views about something after investigating the topic more thoroughly. For example, there was a time when I sided with the monetarists who linked the money supply with inflation. What I found upon further investigation was that sometimes the money supply does rise at a similar rate to inflation, but sometimes it just doesn’t. Sometimes inflation severely lagged money supply for many years until inflation suddenly burst onto the scene and actually exceeded the growth in money supply. How does this happen? There must be some other variable at play, and history shows that this variable is public confidence. One of the reasons I focus so much on the protest/riot aspect of this whole crisis is because it reflects public confidence. This is a variable that will determine investment trends.
I also used to be an advocate of a gold standard until further investigation. A gold standard will not solve our problems. Many of the hyperinflations in the past were under a gold standard. The only thing that changes under a gold standard is the method of devaluation. Instead of printing fiat paper, governments clip coins. Effectively it’s the same thing. The fundamental problem is not the form of money, but the lack of discipline of politicians. Think analogously to why dictatorships don’t work. Yes, in theory if we had a benevolent, all-wise leader, a dictatorship would be preferable to what we have today. But the reality is that human nature won’t allow for dictatorships to work for an extended period of time. If there’s one thing I’ve learned over the years, it’s not to bet against human nature. The bottom line is that a gold standard doesn’t counteract the problem of human nature. This is simply the practical application of a theory that sounds good on paper.
People always expose their own mental rigidity by their assumptions. I personally love it when people assume I fit a certain investment mold just because of the beliefs I have. For example, people think that because I am bullish on gold, I must think the stock market is going to collapse. Wrong. Or they think that since I am bullish on gold, I must believe in a gold standard. Wrong again. People then assume that I think gold is an inflation hedge. When I mention that gold collapsed from $850 to $250 from 1980 to 2000 in a period of steady inflation, suggesting gold is no inflation hedge, those who portray me as a hardcore gold bug are disappointed that I don’t handpick data points. Of course gold bugs then start attacking me on my stance that gold does not hedge against inflation. So yes, my views anger gold bugs, deflationists, inflationists, Pollyannas, Cassandras, and everyone in between. In my opinion, this is the biggest compliment I can receive.
I am well aware of what I am supposed to believe about investing. However, because I’ve found that so many of the assumptions about investing are wrong, I try not to assume anymore. It is usually the assumptions that get you in trouble. Home prices never fall! Gold is a barbaric relic! Government bonds never default! Don’t assume- you’ll be a better investor for it.
Don’t be an Academic
The problem with academics is that they are pressured to fit a certain mold. Are you a Keynesian or Austrian? Do you believe in free markets or regulation? Hard money or fiat money? Those in the academic field who have devoted their whole careers to being, say, a monetarist, are not going to change their views very easily even if the economic landscape has changed. This is the kind of intellectual rigidity that is a hallmark of academics and economists. Those who truly thought outside the box are those who I would characterize as investors. Think Ricardo. Think Keynes. Adam Smith was also a very practical economist.
Never get to the point where you feel you have to defend a position- this will skew your thinking. Test your theories in the real world. This act alone will distinguish you from an academic.
Focus on the Big Trends
I don’t want to be someone who is spectacularly right once every 20 years. There are people who make prescient calls only because they’ve been predicting the same thing for 30 years. This is not very impressive. Yes I think our debt structure is unsustainable and yes I think gold is the place to hide, but this is only temporary. Fundamentally I see myself as an investor, not a gold bug. I invest in things that have nothing to do with gold, but that’s not the focus of this blog. There’s a once in a century debt crisis on the horizon and I fully plan on capitalizing from it. This is the big trend. This is my main focus.
There is a time for all different kinds of investment approaches to be in vogue. Let’s take a look at the concept of bottom-up value investing. The value approach to investing has been shown to outperform in the long run, and I think this gives many value investors the idea that they can be purely balance sheet/income statement focused. However, I think what a lot of value investors realized after going through a monster bear market is that macro trends do matter. Even the best stocks get demolished in a bear market. It is critically important to frame your investment ideas around the major trends. The trend in global debt defaults is a massive trend that comes around every couple of generations. Ignoring this massive trend just isn’t prudent.
From the U.S. perspective, Boomers are starting to retire, which implies that the investment landscape is going to change. Understand that it will be very hard for real estate to rise in this environment unless we have a massive influx of immigrants. Also understand that in a low interest rate environment, Boomers are not incentivized to save. At any hint of inflation, they will start the stampede into hard assets. This is the reality we face. Don’t worry about month-to-month retail sales or core inflation. These trends are not as important. Focus on debt. Focus on demographics.
The years ahead will be interesting. I believe the great investors will make themselves known in the next 5 years. Who can stay flexible when the world is changing so fast? Who can welcome new ideas? Who can view events through a clear lens without letting biases cloud their thinking? We’ll find out soon.Follow