Don't Make the Same Investing Mistakes as the Fed Chair
Transitory Inflation or Predictable Disaster?
The other day I read a phrase that made me reflect:
"Forecasts often tell you more about the forecaster than about the future." Warren Buffett
The following reflection might cost me many subscribers to the newsletter, but I completely agree with Buffett's insight. Who am I to say otherwise?
In the world of finance, there was an experiment conducted with monkeys which were able to select stocks and achieve a return much higher than the average investor. This makes us ponder about the chances we have to beat the indices. Perhaps in that scenario, it's much better to join them.
This might be the most accurate decision. Especially when we see that even the heads of the FED can be so grossly mistaken, like when Powell said that inflation was transitory, or when Ben Bernanke stated in 2007 that "given the fundamental factors that should support the demand for housing, we believe the effect of the problems in the high-risk mortgage sector on the rest of the real estate market will probably be limited."
These last statements were made just before the great recession of 2008 and when there were already some banks in trouble. Therefore, don't blame yourself if you buy a stock that falls 20%.
So, do I index and forget about it? Yes and no. If you want to save yourself this newsletter and not pay attention to anything, maybe it's the best idea. However, I believe that as investors we have two objectives that we can achieve: 1) diversify. 2) reduce risk.
The first seems obvious though it's not that simple. When I talk about diversifying, I mean doing so in terms of assets. It's not enough to have shares from various sectors. Unfortunately, when the market falls, it generally falls across the board. I'm talking about having several different assets that are uncorrelated with each other: stocks, gold, fixed income, cryptocurrencies, cash (yes, cash is also an asset), ...
For the second point, reducing risk, what we should do is be positioned for any market situation and take advantage of it. You've surely always heard a relative say: "this crisis was an opportunity for XXXX". This always happens; crises are opportunities, and we can try to seize them.
Although it's not possible to guess what the market will do, it seems really easy to understand the state of the economic cycle we are in. Remember the issue of liquidity and interest rates that we have explained in other newsletters. That's why it was so easy for us to understand the fall that occurred in 2022 and the subsequent rise in 2023.
Remember, crises generate opportunities. This allowed us to buy the S&P500 40% cheaper than it is today and buy Bitcoin at $16k.
This is the key to everything, having liquidity when opportunities present themselves.
With this, I would like to conclude my reflection for today. Going back to the beginning, no one can predict what the markets will do today, tomorrow, or next week, but it seems simple to have a discretionary view of what will happen in the medium to long term.
Another week I'll tell you some curious data about the markets, and why we think there might be a bull market in the coming months.
Despite the volatility we've seen in the crypto world these past few weeks, our asymmetric portfolio continues to hold up very well. This is because volatility has increased slightly, and the declines in some assets have been offset by our hedge.
