Swim or Die. Investing in an Era of Inflation
I just had the best three months investing in my life. My personal portfolio was up 27% in the quarter. I have had better returns in percentage terms but it’s never been better in terms of how much money I made.
This isn’t shocking. The Nasdaq was up 42% last year and I’ve been putting money into my various portfolios for over 30 years. Given the power of compound interest, every year that isn’t a market crash should be better than the one before.
That said, I did better than the average investor for two reasons. One, I sold about 35% of my positions back on December 7, 2021. At the time I put out a note saying that the market had topped. I wrote:
“This is the most ominous chart I’ve seen in years” pointing out the Gravestone Doji candlestick pattern on the S&P 500. I was correct. The market sold off.
Then a year and a half later when it became clear that inflation was dropping and that the Fed wasn’t going to raise rates again I started buying aggressively.
I told you about Marathon Digital (MARA) last week which was up more than 200% in six weeks. But there were other big winners like UiPath (PATH) and Dlocal Limited (DLO) which I still own.
I’m not telling you this to toot my own horn but to let you know that you can do a lot better than those target retirement funds your company is jamming down your throat.
That said, the first rule of investing is to have money to invest. Dollar cost average works. Set it up so it is automatic. If you invest $600 a month starting when you are 20 you will have about $7 million by the time you are 70. This is why vampires are so rich.
This leads us to the rule of 72.
The rule of 72 is a simple way to see how long it takes to double your money. If you want to know how long it will take your returns to double, you divide 72 by your annual return.
For example, if you buy a 10-year Treasury at a 3% yield, it would take 24 years to double your money. If you get a 6% yield, you will double your money in 12 years.
The problem is that the rule of 72 also works in reverse. If you have an 8.6% inflation rate, it will cut your purchasing power in half in just 8.37 years (72/8.6 = 8.37).
Of course what you really want is real returns. You calculate that using your 8.6% inflation minus your 3% yield, which equals 5.6%. Then you divide 72 by 5.6% which equals about 12.86 years. So if you buy a 3% yielding asset in today’s market, you will lose half your money in almost 13 years!
They say that a shark never sleeps because they must keep moving water past their gills or they will suffocate. A shark must swim or die.
The government has set up the monetary system in much the same way for us plebes. If you stand still, inflation will eat your savings. If you invest and make enough to cover inflation, the government will tax your gains.
The trick is to maximize your gains and avoid paying taxes. I’ll tell you more on Thursday.
All the best,
Pro Trader Today