Stay Off the Rollercoaster
By Tony Allison, June 25, 2007
Rollercoasters are fun, heart-pounding and immediately gratifying. That’s great for a day at an amusement park, but not great investment behavior. Riding the investment rollercoaster, with frequent jumps on and off, may satisfy one’s need for stimulation, but it’s a lousy way to create wealth.
If your moods are dependent upon the daily CNBC tickers, or the pundit-du-jour’s opinion, then you are living the life of an investment manic depressive. Your outlook swings from too low to too high, depending on that day’s (or week’s) results. Worst of all, the inevitable highs and lows of the market will often lead the Rollercoaster Investor to jump off when times are tough and bargains abound (too stressful!), or jump on board just as the good times are peaking (everyone’s getting rich except me!) To one degree or another, millions of Americans are Rollercoaster Investors, swayed by the momentum-trading hedge funds or the daily news cycle. In the following paragraphs, I offer some tips on how to avoid life on the rollercoaster, and prepare for the changes coming down the road.
The “Long Run”
To quote the late British economist John Maynard Keynes, “in the long run, we’re all dead.” Hard to argue with that, but conversely very few investors have amassed great wealth trading in and out, trying to call tops and bottoms. For most of us, a long term perspective is clearly the best way to invest. However, don’t look at “invest for the long run” as a mindless mantra, wherein you buy a few stocks or funds and check back every 10 ten years or so.
If you are to successfully stay off the rollercoaster, you need to educate yourself regarding the fundamental trends on a global basis. When you understand the trends, it will be much easier to remain calm, and more importantly, patient, as the volatility of day-to-day events can often overshadow the longer term scenarios that will eventually emerge.
Everything is Relative
In times of monetary inflation, value is often hard to discern, especially when the formula by which inflation is measured has been changing. Begin to think in relative value terms globally, not just in US dollar terms. Since 2000, your assets may have gone up in dollars, but are losing value when measured in gold, copper, or other currencies. Expect this trend to continue as global inflation increases, foreign markets grow faster than ours, and the US trade deficits worsen.
Many factors are in play when trying to understand value and wealth creation. Your stock portfolio may double between now and 2011, but if inflation accelerates and the dollar continues on a downward path, then those gains may be just an illusion. Your purchasing power may have dropped as much or more, negating your gains. You may feel wealthier, but in fact you are not. Since America has dominated the 20th century, Americans have always thought only in dollar terms. With the US dollar in jeopardy of inflating badly in future decades as we face enormous demographic obstacles, it is imperative to think in global terms. How does the dollar relate to gold, silver, oil and other currencies? Thinking in these terms may alter your investment strategy if, for instance, you are pondering investing your retirement nest egg in 30 year treasury bonds. Your money won’t be at risk, but the future value of that money is another question.
Future Growth- Switching Engines
Another trend that is slowly unfolding is the uncoupling of the US as economic engine to the world. In future decades, the US may no longer be the engine of world growth, as it has for the past 60+ years. The US economy will still be relevant, but may just be another freight car on the train (and hopefully not the caboose). Growth is moving rapidly to countries experiencing their own Industrial Revolutions, made possible by access to free trade, markets and capital. China, India and Eastern Europe are growing very rapidly and together represent nearly half the earth’s population. The US represents 5% of global population. India reported GDP growth of 9.4% for fiscal year end, March 2007. China continues to grow in excess of 10%. US growth will be fortunate to exceed 2.5% this year.
China, with 1.4 billion hard-working people, is developing on a massive scale, which should last for decades. It will continue to devour enormous amounts of iron ore, copper, oil, natural gas, cement, silver, lead, zinc, etc. as its industrial revolution progresses. There will be dramatic ups and downs, but short of a global pandemic, China is never going back to a rural economy.
Love and support your country, but be a realist on future trends. Investment and capital will flow to the areas of faster growth and greater potential (given political stability). Keep global investing on your radar screen. Big money from around the globe will be flowing into Asia for decades to come. Look into US multinational companies with exposure to Asian growth and Asian currency as a way to get your foot in the door. The global growth engine is heading East.
Gold also tends to flow in the direction of the stronger countries from the weaker. As European central banks continue to divest themselves of gold, Asian central banks, particularly China, speak of diversifying their huge reserves out of dollars. Gold is the obvious alternative for part of it. The Chinese and Indians have thousands of years of history of gold ownership. It has long been the sole store of value through centuries of strife. The Chinese government now allows its citizens to purchase gold. As China continues to industrialize at a frantic pace, where do you suppose the Chinese citizenry (nearing 1.5 billion strong) will turn for a store of value as inflation inevitably attacks the Yuan?
Energy- Lifeblood of Global Growth
Global energy demand continues to grow year after year. The Chinese have discovered the joys and freedom of automobile ownership. Future growth projections look exponential. Dr. Huang Fanzhang is a respected Chinese economist. In a recent interview he noted that there are currently more than 10 million cars on the road in China, but in just 15 years he projects there will be as many as 120 million.
Currently one barrel of oil is found in the world for every six consumed. Prices will fluctuate as always, but the days of cheap and abundant oil have come to an end. The rise of global political conflict over energy is on the horizon.
The “Super Giant” Ghawar oil field in Saudi Arabia was discovered in 1948. It is by far the largest oil field in the world and represents 50-60% of Saudi oil output. When it begins its inevitable decline (Matt Simmons and others think that time is very near), world production will likely decline with it. Oil prices will rise, perhaps dramatically.
Even without the arrival of Peak Oil, future supply and demand imbalances will be an investment trend of great significance and longevity. Investing in energy should not be a short term momentum trade. Find excellent companies with good growth prospects in stable geopolitical areas, and stay invested.
Change is Inevitable
This is a truism, but humans will always resist change, and be surprised (and often unprepared) when it arrives. If one studies the global trends taking shape, then change becomes much easier to manage because it is expected. And long term investors can invest ahead of trends and profit greatly when the short-term crowd piles in late. Inflation (and inflationary expectations) is an example of a trend that is heading our way, but not yet fully manifested. Inflation has arrived in terms of financial assets, but is not yet fully evident in terms of goods, services and labor costs. Understand the global trends and change becomes much easier to anticipate, accept and profit from.
With 24/7 news coverage, it is easy to get inundated with day-to-day CNBC-style noise. The media needs to sell advertising, and the noise gets ever-more shrill. The potential to be influenced by daily events is very strong. Do your best to tune out the daily bombardment. Turn off the computer or television occasionally and take a walk. Revisit your long term fundamentals on a regular basis. Geopolitical events can alter the trends occasionally, but usually for only a relatively short time. The most important reason to think about long term trends is they inevitably lead you back to the ideal investment behavior: patience. Save your adrenaline rushes for the amusement park.
U.S. stocks ended lower on Monday, with the Dow Jones Industrial Average losing earlier gains of up to 120 points, as jitters resurfaced about the impact of the distressed subprime mortgage market and of higher interest rates on financial firms. Nervousness about subprime mortgages resurfaced last week after the near collapse of two hedge funds owned by Bear Stearns Cos. Inc.
The Dow Jones Industrial Average ended at 13352.05, down 8.21. The S&P500 ended down 4.82 at 1497.74. The Nasdaq settled at 2577.08, down 11.88.
Crude-oil futures closed modestly higher Monday as news on Nigeria and Venezuela played tug of war on the oil market, pushing crude futures near a two-week low then lifting prices to a high well above $69 a barrel. It was reported Monday that both Exxon and ConocoPhillips have refused to agree to Venezuela's terms for projects in the Orinoco river belt, and may pull out of Venezuela. This was bullish for oil, as the already poorly-run oil industry in Venezuela will likely just get worse if the oil giants depart.
Gold futures fell Monday, but managed to cut their losses by the close as concerns over global gold production and a modest recovery in oil prices helped lift the metal from a nearly two-week low. Gold for August delivery fell $2.30 to close at $654.70 an ounce on the New York Mercantile Exchange.
Wishing you a good evening,
© 2007 Tony Allsion