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The Nature of Investing

Written by Briton Ryle
Posted August 23, 2021

I hope what I’m about to say doesn’t disappoint you. But the fact is it needs to be said. And I’ve never shied away from speaking my mind. You’ll always know where I stand on the most important issues that investors face, no matter how uncomfortable the truth (as I see it) may be...

As always, I may be wrong. But you can rest assured that 23 years of boiling the macro down to its sweet profitable essence has brought me some perspective on the nature of things. 

What I have to tell you is simple. This stock market is not a bubble. 

Are stock prices pumped up by Fed liquidity? Yep. Are investors whistling past the graveyard as they try to cram years of performance through the relatively tight window the Fed has opened? Probably...

But that doesn’t make this market a bubble.

Look, I’m not some wet-behind-the-ears, new-kid-on-the-block raging bull with dollar signs in my eyes who will say anything to justify my reckless investing behavior. That nonsense is for the young, brash, and soon-to-be-poorer.

I’m old and crotchety and I ain’t got time for all that.

Like everything that's truly good in this life, my point is simple. To call this market a bubble is to fundamentally misunderstand the very nature of investing. 

A bubble market is a frenzied market. Do you see a frenzy out there? Yeah, me neither.

What about last December and January? What about all those electric vehicle (EV) stocks doubling and tripling in a matter of a few weeks? Sure, that was a frenzy. And that white-hot intensity burned itself out. That’s the nature of a frenzy.

That mini-bubble popped, and it didn’t take the whole market with it. Huh. Whaddya know…

It’s Different This... Always Been This Way

I will not speak the five most dangerous words in investing. The stock market does not like certainties. Proclaim in public and with conviction that investors have learned this or that lesson and the market will put you over its knee and paddle some sense into you. 

But I think I’m safe to say that investor behavior evolves. Investors learn and we’re not likely to fall for tulip bulbs again. Internet stocks at least resembled viable companies…

The 2007–2008 financial crisis is a bit of a head-scratcher for the “it’s a bubble” crowd. Because the stock market wasn’t particularly expensive. And it wasn’t investors that brought the world’s financial system to its knees. It was the very financial institutions that make up that global system that damn near committed suicide. 

Funny that many investors now know what a credit default swap is and are happy to talk about Fed-fueled liquidity over dinner and drinks. 

The stock market’s nature isn’t about valuations and P/E ratios. Such metrics are just mileposts on the liquidity highway. The market’s true nature is about inflation, growth, and future obligations.

Life, Death, and the 8% Annual Return

If you’re engaged in any kind of economic activity, you’ve noticed that prices pretty much only go up. Inflation means that your future obligations will be more than your current obligations. So whatever cash you may have simply has to beat the inflation rate, or you’re losing. 

For insurance companies, state pension funds, and retirement funds, this is more than an academic exercise. It’s the 8% you have to make each and every year. Make that 8%, you live and maybe even thrive. Fall short and, well, sorry about that…

This is why I say that the stock market isn’t a bubble. The chief financial officer at the California Public Employees Retirement System (CalPERS) isn’t dancing on his desk because he just doubled his money in Tesla. Well, maybe he or she is. They’re kinda weird in California sometimes. 

The nature of investing is formulaic. It’s an equation for turning 1 into 1.08 over the next 12 months. And then turning 1.08 into 1.17 the year after that. 

Investors will buy as long as they have cash with which to buy. And stock prices will rise right along with it. And they will continue until investors don’t have any more cash to put to work, until the liquidity dries up. 

On Wednesday, I’m going to look at a couple things that could cause liquidity to dry up very quickly. At least one of these will probably surprise you...

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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