MoneyShow Investor Keynote

NOTE TO READERS: Stock and bond markets were spooked by the August CPI report (+0.6% for August, +3.7% over year ago). But don’t be tricked—the imaginary Owners’ Equivalent Rent (OER) component I have written about (that should be thrown out of the index) accounted for more than half of it. Over the past 12 months, OER contributed 1.8% to the overall (3.7%) inflation number. Excluding OER, CPI inflation was just 1.9%. (1.3% excluding rent). I hope the Fed understands this!

 Summary: Last week I had a great time working with my good friend Debbie Osborne again to give a keynote talk at MoneyShow’s Accredited Investor Virtual Expo. I gave the participants my thoughts on an investment strategy to protect capital. Thought you might like to see the notes I wrote up ahead of the talk. You can see the video file by clicking this link.

 After the last three years, investors have every right to feel fatigued. I certainly do.

We have lived through a once-a-century pandemic, an attack on the U.S. Capitol, the attempted overthrow of a Presidential election, the decoupling of US/China relations, rising risk surrounding Taiwan and the world’s supply of high-end microchips, Russia’s brutal invasion of Ukraine, and supply-chain interruptions that, along with wild swings in government spending and Fed policies, spiked inflation and triggered a dramatic run-up in interest rates that have made buying a home virtually unaffordable at today’s prices. Pundits, policy makers, and economists saw none of this coming.

As investors, our main job today is to protect the net worth we have worked so hard to accumulate from geopolitical, economic, and policy risk. In this Keynote Address, I will explain why economics did such a bad job and give you a simple framework for understanding these massive asset-market disruptions. I will explain where we are today, and help you understand what to expect in the post-pandemic years ahead.

And I will give you five simple disciplines behind my investment strategy today:

1. Leave your emotions at the door before you make investment decisions. Excited investors—both optimists and pessimists—make big mistakes.
2. There are 2 economies: our $23 trillion GDP economy, and the $481 trillion of assets on our balance sheet. Forget GDP; the tsunami events (financial crises) occur in the balance sheet when people decide they want to change the mix of tangible and financial assets they already hold.
3. The major asset market events are triggered by changes in inflation (the capital gains yield on tangible assets) relative to interest rates, and by periodic financial crises that temporarily shut down credit markets and give us once-a decade opportunities to buy the best assets at back-to-school sale prices.
4. To do that you need to keep the core of your portfolio always invested in equities of the world’s best companies—you already know their names, companies like APPL, AMZN, GOOGL, BX, MSFT, PFE, MRK, LLY, JNJ, CVX, EQNR, LMT, TSM—with great management, history, bullet-proof brands, dominant market positions, cash, low leverage, free cash flow, and a path to improving shareholder value through growth, reinvestment, dividends, and stock buybacks. You need to avoid excessive leverage; and you need to hold plenty of cash during good times so you are able to buy great companies for half price during financial crises.
5. If you have done these things, turn off your TV, put down your phone, and spend time with your family. If we learned one thing during the pandemic, it is that time with the people you love is more important than money.

Dr. John

The views and opinions expressed in this article are those of Dr. John Rutledge. Assumptions made in the analysis are not reflective of the position of any entity other than Dr. Rutledge’s. The information contained in this document does not constitute a solicitation, offer or recommendation to purchase or sell any particular security or investment product, or to engage in any particular strategy or in any transaction. You should not rely on any information contained herein in making a decision with respect to an investment. You should not construe the contents of this document as legal, business or tax advice and should consult with your own attorney, business advisor and tax advisor as to the legal, business, tax and related matters related hereto.