Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler talking about the news of the week regarding the financial world and the things that are being talked about out there.
Investing Context
Getting this stuff into context is really a big deal. You’ll hear news, and it’s hard to put it in context. The media tends to put things in a very negative light because it attracts attention.
It’s just part of our survival instinct. We are attracted to these types of things, but there have been a lot of people talking about inflation recently, talking about how the dollar is depreciating in value.
They may say, instead of it depreciating in value and instead of inflation, it’s a lot more impactful to say that it’s crashing, right? That’s going to get your attention a lot faster than saying it’s depreciating in value.
We don’t want wimpy words. We want something that’s really, really going to scare you because that’ll get your attention.
One of the things I talk about in regards to inflation is about how equity stocks have historically protected us from inflation and the idea that we own stocks because companies raise prices and you own the companies that are raising prices.
If you have inflation and the information comes out that there’s inflation, but in the short run stocks go down in value, what’s going on there? If they’re supposed to protect us from inflation, why is it that sometimes it happens that stocks go down? So there’s a segment on CNBC that I thought I’d play for you regarding this.
Speaker 1: Look, I think this is Costco’s time in that they’re eating a lot of margin in order to bring in customers. They do everything on a volume basis. I think Costco is a terrific investment if that’s what their number is.
I like it even more, because what they’re doing is saying, this is the moment when people are trading up to the Kirkland brand. We have promised in an inflationary world to hold the line.
They’re not raising prices, they’re keeping prices low. People who raise prices, maybe there’s a weather issue, could be a gasoline issue. But when you speak to Costco, they’re adamant, “Look, we’re not going to raise prices.”
Price Inflation
Paul Winkler: Well, I wouldn’t necessarily say, “Hey, let’s go out and buy their stock right now because of that.
Companies are raising prices.
Basically what he’s saying is that companies, as I’ve said many times, when you have inflation, you might actually react to it a little bit differently than your competitors do.
Some companies may raise prices, maybe they’re going to get a little bit fancy. Maybe they’re going to change the volume in their goods that they’re offering. Maybe they have smaller boxes. So it’s in essence, you get less product for the same price or whatever.
But here’s the point. When a company holds the line, what is going to happen? If their costs remain the same? Well, of course their earnings are going to be hurt by it.
So that’s what he was talking about comps. If you look at that compared to other companies, what are they looking like? What are their comparables to other companies as far as profitability goes?
They’re not looking so good. Now, he’s a stock picker from way back, and I’ve talked about studies regarding if you had actually chosen the stocks that he told people to buy, your returns would have been pretty abysmal results.
The concept here is that when companies hold a line, what are they doing? Well, basically they are trying to take shares from other companies.
So in essence, you might not raise prices right away, and you may try to hold out and take a hit to profitability in the short run and do it purposefully so that when things come back or when you feel like you can raise prices again, now you have the shares.
A lot of the customers have gotten used to going to your store versus your competitor’s store. And that’s the idea behind it, if I can get people accustomed to coming over to our store because our prices have stayed low, then they’ve gotten into habits.
And we know what people do with habits, right? They keep them up. They’re hard to break.
Stock Returns
Once I’ve gotten into the habit of going to one place versus another for my goods and services, I’m probably not going to break that even when the prices do go back up. So what’ll happen is this, and when you think, look back to the 1970s.
All different kinds of companies sold cars, and those car prices for many companies stayed the same for a while, and then a competitor started to raise their prices, but one held out and kept their price low, because they were trying to take share from their competitors.
Then eventually they had to raise prices, maybe they raise prices for service in their dealerships or whatever, but they found ways to get money back. If you look back, you will see that the returns for stocks were significantly higher than historically normal.
Why? Because of inflation.
What happened is stock prices went down and that’s the way stock markets work. They go down in anticipation that there are going to be problems ahead, and the big problem is going to be profitability. So stocks will go down and then all of a sudden companies are dealing with profitability issues.
But why? I mean, there’s supposed to be inflation. Stocks are supposed to protect us. Yet they don’t go up right with inflation.
We think that stocks are supposed to go up in tandem with inflation, but that’s not the way it works.
Many times they’ll go up, but then later on, interest rates are high. If you looked at stock returns, it was way in excess of what CDs or any fixed income investment was paying because CDs and fixed income investments have never been a good protector against inflation.
People forget that over the past 10, 15, 20 years, interest rates have been abysmal. I mean really, really bad. Yeah, recently they’re high. Well, the same thing happened in the 1980s and interest rates were much, much lower before that.
Then you got to the 1980s, and people did the same exact thing. They started bailing. Matter of fact, there was the death of equities. Business Week had an article, “The Death of Equities,” and it was about how investors were just bailing on stock markets.
Check Your Expectations
They had found collectibles and other things that were much more attractive to them. Then they moved away from equities. Then there was an increase and they missed it. Investors do that time and time again, they miss it.
It’s really important not to miss it because if you’re sitting there in fixed income investments, a dollar in treasury bills grows.
It’s really important to have proper expectations when it comes to investing.
If I expect a certain thing is going to happen, let’s say that stocks will go up, as soon as inflation kicks in and when it doesn’t happen, you go, “Well wait a minute, the whole paradigm doesn’t work anymore.” Just throw it away.
Annuities can’t protect against inflation because they’re just an intermediary between you and where your money gets invested. You give your money to an insurance company, the insurance company takes and invests that money into fixed income investments primarily, and then a little bit of real estate.
But if you look at that, you say, “Wow, okay, how can they give me protection against inflation when they themselves don’t invest in things because of their mandate as an insurance company?”
The answer is obvious, “They can’t.” The best way to make a ton of money with annuities is to be the person selling them.
So if we look at equities, stocks, and markets, how does inflation protection happen? I just thought that was a really good example to bring to your attention regarding how this stuff works.
As I’ve said before, 93% of the experts can’t beat what the market’s done over the past 15 years, the 7% that did, what we know from research is that it was blind random luck.
But you know, you see an “economics expert” issue a dire warning. Now, number one, why is he going to tell you that? What’s in it for him to tell you that there’s something going on with the dollar?
Now, if you look at the dollar, it has been against many currencies so far this year, it has already gone down versus other currencies like the euro and like the yen. So it has already done it.
Economic Booms and Depressions
One of the things I pointed out is that we walked away from the gold standard for a lot of reasons. And one of the things that would happen is other countries would go and redeem dollars for gold.
So we had an outflow of gold, because our dollar was tied to the gold, and that was really bad. It’s not unlike what happened in the 1800s. People were a little bit panicky, and they turned in their dollars for gold and then all of a sudden the money supply went down.
The number of dollars floating around lessened, and nobody goes around to the grocery store with scrapings of gold to buy groceries. It’s just not practical. So they didn’t have dollars, so they wouldn’t spend because they didn’t have the dollars to spend.
Then all of a sudden people turned in their gold for dollars when they felt euphoric and excited. You’d have hyper expansions and hyper contractions in the economy, which was really, really bad.
These booms and depressions can be really devastating.
The thing that they’ve been talking about for quite a while is this whole idea of China and their currency. And if you look at their currency, it’s likely to be reserved currency. Seriously, nobody trusts that the government, because it’s a communist government, will do what they say they will do.
Nobody trusts them, and you’ve got to be very trusting of the currency because the country that actually puts it out there, if they can manipulate it, they can ruin you pretty quickly.
All they have to do is devalue it and you’re sunk.
Now, if we look at, and I said the short version for investors that will always trade stocks, they’re going to be traded at a multiple of whatever currency that they’re issued in. So if we’re looking at U.S. dollars and U.S. stocks, the stocks are traded at multiple of their earnings.
Historically for the S&P 500, U.S. large stocks sell for about 16 times earnings. If all of a sudden we, instead of using a dollar and it’s not $16 to $1 of earnings, and we change it to clams, that it’s going to be 16 clams to every one clam of earnings.
A Weakened Dollar
If all of a sudden the dollar weakens, it takes more dollars, it takes more pennies. Really, it’s a small increase because you don’t see huge swings usually.
The dollar weakened, and now it takes more of our physical dollars to buy things from international markets, and if those things in international markets are companies, then you’ll see that their stock markets will go up versus U.S. stock markets. They’ll become more valuable because we are buying them using our dollars.
If we have a weakening or a significant devaluation of the dollar, then I’m glad I’ve got international companies and I’m glad I’ve got tens of thousands of them. That’s a really good thing.
This is why it’s so critical to not forget about international diversification, as so many times people do.
When I got in this business, U.S. stocks had been weak for two decades and people were walking away from U.S. stocks saying, “Paul, don’t don’t bother putting any of your clients in U.S. stocks. Just put them in international.”
Why? Because you had two decades where international stocks had done better. Anxiety is a funny thing. We fear the future. Then we come up with all kinds of possible scenarios that cause us great distress, and in an attempt to protect ourselves, we actually bring on the calamity we’re trying to avoid.
And that so far, year to date, the weakening dollar is part of it, the international has done better than us. Will it continue? Who knows? Diversification is the most rational way to protect ourselves because you just don’t know what’s going to happen in the future.
And I think far too many people are far too undiversified. They just really, and they say, well, you know, need to pull your money out and just kind of wait and see what’s going to happen, and then markets recover, and it’s too late to get back in.
With all of these issues that investors are up against, they’re trying to figure out what’s going to happen in the future to protect themselves, and they literally put themselves in the danger that they are trying to avoid.
I’m going to educate until the cows come home so that you don’t put yourself in that position.
Want to talk with us directly?
Schedule a call here.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
