The Definitive Take on Inflation

We’re hearing a lot more about inflation these days when it comes to discussing investing. What’s it all about? Here’s my definitive take on inflation.

What is Inflation?

Inflation is a measure that tells us how rapidly the prices for a basket of goods and services are rising. The “basket” consists of a cross section of basic goods and services that we need to live on a daily basis. It is expresses as a percentage. An inflation rate of 5 percent means that the price of a basket has increased collectively by 5 percent. Inflation can be expressed on a monthly or annual basis.

What is the impact of inflation? Why should we care?

Depending on what role you are playing, inflation can influence how we as consumers, companies, and investors behave. Let’s take a look.

Consumers

High inflation implies higher prices for goods and services that we need to live the quality of life we aspire to. If our incomes are rising at the same rate then the impacts are minimal as we can continue to afford to buy the more expensive goods. However over the last few decades income growth levels for a significant portion of people has been flat and in some cases falling. For those people with static incomes, rising inflation makes goods more expensive which takes more money out of our income, creating less savings or in the most extreme case, being unable to buy the same goods and services. Inflation diminishes our purchasing power. The impact in this case is we are either less able to purchase goods or may have to purchase less goods than we used to. Inflation will force us to change our behaviours by either stopping the purchase of expensive goods or if we still need them, to look for alternatives or substitutes that are cheaper. This might mean purchasing something used or purchasing a lower quality product or service.

Businesses/Companies

High inflation implies higher prices for companies to develop, create, and sell their products and service. Assuming the prices they sell their goods and service is the same, higher production costs will reduce profits. Businesses are then faced with some difficult decisions:

• Increase the sale price to cover the higher production costs. Profit margins would be the same, however the higher prices may discourage their customers from buying their products. They may stop buying, or buy less.

• Keep the sale prices the same, which would lower profits and cashflows. The company would have sell more of the same goods and services to retain the same level of profitability.

• Keep the sale prices the same but subtly and in a stealth like manner lower the quality and quantity of the product or service. For example continue selling a can of pop for $1.00 but reducing the size of the can from 300 litres to 275 litres or reducing the number of services in a package but still charging the same price. Check out what’s happen to candy bar sizes over the years.

An example stealth inflation. Candy bar sizes have been slowly shrinking for years while prices have not fallen at the same rate and in most cases have stayed the same or increased.

In all these cases, the outcomes for companies are not positive.

Another impact of higher inflation is higher costs for obtaining capital, especially borrowing. In periods of higher inflation, lenders will also increase lending costs interest rates to protect their interests. Higher borrowing and financing costs will further reduce a company’s future profitability.  

Investors

The ultimate goal for investors is to grow their savings at rate to protect their purchasing power for periods when inflation is higher. As a result, investors are always looking invest to generate higher returns than inflation.

In periods of high inflation, fixed income products are more appealing as interest rates are higher as well. On the other hand owning corporate bonds while paying higher interest, could fall in price if inflation rates rise.

Stock prices are driven by expectations of future profits and cashflows and future costs for obtaining financing. We’ve seen that inflation can negatively impact profits and cashflows and increase financing costs. These negative impacts could then negatively impact stock prices. That being said, companies that sell goods and services that are in high demand, can pass those higher costs through higher selling prices, which could grow their share prices.

Stock valuations are also driven by financing costs. Applying discount cashflow valuation models, higher interest rates will lead to lower stock valuations which could also depress stock prices.

It’s pretty clear that inflation, especially rapidly rising inflation can do some serious damage to various levels of our economy.

Where we've been with inflation

Over the past 30-35 years, consumers and businesses have enjoyed a period of stable prices with very low inflation. This is due to technology, more efficient global supply chains, and an extraordinary period of low interest rates.  The one segment that hasn’t benefited from low inflation has been savers, who have seen low interest income from low risk investments such as GIC’s and basic savings accounts.

 Where we are now with inflation?

The pandemic has changed the momentum (or lack of momentum) with regard to inflation. The global economic shutdown of the past 2 years, has created severe disruption in the supply and distribution of goods. The pandemic has highlighted some big deficiencies and inefficiencies in global supply chains. One of the core foundations of global trade and distribution has been reliance on lean, on-demand inventories. Good are produced and shipped as needed. Inventories are kept to a minimum to save on storage costs. When COVID shut down overnight or impaired some of these critical distribution channels globally, all hell broke lose. Shortages in basic materials and labour were super pervasive because of lock-downs and as a result prices went up significantly. Home renovation and the push to create home offices and gyms pushed demand for building materials and appliances up. Supply was not there to keep up.  Inflation, which has been non-existent has returned with a vengeance.

Where are we going with inflation?

Central Banks have been pretty adamant that rising prices and inflation will be temporary as economies open up from the pandemic with supply increasing. We’ve seen it begin in some areas such as lumber and steel. At some point inflation should slow down and prices falling back, however I believe that prices will not fall back to pre-pandemic levels. Inflation will settle down , but I think it will settle at a higher rate than what we’ve been living with for the last 30 years. We will enter a new normal for inflation. This means goods and services will cost more, borrowing/financing costs will be higher, wages will be higher, especially for low-paying services which have been stagnated for decades, and savings vehicles will generate higher returns. The pandemic has and will create a rethink on how goods are made and distributed. We may see the return to carrying higher inventory levels, or at least enough to create buffers to future economic earthquakes and health crises. I think we will see readjustments in supply chains from global-based to regional/local based distribution channels. We might see free trade get watered-down, again with an emphasis on regional trade agreements. Then there is the whole transition into more climate friendly tools and technologies, and the associated behaviour changes and high costs that come with it.

An awareness of inflation and general pricing trends is an important data point to be aware of for investors as it has great economic and financial impact on a variety of participants in our society.

A new way for Sage Investors!

By Aman Raina, MBA

One of my big goals for 2016 that I wrote about back in January, was to leverage technology to elevate and increase my distribution of the various learning modules I’ve developed and use with my coaching clients. They are important modules in laying a foundation in understanding important principles that go into figuring out what stocks to buy and sell. To me they are a cornerstone of my practice. 

Well I’m happy and really really excited to announce that I’m ready to take my practice to the next step!

Today I’d like to share and invite you to join up with my Everyday Investing lecture series.

Everyday investing is a series of 8 online modules that teaches you the key components that go into deciding what stocks to buy and sell.

A lot of people I’ve met and spoken with over the years find the concept of buying and selling stocks and investing as a whole to be intimidating and it can be if you don’t go into it with some basic fundamental concepts about investing nailed down.

The Everyday Investing series by Sage Investors is a series of online modules that guides you through the core fundamental practices of making investment decisions.

The goal here is to not turn you into an MBA or CFA. It is to make you literate and comfortable with basic investment practices that you can leverage in your day to day life that will enable you to analyze and make more successful investment decisions instead of resorting to throwing darts or polling your colleagues for stock tips and tricks.

The Everyday Investing series consists of 8 modules, all delivered by yours truly. In Module 1, I will lay the foundation for the series by establishing some first principles on how companies create wealth. I will use this foundation to build on more specific investment competencies. I believe this module is critical to understanding investing that I have decided to offer it with my complements for free!

In Module 2 I will teach you how to read and interpreting one of the most significant tools investors have at their disposal, the financial statements.

In Module 3, I will review some basic every-day macro-economic measurements that can lay some better context on the external environment a company operates within.

Module 4 looks at one of the core drivers of the investment decision which is understanding how risky a stock can be and more importantly how we can manage investments that just aren’t going the way we want them to.

In Module 5, I will walk you through the process of analyzing a fundamental investing question which is whether the stock cheap or expensive. I will teach you how to value a company and its stock.

Module 6 , I will bring everything together and build a framework for you for making an investment decision. I will teach you how to answer the 8 most important questions you need to ask every time you are evaluating a stock.

When you get to Module 7, it’s about understanding the myriad of investment products and vehicles that are available to us and more importantly identifying the securities that are in alignment with our own personal investment ideology.

Last but not least we get to Module 8 and the end of the Everyday Investing series with a deep dive into our behaviours towards investing. I really believe that secret sauce that separates great investors is their ability to manage their behaviors and emotions towards investing. I will examine the behaviours and biases that often screw up or investments decisions and how we can manage them better.

I’m not going to kid you. This series, just like the face-to-face sessions I’ve delivered (and still will deliver) will require a bit of time commitment on your part. The great thing about the Everyday Investment series is that it is very on demand. I just love the fact you can be sitting on a bus, or subway, or in a café and learn this stuff! You set the schedule and engage in the series on whatever time works for you. If you get fuzzy about a concept, you can easily go back and review. You can engage in the series as whole or take specific modules that you find more interesting and relevant to you. While you are working on a module, the learning doesn't stop as through our discussions group, you can interact with other participants to compare notes, ask questions, and build a community of committed knowledgeable sage investors.

I believe the Everyday Investing Series is one of the best investment decisions you can make as at the end you will feel empowered and confident about making investment decisions and more importantly I think that the fear factor that many people have about investing will melt away pretty fast.

I invite you to register and look forward to beginning the journey with you to unleash your inner Sage Investor!

Cheers!

Aman Raina, MBA

Investment Activity Review - Part 1 - July 2016

In July I decided to add a few new companies to my portfolio. In this post I will review the first which has been in the news quite a bit and for me is a company I completely don’t have my head wrapped around, but based on valuation, sentiment, and potential, I thought it could be an interesting pickup.  The other is a bit more straight forward and I’ll speak more about it in a separate post. 

I also decided to buy some more stock of a company I currently own so lets get that one out of the way first.

Added to position in Potash Corporation (Ticker: POT)

During the month the company announced it was further cutting its dividend by another 60 percent. The company also reported weaker earnings as prices for potash continue to toil at low prices. Both events were not surprising and it reflected in the stock marginally falling down to the the $20 level.  So I used the opportunity to average down my costs which are now at about $22/share.

In the earnings call, management claimed that prices may be at or near a bottom and expects production and demand to pick up later in the year.  A little spin for sure. We also learned that the latest contracts signed with it’s biggest customers which reside in China and India worked out to about $220/tonne which are near all-time lows.

The potash industry is definitely in a low point of its cycle. It could get worse before it gets better. I have no idea if and when potash price will rise again. All I know is that they appear to be making making enough to cover their cost of capital in a weak market.  Eventually prices will rise and float the stock price higher but I have a feeling it will take time. A lot of people held on to the stock because of the high dividend yield but with that seeming out of play now, it could test the stock price. It will be a bumpy ride, however I’m OK to wait. Potash is a key component in agriculture. I don’t think it can easily be substituted and given more of the world population are moving up the consumption chain in terms of healthier foods, the company should benefit in the long term.

OK now to our new addition….

Opened Position in Twitter (Ticker: TWTR)

This stock and company has not got a lot of love from investors and from me. I’ve written and ironically tweeted in the past that I just don’t get how they make money on this. It’s been a head scratcher for me and yet here I am owning stock in it. How did I get here? Well I got here by the usual path which is answering the 8 questions I ask every time I look at a company.  So let’s get to it.

Question 1: What do they sell?

Here’s the formal description of the company as per Reuters:

“The Company's service is live-live commentary, live connections, live conversations. Its products and services for users include Twitter, and Periscope and Vine. Its Twitter is a platform for public self-expression and conversation in real time. Its promoted products enable its advertisers to promote their brands, products and services, and extend the conversation around their advertising campaigns. Its promoted products consist of promoted tweets, promoted accounts and promoted trends. Its Fabric platform offers modular software development kits that help developers build applications, gives them mobile analytics, the ability to generate revenue through Twitter's mobile-focused advertising exchange, MoPub. It offers subscription access to its public data feed for partners wishing to access data beyond its public application program interface (API).”

Twitter is areal-time newsfeed that you fill with your own commentary, documents, links, video clips, images that you share with people, inviting them into your own real-time existence and vice versa. The proviso? Do it in 140 characters or less. It has become the CNN of the second screen. When a live breaking news story occurs, Twitter has become a source to get information (whether it is vetted and accurate is another question) in real-time and also to communicate with people with your main screen being the TV or maybe your tablet or computer. It got traction because we all have zero attention spans and placing a 140 character limit on tweets can give you quick hits on a variety of content.

Question 2: Who do they compete with?

Twitter competes with other social media content providers like Facebook, Snapchat. It also competes with traditional content providers in the news and entertainment media. Your CNN’s and TMZ’s of the world.

Question 3: Who buys their products and services?

I’m still a bit fuzzy on the “who” is as it pertains to its client base, but I’m willing to take a shot trying to figure it out.

When it first rolled out, it was pretty much used by the young 18-34 crowd and served as a driving force in perpetuating the Millenials as narcissts motif. It still is main demographic however, over the years the reach has gone beyond young demographic to a cross-section of consumers of pop culture, news and information. Currently there are about 300 million users which pales in comparison to Facebook with its 1.5 plus billion user base and it is growing slower. The last report indicated its users grew by 3 million in the most recent quarter.  As for what they are buying, I wouldn’t say it’s about users of Twitter buying things as it is Twitter selling advertising and access to a mass market of users and providing companies tools to segment and target their value proposition.  Right now I don’t think people are buying things directly off Twitter, although I think the company would like to evolve that way.

Said another way, Twitter right now is like Facebook is at its core:  an advertsing company. It makes money selling ads and althought I didn’t believe it, it appears to be selling a lot of ads that once were running more on traditional media outlets and as advertising dollars continue to bleed away from newspapers, magazines, TV and radio, online portals will be big benefactors.

Question 4: Will they buy their product over and over again?

If there is a critical mass of people using the service then yes opportunities will be there to sell companies opportunities to access them to promote their products and services. Twitter, like all Internet businesses has to give people a reason to stick around. It needs to provide meaningful and compelling content.

If you dig a little more deeper, there seems to have been a fair amount of analysis on what attracts people to Twitter and makes them want to come back. Dr. Marion Underwood, a clinical psychologist at the University of Texas at Dallas offered an interesting observation that offers some insight into the phenomenon.

“The type of reinforcement schedule that is the most reinforcing is what’s called an intermittent schedule. So, you have a rat pushing a lever and he gets rewarded, but not in a predictable way. Many times, that animal pushes that lever and nothing comes, but every once in a while, it gets a great treat. So the rat keeps pressing and pressing and pressing even though there’s not much reinforcement coming because every once in a while, it’s just great.”

“Twitter offers these intermittent rewards that keep us coming back. Maybe you’ll check Twitter once and have a notification that someone retweeted you. That’s enough to keep you coming back a handful more times, even if nothing new and rewarding has occurred. We keep pushing the lever, hoping for something great. The concept makes complete sense for those who wind up checking Twitter multiple times each day (same goes for email, too).”

Makes sense to me and I see in my own case why I keep checking in on my account.

Question 5: Do they make money?

I honestly thought they didn’t make any money and when you look at their income statement it’s been losing money the last 3 years, yet they seem to be losing less money every year and revenue have increased 400 percent in the last 3 years. Somebody is buying their product.  When I pulled my favorite metric Economic Profit, comprising operating profits and invested capital, we find that the company has been generating returns on invested capital in the 11-18 percent range compared to it’s cost of capital of about 11 percent, so it is creating tangible wealth. It may not be crazy wealth compared to Facebook or Google but it is tangible. I was surprised to see this.

Source: Valuentum Securities

Question 6: What do they own and who do they owe money to?

They seem to have a clean balance sheet in that they don’t have a lot of Goodwill and Intangible assets and they have a manageable level of debt (Debt/Equity comes in at about 0.20). Their liquidity is extremely strong with a Current Ratio of over 10.5. They more than enough cash to pay off their debts.  They’re not going out of business anytime soon.

Question 7: How risky is their business?

There are a lot of question marks surrounding the long-term viability of their business model. At the same time there some thing going on that are very intriguing. 

Twitter faces a lot of challenges to their business model. It’s not the only service that offers a real-time chat format. Facebook and more specifically it’s offspring, WhatsApp and Instagram offer variants on the timeline format so it’s not like anyone can’t enter this space.

One of features of Twitter is it is quite unfiltered in that as much as it can be an effective source of information, it can also expose users to insane levels of harassment and trolling. As much as Twitter says they take the protection of its users seriously, many users have said otherwise and have dropped out. The company needs to project to the market that its community is a safe one.

The market also has some serious reservations of their management team led by founder Jack Dorsey. After a period where key executives were leaving the company, Dorsey who had left the company to found and manage Square came back like the Steve Jobs/prodigal son to right the ship and the company has come under harsh criticism about any lack of strategy to monetize their product in much the same spirit as Google and Facebook. One of my core elements of my investment ideology is that the company has to have solid competent management. Twitter does not project this very well. Sure it has a dynamic, eccentric, Type A founder but so far the optics have been that the management team has been dysfunctional in establishing and executing any kind of cohesive strategy.

As much as I haven’t understood Twitter’s business model, I’ve been a heavy user. I get most of my investing information and commentary through Twitter now. I get more referrals and contacts through Twitter than I do with LinkedIn or Facebook. Despite this I’ve been pretty indifferent to the stock. Then I came across a piece (via Twitter of course) by Ophir Gottlieb of CMLViz.com who outlined that the company despite being reviled by Wall Street has been very quietly tweeking its offering in terms of content, advertising/analytics offerings.

Location, location, location

According to Gottleib, “…Location tweets are critical in two ways. First, for logged in and non-logged in users alike, access to relevant information (aka tweets) will be impossibly easier. Of course, the next step is how that access makes it an innovation for advertising…Twitter's foundation is real-time communiqués and now it has added location specific targeting in real-time for advertisers and users alike…”

Going all-in on video streaming

“Since video is becoming the end all be all in advertising and video Tweets on Twitter have increased by over 50% since the beginning of 2016, the company has focused on innovation here...”

The company recently announced it is increasing the length of videos that can be posted from 30 seconds to 140 seconds. I’ve tried and from my experience you can say a lot in 140 seconds as a one of my mind maps tweets shows.

If that’s not enough, the company is going pretty hard at live streaming. It has inked deals with most of the major professional sports league to stream some level of live content. The big one is with the NFL to stream their Thursday Night games. Huge eyeballs and huge advertising opportunities. UPDATE: Since I penned this, Twitter has announced that they will be partnering with Apple to stream the games on their app via Apple TV. This “partnership” got people all giggly and wondering if this is a precursor to an eventual buy-out by Apple? (Stock popped 7 percent on the news).

Maturing the analytics

The company also appears to be taking seriously offering a more robust analytics toolset. Again from Mr. Gottleib,

“Twitter Carousel takes actual tweets to create an advertising unit. Disney, Gatorade and Volvo are already participating. The most beautiful part of Carousel is that the secret weapon is of course, simply, the tweet. It happens 500 million times a day and unlike a Facebook or Snapchat post, is in fact content....and perhaps the best part of that blog post was this little gem: "Disney pulled in Tweets from a variety of influencers on Twitter who gave their permission. " …Now with Insiders, the data analytics side of Twitter has the potential to grow substantially. Beautifully, Twitter data can only be found on Twitter. There will be no Snapchat data product or Facebook friend-voyeurism data product.”

There are a lot of wildcards, but it appears Twitter is trying to respond to them. It maybe not as fast as what Wall Street wants but they seem to be trying. 

Question 8: Is the stock cheap?

Source: Valuentum Securities

The company creating wealth and has a clean balance sheet so from a financial side, it’s seems decent. What makes this stock a speculative investment is how they will execute their strategy which has some appeal but a lot of unknowns and does the management team who has a tendency to get distracted with other projects have the chops to stay focused? The pedigree isn’t there but at current valuations and an overall sentiment that is downright nasty, taking the other side of the trade, could yield more upside if patient.

It has a solid balance sheet with manageable debt so it’s not near any level of financial distress. It appears to be at a point where they are taking the monetization thing more seriously and adopting some clear, tangible strategies to generate additional wealth and this to me was the big reason why I decided to buy in.  The brand is now entrenched in our modern lexicon much in the same level as Google, so there is an intangible value and these elements can make it quite attractive to get bought out. The stock was down in the $16 range which puts at about 40 percent discount to its estimated intrinsic value of about $28-40 range.  Putting these elements together and the fact that so many Smart Money People are trashing this stock (and by the way they were the same Smart Money People who were trashing Apple a few years back and just recently) I thought this would be a good speculative investment. So I bought a very small amount initially and would add a bit more if it should fall back in the near future.

I bought in at $16.88 and shortly after the stock popped as high as in the $18.50 level but quickly gave it back on a supposed weak earnings report even though revenues were up 20 percent (Again nothing makes Wall Street happy). They grew the user base by 3 million which wasn’t Facebooky enough according to the analysts. Yet after the pullback the stock rose back up even further and is now trading near $21 on the Apple partnership streaming deal. It won’t take much to make it go the other way. It’s going to be a rough ride with this stock, but I knew that going in however I definitely have a better comfort level the company after going through my regimen of answering the 8 questions. 

How to Avoid Cognitive Biases

In my last series of articles, I’ve reviewed some core cognitive biases that are constantly messing with our brains and can impair our ability to make better investment decisions. These biases are

Groupthink/Herd Behaviour

Optimism Bias

Expert Bias

Confirmation Bias

Recency Bias

Geographical Bias

We’ve seen how all of these forces and tensions, poke and prod our emotions and decision making. The big questions is, can we eliminate these behaviours or are we stuck with them?

The simple answer is No. We’re human and as such we are ALL predisposed to these behaviours and always will be. It doesn’t matter if you’re a Sage Investor or Warren Buffent or David Tepper. At some point one or likely all of these biases will come in to play.

We cannot eliminate cognitive behaviours but we can manage or control them by instilling some emotional discipline.

How to Manage Our Brain

The reality and some may say the sad, bizarre reality is we need to start thinking more like this guy.

We need to think more like George Costanza and try to take the other side of the trade. If you remember the episode, George made a life changing mood by deciding to do the opposite of what his instincts normally tell him. The result is George gets the job and the girl.

It sounds really really stupid and without any logic, however in investing, it appears that taking a contrarian approach and challenging conventional wisdom can go a long way to making better investment decisions. I wouldn’t go out and do what George was doing, however, certain flashpoints in the psychology of how investors behave can provide good starting points for doing some due diligence that can uncover tomorrows great investment opportunities. Below are some easy methods for managing the various biases that throw us for a loop.

Groupthink/Herding Bias: We need to avoid what the consensus or conventional thinking is on a particular stock or business event.  At the very least, we should be challenging what the consensus is saying and also we need to listen closely to what the consensus does not like as they are likely to be tomorrow’s winners. We need to avoid chasing hot trends or the “It” stock or the investment strategy flavour of the month and stick to long term first principles of investing (i.e. invest in companies and ideas that create consistent tangible wealth from the scarce capital they have been entrusted with by shareholders and are trading at a discount to their value). We need to looking out for companies and ideas that are not in vogue because chances are the market has punished them so much that the stock has become a decent entry point. I’m always looking out for companies that can demonstrate that they can be profitable when business conditions are tough, because when the pendulum turns, a great opportunity will exist to generate some meaningful returns. Dull, unsexy, and boring companies are truly gold.

Optimism Bias: We need to avoid getting immersed in just the positive of an investment opportunity. We need to seek out alternative views and perspectives. If I am researching a stock, I’m obviously interested in looking the positives in the business. (Is it profitable? Do they sell a product that people will buy again and again? Are they financially strong? Etc). I also need to be just as interested in alternative perspectives that are just as important in framing the investment decision. What are the risks the company faces in their industry? What is their competition? Is there any competition?

Expert Bias: Experts aren’t going away. We shouldn’t ignore them and we should always listen as they provide a perspective. We need to focus less on their forecasts and predictions as the research has shown they are no better than any of us in predicting the future. We should however pay close to their commentary that is critical or negative to a business concept as often those provide opportunities to uncover the diamond in the rough opportunities and a starting point for some due diligence. The best example I can think of is Apple when the stock started tanking. It felt like every analyst was pounding the table saying the company had lost its way and lost its ability to create innovative products. This after creating some of the most innovative products in history (iPhone, iPad, iPod) that were still selling millions and millions of units. It wasn’t enough for the analysts and pundits (most of whom have never run a business of their own by the way).  What happened? They came up with a watch. They upgraded their phones with new features and they still sold tons of them and at one point became the largest company in the world by market cap. If you were able to put aside the noise by the experts and focussed on the fact the company was selling 45 million phones a quarter and literally printing money, you could have bought the stock at a 30-40 percent discount.

Confirmation Bias: We need to consume and process information from sources who may not share the same value systems, beliefs and ideologies as we do. They provide perspective, context and a lot of times, a reality check. If I believe in value investing, I shouldn’t ignore insights from people who study market psychology or technical market indicators. They have nuggets of wisdom from which we can profit. Start following on Twitter or Facebook people who adopt investment strategies that are different from yours.

Recency Bias: When we invest, we are trying to make rationale, intelligent guesses about the future. As a result we need to reduce our dependence on using information of the moment as the foundation of the investment decision. If anything, we need to recognize the stories and snapshots of the moment so that we can begin looking at the alternatives. It is from there that we will find the winners of tomorrow that we seek. So if I’m seeing magazine and newspaper covers trumpeting that the stock market closed at a record high, it should act as a flag to me that the easy money has been made and that things may get a bit choppy going forward. Conversely, I watch the news and see a news reports about investors being nervous about putting money into the stock market, I’ll perk up because we could be nearing a moment where an optimal time may be at hand to slowly start building positions.

Geographical Bias: We love our homecooking. The reality is keeping a large amount of your investments domestically is not going give your portfolio the juice it needs to generate long term meaningful returns. We need to get outside our postal code and embrace the fact that business is a global organism and some of the greatest ideas do not necessarily reside in North America. Open the doors.

Easier Said Than Done

Indeed taking all of these actions in a consistent manner is not easy and it is something that you cannot just flip a switch to change your behaviours. It takes a long time and likely will come with some scrapes and bruises. It is a process. At the same time it is possible, especially if you have a network around you of resources and people that can keep you on the straight and narrow. I believe more than ever that managing these behaviors and biases is the secret sauce that can elevate our financial literacy and the level of success we need to meet our long term financial and life goals.

When Soothsayers Go To Camp

Every July, some of the brightest minds in finance and economics (that are male apparently) gather in some rugged out of the way hideaway to fish and talk economics and stocks. Organized by Richard Kotok of Cumberland Advisors, the gathering is now known as Camp Kotok. The theory is to getaway from the noise, neuroticism and smog of New York to clear the mind and reinforce what they all believe the direction of the economy is heading toward. During the time, the group puts together forecasts of some key economic variables (Their level of sobriety cannot be verified).

Last year I noted their predictions for 2015. Which I’ve listed below, with the actuals in parenthesis.

• US GDP will be 2.8 percent (Actual was 2.3 percent - Wrong)
• Fed will successfully manage exit from QE without tipping a canoe (Fed tapered itself out of QE with stock prices continuing to rise – Correct)
• Unemployment will be down to 5.7% in June 2015 from 6.2 in June 2014 (Unemployment fell further to 5.3 percent – The trend is down so I’ll give it to them)
• Inflation will be under control at 2.5 percent (Inflation went down to 0.1 percent – Wrong)
• Average forecast for S&P500 was 1927 flat from 2014 level. Taking out one outlier, expect 4% gain or 2010 (S&P 500 closed up 5.21 percent as of June at 2063 - Correct)
• 10 Year Treasury yields would rise to 3.02 percent (10 Year Treasury now at 2.17 – Wrong)
• Gold and oil both look flat (Gold down 11 percent – Wrong, Oil down 49 percent – Very Wrong)

The Soothsayers were off on 5 of the 8 indicators. Not horrible. Not great either. It's not about competency either. It just goes to show us that predicting the future, even for people who get paid to predict the future and have a lot of letters after their name is very hard to do. Don't get me wrong. The Soothsayers are very bright people. It's just hard enough to be right once. Consistently? Forget it. It's a fools game. 

Fear not though, there's opportunity in them predictions. Often enough these type of predictions when established by a critical mass of constituents can create an opportunity to take the other side of the trade. So I always try to keep an eye on what the Consensus is thinking and try to capture them in my Investor Consensus Blog.