It is autumn in the northern hemisphere but the stock markets are anything but cold and icy at the moment. Only the crash prophets are making noise again and singing the old ballads of doom, inflation, over-indebtedness, China, inflation, and more inflation. Nothing is as widely discussed at the moment as inflation and the possible consequences for the world economy and asset classes.
Share prices and inflation explode – high inflation meets euphoric equities
I like to look at macroeconomic developments. The rising of inflation rates is impressive. Both share prices and inflation explode. Is the high inflation rate temporary, or will it stay for longer? Who knows. I don’t presume to make a judgment here.
Sure, I have a tendency, and if I had to bet, I would bet that things would calm down. But just because I tend to have that opinion doesn’t mean my opinion sways me. And even if I am right, that would probably not guarantee the way the shares prices will go.
Conversely, sustained inflation will eventually bring higher interest rates. For the first time in ages, this will make money more expensive. Debt becomes more expensive. Bond yields become more interesting. Equities become less attractive. The mechanisms are easy to understand.
The valuation levels are worrying
What worries me more is the high level of market valuation. Paying multiples of more than 25 or 30 for companies is a real issue based on a simple economic consideration. Do I want to invest in a company where I must wait 30 years until the profits refinance my investment? Personally, that is too long for such a risky asset class. Thirty years is a long time and was enough to make Nokia more or less disappear into insignificance.
The alternative is that the companies increase their profits quickly. However, with such an assumption, I do not invest in existing substance but hopes. I speculate. Speculating is poison for one’s own risk management. I prefer to invest in the soil where fruit trees grow and not in a field where I only hope that the soil will provide enough nutrients for growth. That is why I am primarily using multiples based on profit and cash flow.
As always, the strength lies in tranquillity
Despite the macroeconomic upheavals, I remain calm. I buy shares every month. Mostly it’s four to five purchases for my cash flow portfolio and now and then additional investments in growth companies. I have time on my side. I am in my early thirties, and it would be wrong if I worried about the future all the time. If stocks drop 20, 30, or even 50 percent, so be it.
In the meantime, I will use the many ways to escape the fast pace of everyday life and come to rest. A walk through the misty forest on the outskirts of the city. A rowing trip at dawn on the city lake with friends. Afterward, a coffee, a breakfast with music from a vinyl record, read by a diamond. Life can be easy.
The trick is not to be dependent
I am not dependent on my shares. Neither economically nor emotionally. They are investments that yield returns. Since they are passive, they hedge well the risks I have on the active income side. Even if I’m ill or decide to work only 50 percent, that won’t necessarily affect my investments.
Conversely, a stock crash will not adversely affect my profession as a lawyer. This lack of correlation creates a high degree of independence. And with this independence, I can relatively unemotionally increase both the active income side and the passive cash flow side without putting too much pressure on myself. That’s why I’m not a big fan of badmouthing the corporate world.
In general, badmouthing or spitefulness is something that corrupts character in the long run. Unfortunately, there is a lot of nastiness on Twitter. Again, the trick is to be independent of such social networks. Those who base their sense of self-worth or their urge for acceptance on likes and followers are dependent on the goodwill of others.
The journey to a life in (financial) harmony always starts with oneself.