Notwithstanding fears of inflation and a rise in interest rates, the stock markets extend their gains again. But the small fall towards the south has again made investors aware of a truth that I also consider to be a fundamental fact: Stock market gains are always on thin ice. Investors who assume they can achieve the same returns as in the past are making a mistake. Instead, we must be aware that ten bad years could well be ahead of us. Nevertheless, I continue to buy shares of profitable stocks. Is that a paradox? No, I don’t think so. But I know what I don’t know and adjust my behavior accordingly.
Gains on stock markets are on thin ice
We saw earlier this week how quickly stocks can go down. Shortly after U.S. Treasury Secretary Janet Yellen hinted at the need for future interest rate hikes, the stock markets became nervous. Yet, she had only said something relatively trivial.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”
Ms. Yellen has done nothing more than emphasizing the role of interest rates as a fiscal policy tool. Every investor must be aware that interest rates could rise again at a certain point. The reaction to Ms. Yellen’s comment may have shown that many investors are not prepared to accept this truth. In any case, we should expect excessive capital outflows from equities in the event of broad interest rate hikes. Book gains on the stock markets could then melt away quickly.
Later in the day, she also clarified her statement that she does not see an inflation problem coming. Perhaps Ms. Yellen just wanted to test the market to see how it would react to the possibility of higher interest rates. If that was the case, then the result should be clear.
I am thinking about taking some chips off the table
My readers know that I’m not in it for the quick buck. I invest in companies that I believe can do two things. One is to hold and secure my wealth. After that, they should increase my wealth over many years. That means that I think in the long term. Price fluctuations and volatility are thus of little interest to me.
Nevertheless, I also think opportunistically. Given a choice of two alternatives, why should I choose the one that might be worse? I am facing this question right now. My Archer-Daniels-Midland shares have done pretty well. Unfortunately, they are now at a level that hardly looks healthy.
Why shouldn’t I take some of my profits here from thin ice on dry land? I could use the new capital to invest in a company with a cheaper valuation and a higher dividend yield. As we can see above, the recent price increase was parabolic. Historically, the share has permanently corrected very strongly after such phases. So I could use this capital to build my first position in Bristol-Myers Squibb, for example. I’m only talking about a small portion of my ADM holding, maybe 25 percent of my invested capital. I would let the rest sleep in my portfolio, making sure that I don’t miss out on any further gains.
Nice dividend hike from Pepsi
I was pleased to see Pepsi’s dividend increase alongside this. The company increased its quarterly payout by five percent. Nevertheless, we see that the shares have become quite expensive. Historically, the stock is overvalued and has little upside potential. For the time being, I will therefore not buy any more shares of Pepsi.
Slightly changed TEV Blog design
I have also changed a bit the design of the TEV blog. The changes are relatively small, but I wanted the Blog to look a little less generic. The design looks a bit more like a magazine now since I added another column on the left side. There will be a few more changes in the upcoming months. I enjoy tinkering with the look and trying things out. I am curious to see where the journey goes 🙂
All the best,