Predicting the future is an implicit component of our investment decisions even though we all know it can’t be done on a reliable basis. However, there are principles that have been proven to be statistically reliable in numerous peer reviewed academic studies and in the real world. Warren Buffet, the greatest living investor, tells us we need read only one investment book, The Intelligent Investor by Benjamin Graham. Berkshire Hathaway, Buffet’s monstrous conglomerate valued at $500 Billion, is testimony that the principles found in the Intelligent Investor actually work. Likewise, the principles taught by Modern Portfolio Theory which can be found in books like, A Random Walk Down Wall Street by Burton Malkiel, have been validated by the success of Vanguard funds. It is almost impossible for the average investor to beat an age appropriate mix of low cost index funds with either managed funds sold by commission salesmen or individual stocks picked by people who love to pick stocks, like me.
Yesterday I read a somewhat hysterical article concerning a world wide buildup in the inventory of unsold new cars. The author of this article bases his fears on photographs found on Google Maps. When were those photographs taken? If you Google my house you will see nothing but a nasty tangle of weeds, even though my house has been under roof for a year.
From time to time a build up of excessive inventory occurs. Usually, this is a harbinger of the next recession. Automobile companies will not continue to build cars that can’t be sold, at least not for very long. When the inventory of any unsold product gets too high, prices drop and layoffs are in the news. Ultimately, the annual industry total assembled Vs total sold will tell the story.
There are a number of signs that the next recession may not be all that far off, but there are some that are still positive. The Shiller Price Earnings Index and corporate profits are at disturbingly high levels that usually are indicative of a significant drop in the market sometime in the near future. On the other hand the Federal Reserve Bank may keep pumping up the economy with funny money. We know that will ultimately have to come to an end, but when? The Index of Leading Indicators and the Index of Coincident Indicators are both kind of flat looking, OK, but they aren’t screaming its time to put new money into the market. On the other hand the Transportation Index is rocking! People are paying good money to ship coal to China, iPhones to stores all over America, and UPS just brought me some new insoles for my walking shoes.
Personally, I am a little nervous, but then I am always a little nervous. It is my nature. We have enjoyed a hell of a run since the first quarter of 2009. When will it end? And it will end. While Wall Street is happy, Main Street isn’t doing so well. The median household income adjusted for inflation continues to drop. These two numbers can not stay far out of whack for very long. If sales fall, so will profits. The best I can do is maintain that age appropriate balance between cash and bond funds on the one hand and stocks and stock index funds on the other hand. For someone my age, 63, depending on who you choose to believe, I should have somewhere between 37% and 60% of my liquid net worth (excludes my primary residence) in low cost stock index funds and shares in individual companies. Personally, I have made the decision to stay between 40% in stocks and 55% in stocks. When I think the market is overvalued, like now, I want to be near the bottom of my range, which I am. When the market is in the tank, I will hopefully have the nerve to move the slider up to 55% in stocks. I did this back in 2008. It worked out really well, but back then I had a job. I was basically throwing new money into the market. Now that I am retired it will be harder to do the right thing with existing money that can not easily be replaced.
Now if I could just get my crystal ball to work....
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