I took a day off from the blog yesterday. I woke up late and decided to just stay in bed a little longer. I hop everyone had a great Saturday.
I am cynical optimist. I think it is a good mindset for investing. Thank goodness I am not cynical pessimist.
I was raised conservative and went to a conservative jewish day school. I liked it.
As I have gotten older, my faith in religion and institutions including the markets and government has faded. I think that is normal.
My friend Brian is a great writer and I love how he thinks about the markets and life. Brian is also cynical optimist which may be one of the reasons I enjoy his great weekly newsletter.
This week he riffed on faith as it relates to the markets…
Folks, the secret’s out.
Those who live, work, and die in the world of economics and finance have tried for hundreds of years to quantify and make a science out of the policies that even the policymakers cannot agree upon.
And yet we have “rules” that we take as sacred.
We believe we know what bonds or gold will do when interest rates are low – or high.
We think P/E ratios can tell us something about a stock’s future price.
We believe we can influence inflation and deflation by managing interest rates.
We act as if we can control our economic and financial ecosystem like a Pioneer equalizer from the 80s, moving each of the sliders to the precise spot that will ensure a balanced outcome.
But it’s all an illusion. It’s throwing darts at a board. And ultimately, it’s an act of faith on the part of the participants.
We believe that the S&P 500 was designed to be a broad index that we can invest in for diversification- until five stocks make up 25% of its market cap.
We believe that sales and revenue drive a stock’s price – unless you’re Tesla when a 3% rise in sales over the last year translates into a 700% rise in your stock price.
We believe that despite the gyration of the stock market, value investing will always win – until it doesn’t for 13 years running.
We believe that debt is a killer – until the stock market is at all-time highs while we carry $26 trillion on our nation’s credit card.
But it’s all okay, as long as we have faith that it will work out.
Is there any more core tenant to economic theory than faith?
Faith that the piece of paper or composite metal in your pocket – or digital representative of such in your bank account – can be exchanged for goods and services.
We buy Tesla at $2250 because we have faith someone will buy it from us higher.
We pile on the national debt because we have faith that it will work itself out, somehow.
We buy that house for $250K over asking because we have faith that it will be worth more someday.
And as long as we have that unquestioning faith, the economic policymakers will feel free to change the rules as they see fit in order to maintain the narrative.
This is a tough market for people that can’t go with the flow…if you don’t have faith that it will all work out.
Those people are short Tesla at $300.