Let’s be honest, we are all tired of the crisis/recession/inflation context. When there is so much pressure on your financial stability, all we want is to hide and wait for it to be over.
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In today’s article (but there's also a video on YouTube), we will look at the crisis strategies of 2 popular financial influencers. Why they suggest to hold cash? What stocks should we invest in? Is it true that there’s going to be less competition on the market and more.
According to Nassim Taleb’s antifragility concept, in times of turmoil we are supposed to build resilience and even thrive. So I was looking for advice from some popular influencers on how to do it. Two videos caught my eye: Humphrey Yang’s "How to Invest When Interest Rates Rise" and Graham Stephan’s "How To Use The 2023 Recession To Get Rich."
Here are some recommendations they give us and our critical view:
Both Humphrey and Graham suggest to keep more cash and put it in savings account.
Graham says that in "2018 cash was the best performing asset and had you just been saving your money in a high-yield savings account (HISA) you would have far outpaced the market."
It means that HISA yield minus inflation was better than the market performance. But let’s compare it with the simplest investing strategy - index investing:
Holding onto cash for one year yes, but as a long term strategy it won’t work. Because by investing you might underperform this year but outperform next year and in the long run you profit more when investing. The volatility is higher (such as now) but returns are higher, too.
Holding some cash in HISA might be good but as a temporary solution for some part of your savings, but don’t transfer all your savings there.
Everything becomes less expensive
First, not everything. In order to keep up with profits companies are actually rising prices. And secondly, that’s true that companies’ valuation is falling but be careful with the reasons for it. If Apple's share is falling because of shortage of chips - then it’s temporary bottleneck in supply chains that can be restored.
If it’s Moderna, then it’s clear why they are down 50% this year. Maybe there isn’t much application of it in the post Covid future? And there’s no point in buying it?
There is less competition on the market
Also doubtful statement. It’s actually tightening because companies are fighting for clients. In fact, according to EY global mergers & acquisitions (M&A) are up 35% compared to average of the previous cycle (2015-19). It means that bigger fish buys weaker players to increase the market share.
After every bear market comes bull market
True in the long run, after each sunset there is sunrise, but it sounds overly optimistic because unlike in nature these dark periods in the stock market may last long. Have a look at previous historical rebounds:
They might take from 3 months to 10 years and come in different shapes: V, W, L and even K (like in pandemic).
Act lean and cut expenses
It’s not easy when everyone around increases prices. In February Amazon increased the price of Prime membership plans by 15%. Disney rises prices 38% as it surpassed Netflix in the number of subscribers on its streaming platforms.
If you have a goal to save for the new iPhone, figure out 2 things: what takes the largest chunk of your budget and what has risen the most. The highest inflation is seen in Energy and Food categories, but cutting costs on food and gas is not an option in many cases. However, pricy cereals and bakery products might come with the same price as fruits and vegetables now.
Instead of thinking about cutting costs on gadgets that went up 7.2%, but comprise a small percentage of the total expenditures ($489 per year on average), it’s worth reconsidering subscriptions because they eat up more budget. According to C+R Research in 2022 Americans spend on subscriptions $219 monthly (or $2628 annually). And the inflation in this subcategory is 5.5%.
Invest long-term and diversify
Great non-trivial advice, very specific for the current market 🙃
What should I buy then?
Graham doesn’t tell us but Humphrey does. He mentioned Vanguard Value ETF and sectors like Consumer Staples, Financials and Health Care. Is it really a good hedge? How did they perform in the last year?
Well, we see that they performed poorly.
What industries benefit from the inflationary process and provide some kind of hedging for a retail investor’s portfolio?
We did a research on how to create an anti-inflationary portfolio. The winners during times of high inflation are sectors that can transfer increased prices to consumers.
Energy has a positive correlation to inflation because the revenues of energy stocks are naturally tied to energy prices, a key component of inflation indices, such as CPI(Consumer Price Index) and PPI(Producers Price Index), with the second being the predecessor of inflation for CPI.
REITs own real-estate assets and may provide a partial inflation hedge via the pass-through of price increases in rental contracts and property prices.
Banks and insurance companies historically benefit from growing interest rates. Although the cost base for banks increases, i.e fed rates at which they borrow increase, they can more than make up for it by transferring this increase to borrowers and even increasing their profit margins while doing so.
Utilities are also an inevitable payment in everyone's budget. As natural monopolies, they should be able to pass on cost increases to consumers, but their pricing power is often limited by regulators. However, the regulator usually allows some increase in tariffs caused by higher energy prices and inflation, which helps companies maintain profit margins and sometimes even slightly increase them.
Food and staple retailers can usually transfer the growing cost of goods to consumers and even increase profit margins given enough consumer spending power.
You can have a look at a good Inflation-proof portfolio in Gainy app here.
Buy real estate once the market is flattened
Graham also said that "Wall Street consensus is that National housing prices are going to decline seven percent with a worst case decline of 10 to 15 percent."
So if you know that the housing market is going to go down - why not short it? Jake from TradingLab made a video on why and how he’s shorting the housing market and if we look at the strategy it’s performing scarily well.
You can also see what it is comprised of and follow this strategy in Gainy in one click.
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