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What Does The Intelligent Investor do in a Time like This?

As I write this, inflation in the UK is sitting at 9%, and in conjunction with the current global economic climate, it has investors trembling – and rightly so.

Incomes are being squeezed, monetary policy is being tightened, and a recession is looming, yes, it is every investor's worst fear, the threat of oncoming stagflation. And right now, markets are ranked with portfolio-trembling fear. So, what does the intelligent investor do?

Benjamin Graham, in his 'The Intelligent Investor' (which has become a bible for many investors out there), concluded that a good policy during inflation is not to have all one’s funds in either the bond or the stock basket, as neither can insure against the uncertainties of the future and the threat of the dwindling purchasing power of the pound or dollar. Despite conventional wisdom being that short-term bonds are the best avenue for investors looking for cover from inflation, as the issuer will pay you the face value of the bond relatively soon, Graham said that the stock component of a portfolio had the same chances as insuring against the risk as to the bond component.

Perhaps the architect of the index fund even before the first one was created in 1976 by John Bogle, Graham was a devoted advocate for diversification, conservatism, and value investing. But his environment is much different from the one we face today, with many believing value investing is no longer a possibility in today’s markets. In today’s economic environment, laced with the coming-of-age of cryptocurrencies, a war in Eastern Europe, surging energy prices, and the highest interest rates in over a decade, investors are beginning to lose hope as markets flirt with bear territory and political uncertainty wreaks havoc across the world’s economies.

Age-old wisdom would tell you to invest in bonds in such a world; but in an environment such as this conventional wisdom cannot always be relied upon, as U.S Treasury yields are falling, and in the UK, index-linked gilts have depreciated in previous months. Stocks are not proving to be stable either, with the S&P 500 swimming in red, and the FTSE 100 looking equally rouge. Of course, there is always gold, often a safe haven for currency-sceptics during times of high inflation, owing to its “recession-proof” features and that it has no ties to the other markets. Yet, professional word of mouth is that gold can no longer be looked to for a safe retreat. For example, between 1980 and 2000, gold lost over 40% of its value whilst the CPI rose over 120% - not your ideal hedge.

Yet despite all the articles, reports, press releases, and professional analysis; one thing remains certain: every investor is different. In The Psychology of Money by Morgan Housel, we are taught that everyone is different and that it is because of our different circumstances that we manage our finances and portfolios differently. As such, we all have different goals in investing, some wish to acquire great wealth, others want to keep their children’s college dreams alive, whatever it may be, we are all different. While gold may be the best hedge for some, treasuries may be the viable option for others, and some may find both as good components to add to their hedge basket, while some take the long-term view and ride out the storm of uncertainty.

My advice?

There is no one intelligent investor; we all face different worlds, lives and circumstances.


References/Further Reading

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