What’s truly valuable has no price and cannot be bought.
If all investments are being cast into Treacherous Waters, our investment strategy must adapt accordingly. Once we set aside denial and magical thinking as strategies and accept that we’re in treacherous waters, a prudent starting point is to discern the most consequential contexts of all decisions about where and how we invest our time, energy and capital.
The most consequential global context is to first and foremost “invest in yourself”: invest in forms of capital that cannot lose value (for example, integrity, skills and experience) and assets that are not dependent on fluctuations in valuations for their utility. This is the essence of Self-Reliance.
For example, tools retain their utility regardless of their current market value, and so does a house as shelter and yard to grow food. Whether the value drops to $1,000 or soars to $1 million, the property provides the same utility of shelter and sustenance.
In other words, the mindset of speculation–buy low and sell high to accumulate as much money as possible–is not the only context to consider.
A second global context is that speculative winners–assets that rise sharply in value–will increasingly be targets for “windfall” and/or wealth taxes, as well as capital controls, such as limits on selling. If you log a 500% gain, then paying a wealth tax is a small price to pay for such a handsome gain. But such enormous gains will very likely be far more scarce going forward as speculative bets become net drains on capital and speculators exit because their gambling chips are gone or they realize they better conserve what capital is still left.
Meanwhile, back on the Government Ranch, the crying need for more tax revenues will become increasingly dire. As speculative bubbles pop, capital gains will dry up and blow away, and this rich source of tax revenues will have to be replaced with higher taxes and junk fees on whatever income and assets are available for “revenue enhancement,” ahem.
A “special assessment” tax on those worth $100 million or more will be approved first. The bar will then be lowered to $10 million, and then $1 million, which will of course include all assets, the family home, 401Ks, pension plans, small businesses, etc., and any assets held overseas. Civil penalties for stashing assets in dodgy offshore tax havens will of course increase concurrently. Purchases of cryptos and precious metals will be closely monitored / scrutinized.
Yes, the billionaires and corporations will remain untouchable due to their heavy buying of influence on the Political Action Auction ™, but the plump medium-sized fish who can’t swing millions in political contributions and legal fees will be inviting targets.
This generalized increase in taxes and junk fees on the wealthy and high consumption households will favor those who figure out how to live well on less income and fewer high-value assets.
A third global context is that simple bets on sectors may not provide the easy, stable returns that characterized the past 40 years. Those who rotated into “hot sectors” and cashed out when everyone else jumped in did very well.
This mindset is still ubiquitous. Many are calling for a commodity super-cycle that will deliver reliable gains to anyone investing in energy/commodities for years or decades to come. Others are flooding back into Big Tech or emerging markets.
Such simple trend-following sector bets will not work as reliably going forward, for several reasons. One is that artificial scarcities tend to be followed by gluts that crush valuations.
Another is the emergence of asymmetries within sectors. In other words, a rising tide will no longer not raise all boats.
Per a quote from Nassim Taleb: “Finance has three simple rules: maintain a clear mind, figure out asymmetries, never talk to idiots.”
What are asymmetries? In shorthand, “winners take most.” Put another way, the winners in each sector may garner the majority of the gains within the sector, as the winners have figured out a strategy to navigate treacherous waters.
Those pursuing old strategies will either lose or reap meagre gains.
The most successful investors / speculators will dig into companies, looking for asymmetries in financial assets, expertise, management, etc.–the traditional tools of stock pickers.
Buying index funds and ETFs to ride the tide higher will mean losing as the speculative tide ebbs.
