• Doom and gloom really is an investment strategy, sometimes
  • Investment returns are relative… to everyone else
  • Why it’s time to begin reading Wealth Advantage

Whenever I meet readers in person, they seem surprised I’m not like the donkey from Winnie the Pooh. After so much doom mongering, they expect a downhearted cynic instead of a pleasant one.

But the truth is that it’s much easier for investors to outperform the market during turmoil than during boom times. And so I get excited about all the turmoil to come. It’s an opportunity to show your metal, rather than set and forget investing like your neighbours and their mothers.

Booms have a habit of covering up mistakes and encouraging overconfidence. People with short memories forget that crashes really do happen, defaults occur and even risk-free assets crash in price.

Market commentator Jack Farley recently pointed out that long-term US Treasury bonds have now crashed more than the US stock market did in 2008! So much for risk free…

Of course this was predictable. I spent much of 2021 wondering out loud why investors would own bonds at all given their potential to crash without offering any return in return for that risk. But investors continued to believe that central bankers had inflation under control and inflation was still inside Pandora’s Box. The fact that it had been opened by the same central bankers didn’t seem to bother anyone.

Eventually, all hell broke loose, with a stream of US banks going bust due to their bond holdings and the UK government wasn’t far behind, for a few hours.

Most people panicked. I thoroughly enjoyed the show.

Part of the pleasure at the prospect of such chaos is just schadenfreude on my part, I suppose. There’s nothing like watching a well-deserved reckoning play out for those who denied it was coming.

That’s basically why I had children – to watch them learn the hard way. My family think I have a very wise and long-term parenting style that makes my daughters independent. But the truth is that I enjoy watching consequences making themselves felt, rather than imposing them or forestalling them.

So, when the world’s politicians announced they were making a bid for net zero, I didn’t panic about the misery and chaos this would cause. I looked for ways to profit from it. And have enjoyed the profits and the debacles playing out in the media since.

When central bankers announced they wouldn’t raise interest rates because inflation wouldn’t take off in 2021, I warned readers about the consequences for bonds of inflation and interest rate hikes.

When Australian bankers assured senators that irresponsible American- and European-style bank lending practices were not happening in the UK, I exposed they were even worse and watched with glee as the fallout hit during a Royal Commission six years later.

Last week, in The Fleet Street Letter, which is Britain’s longest running newsletter, we predicted a resurgence in home building activity from extreme low levels. That same evening, the Telegraph reported:

New housing starts have surged to nearly a 50-year high as developers scramble to beat a net zero deadline. Builders began construction on 73,600 new homes between April and June this year, a 34pc jump compared to the same period last year and the highest quarterly total on record since at least 1978, government data shows.

Of course there have been plenty of misses. But there’s something deeper going on here. A method to investing in the madness of crowds and the inevitable reckoning they’re in for.

You see, in the hustle and bustle of the stock market, it’s very hard to pick the right stock to profit from a trend. Indeed, picking any individual stock means taking on a very long list of risks that you don’t necessarily want as an investor.

If you want to bet on a bull market in uranium due to the resurgence of nuclear power, you might want to own uranium stocks to maximise your gains. But if you do, you’re taking on the risk that their management makes a mistake. Or that they hedge their exposure to the uranium price by selling long-term contracts at fixed prices, which would prevent them from profiting from any uranium price surge. Or some other such complication could make a mess of the connection between your prediction and your investment outcome.

So, if you want to profit from generalised trends in what happens next around the world, the execution becomes challenging. I recall one year when my top investment recommendation featured a prediction that didn’t come true at all…

The challenge of figuring out how to profit from what you expect has been made easier by exchange-traded funds (ETFs). They can diversify holdings to try and reduce company-specific risks.

But what if you had the time to analyse which companies are best suited to profiting from a trend you’ve identified?

Enter my friend John Butler who has a solution and a history of making this work. At investment banks, John would forecast the macroeconomic environment and build an efficiently diversified portfolio tailored to that environment. If correctly implemented, this kind of investment process not only allows an investor to maximise the upside in the good times but also limits the downside in the tough times.

It’s all about being in the right place at the right time. This contrasts starkly with another popular formula for investing gains – the Permanent Portfolio, as devised by… well, a few people.

The idea of the Permanent Portfolio is to invest in an equal portion of various asset classes, because each asset class performs well in different environments.

Different creators of different Permanent Portfolios used different asset classes, including stocks, gold, bonds, real estate, cash and more. But the idea is the same: you’re agnostic about what happens next in the world and maintain a balanced exposure to all the possibilities.

The real question is whether we can outperform such an agnostic outlook on life. I think you can. If you do too, check out John’s Wealth Advantage now.

Until next time,

Nick Hubble
Editor, Fortune & Freedom