“Once your mind is inhabited with a certain view of the world, you’ll tend to only consider instances proving you to be right. Paradoxically, the more information you have, the more justified you’ll feel in your views.” Nassim Taleb
If you are our client, the next time you're in to review your portfolio I'll be presenting your analysis on a beautiful 51 inch flat screen monitor fastened to my office wall. You'll recognize the brand as one of better than average quality---you may or may not think about the fact that the brand hails from South Korea. The most beautiful thing about that beautiful flat screen is that I got it for just a few hundred bucks.
That's what came to mind Friday as I listened to an "expert" on CNBC harp on about the fact that while the Fed says inflation remains very low, his family's grocery bill is off the charts.
Believe it or not, the fact remains that, while you and I indeed spend more on groceries than we do flatscreen TVs (and food prices are up), we've yet to see the kind of broad-based inflation that conventional wisdom says should have resulted from those trillions of new dollars
Just last week a neighbor confessed to me that he invested "a ton of money" in commodities three years ago and got creamed. Everything he learned in his college econ courses, so he said, told him that, given what the Fed's been up to, inflation should have skyrocketed. I have a client who has a very intelligent friend who dabbles in the markets. Three years ago he followed his friend's advice, and---with his personal online trading account---loaded up on all sorts of commodity funds (largely energy and metals) and ETFs. Save for his modest exposure to ag commodities (think grocery bill) last year (up 50%, after declining in '11 and '12), it didn't turn out so well. I have another client who, around that same time, sent me a very thoughtful email explaining why he, a highly intelligent and educated gentleman, and the experts he follows, expect the dollar to ultimately descend into oblivion under the weight of excessive printing as well as the massive ownership of treasuries by foreigners who are poised to dump them.
But here's the thing, as I told my neighbor the other day, and counseled those two clients back then, I actually agree that present Fed policy runs the risk of creating a high rate of inflation at some point in the future---at some point in the future (although I disagree that foreigners are poised to shoot themselves in their economic hearts). But not, as I suggested in Little Chasing Going On, until some of those dollars start moving through the economy. And not, as I suggested in A Little Foray Into Cycles Past, until we see a tightening of the present slack in the economy.
In his book Investing From the Top Down, Anthony Crescenzi says you should "curb your selective reasoning":
There is now scientific evidence indicating that the part of the brain associated with reasoning is inactive when people are given information that conflicts with their own thoughts about a particular subject. In place of reason people seek out information and opinions that confirm their own views.
Your everyday "conservative" loathes government over-spending (except on the stuff he agrees with [say, military], or benefits from) and excessive money printing. Two very loathable things, I might add. So much so that he trumpets every price increase he can lay his eyes on as proof that the government is destroying the foundation of the once-mighty U.S. dollar. So when someone tells your everyday conservative that there's presently little or no inflation, he responds with "no inflation my a**, have you been to the grocery store lately?" I would say "yes, and I've also been to Best Buy."
This is destructive behavior in any walk of life including the investment world. For you, it is a good thing that you recognize this because it means that while you are doing the math and making rational judgements, others are looking the wrong way, creating opportunities for you to exploit. Look for situations where selective reasoning is blinding the markets from reality, and nail it.
My point? When it comes to our portfolios, narrow convictions can be very dangerous things. And while I complain ad nauseam about politics here on the blog, we have to be very careful not to allow our emotionally-charged political biases to overcome our ability to reason.
Oh, and guess what we'll be discussing when we review your portfolio on that beautifully inexpensive monitor in my office? Increasing, albeit modestly, your exposure to materials, energy, etc. The sectors that tend to outperform when inflation is on the rise. Like I said, I actually agree...
“Our ideas are sticky. And we tend to stick to our theories. Good idea then to delay ones theories, for once they’re made they’re very difficult to let go of.” Nassim Taleb