#127: Don’t Fight the Inevitable

S2N Spotlight

Yesterday, I presented a chart with the S&P 500 return adjusted for gold (orange) and US dollars (blue). Today, I want to take it a little bit further. One way to interpret the gold-adjusted return is to say that the purchasing power of the US dollar has been eroded through money printing, and the true store of wealth, which is gold, shows that if you regarded your wealth in gold, you would not have done so well.

Today we extend that by saying US dollars are still the world’s reserve currency, the ultimate store of wealth, and therefore the asset I should price my investments in. If that is so, let us adjust for inflation. This gives you the green line. Not as good as the blue line, but not as bad as the gold (orange) line.

As an Australian, shouldn’t I measure my wealth in Australian dollars? It turns out that investing in the S&P 500 with Australian dollars would have done the best.

The simple point I am making quite complicated is that the asset that you deem your store of wealth plays a very important part in the ultimate return of your investment. Currency is often ignored when measuring cross border investment performance.

S2N Observations

I was walking down the stairs from a meeting in the city today while speaking to my wife. I wasn’t concentrating and missed the last step. You know that feeling when you know it is inevitable that you are going to fall. Well, I had that feeling, but instead of fighting the impulse to try and steady myself, I was overcome with calm and let the law of gravity do what it needed to do.

I came down incredibly hard and made a big noise. I broke my glasses. My phone and laptop bag went flying. People came running to help. The strangest thing is that I felt no pain. It is not often that 107 kg of quivering passion falls hard on concrete and gets up feeling quite good. I called my wife straight afterwards. I said all was well and that I felt good. In fact, I told her that the stiff neck I had before the fall just got released and is feeling loose. I started having visions that I could make the Olympic diving team, as my fall was just so graceful.

The reason why today’s letter is late is because I have just come back from the physiotherapist. I think the adrenaline has worn off, and I can hardly move my neck .

On a serious note, I am really fine. The point I am trying to make is that sometimes, when the inevitable happens, try to go with it instead of fighting it. You may do yourself less damage.

In the chart below, you can see that the S&P 500 is on an 8-day up streak. The second time in a year and only the 40th time since 1980.

It has been 199 days since the S&P 500 had a 10% drawdown.

The point I am making is that some things are inevitable. A winning streak will inevitably come to an end. A 10% drawdown is bound to happen. Don’t fight it; prepare yourself for it so that you don’t kill yourself. Here, I am trying poorly to suggest that by using too much leverage, a small fall can become a big fall that knocks you out or blows your account up. Drawdowns (falls) are inevitable, stay calm and fall well.

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