2021 Q3 Newsletter

Of Equity Valuations, Inflation, and Cryptocurrencies

We have fielded several questions recently regarding three broad topics: equity valuations, inflation, and cryptocurrencies. And since these topics are likely on the top of many of our fellow Spartans’ minds as well, this quarter’s newsletter is dedicated to sharing my thoughts on all three.

Equity Valuations

While it is true that US large cap growth stocks are currently expensive by historical measures, small cap growth, value, and international stocks all remain reasonably valued, if not downright cheap. For example:

As such, we will continue to rebalance our portfolios in line with our target allocations by trimming our expensive growth portfolios (sell high) and adding to our cheaper small cap, value, and international portfolios (buy low). Such is the beauty of our disciplined approach.

Inflation

The higher prices you are seeing at your local gas pump, grocery store, and favorite restaurant are real. As evidence, the August Consumer Price Index came in near a -year high of 5.3%. What are the implications for investors? To me, periods of higher-than-average inflation simply confirm the wisdom of our commitment to equity-dominated portfolios throughout our lifetimes in the first place. As a reminder, the approximate long-term returns for the three major investible asset classes (before and after reasonable estimates for taxes and inflation) are:

In this context, we see that stocks are not only the best place to invest for the long term, but the only asset class we can reasonably expect to deliver positive real returns throughout our lifetimes. Put another way, only a fool would expect today’s 10-year Treasury bond’s forever fixed yield of 1.5% to have any chance of funding perpetually rising expenses during a three decade retirement while inflation runs at 5.3%.

Cryptocurrencies

There are currently more than 2,000 cryptocurrencies (digital currencies built on blockchain technology) in existence, the most well-known of which is Bitcoin. All promise to conduct transactions between users securely, reliably, and privately, without the use of middlemen. The belief that one or more of these decentralized cryptocurrencies will eventually displace all current government-sponsored currencies (the US dollar, the euro, yen, etc.) has driven sudden and dramatic price swings in all of them.

While it is true that blockchain technology has many practical applications, there is no guarantee that digital currencies will ever gain widespread acceptance by governments, businesses, or consumers. And even if they do, only a handful of the existing cryptocurrencies are likely to survive. Assuming one or more of them eventually do survive, they will ultimately serve as nothing more than a medium of exchange for goods and services, just as shekels, gold, and paper currencies have done for thousands of years. Like their predecessors, cryptocurrencies will not generate earnings, dividends, rent, or crops, so their expected long-term return will likely be near 0%. Given this, we believe that “investing” in cryptocurrencies amounts to nothing more than pure speculation, completely unworthy of our Spartans’ hard-earned wealth.

As always, feel free to call or email the office to discuss, ask questions, schedule a Plan review, or just say hi. Cheers!

Don Davey
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise