What caught my eye this week.

Last week the major US exchanges went bananas on a strong signal that US inflation might be turning.

And that was very good news.

You know that old adage about it being important to remain invested at all times – because if you miss a handful of days you will miss most of the return?

Here’s what that looks like in practice:

These look like somewhat mediocre returns for a whole year. But they happened in 16 hours of trading.

Admittedly, I have a love/hate relationship with the old “don’t miss the best days” schtick. As a very active investor who watches the markets like most people follow their favourite football team, I feel the rollercoaster ride of a year like 2022 in my guts.

So I sometimes ponder how missing out on the best days might be worth it if you miss the worst days too. The optimal – but to be clear, hugely inadvisable – thing to do this year was to sit out the whole shebang out in cash.

(Inadvisable, sadly, because the books about successful investors who have consistently got in and out of markets wholesale for a profit would be welcome on any ultra-minimalist’s bookcase.)

Begone foul pestilence

Anyway, the inflation news is a big deal. Much bigger for markets than the US mid-term elections, which dominated the US media for fortnight.

From CNBC:

The consumer price index rose less than expected in October, an indication that while inflation is still a threat to the U.S. economy, pressures could be starting to cool. The index, a broad-based measure of goods and services costs, increased 0.4% for the month and 7.7% from a year ago, according to a Bureau of Labor Statistics release Thursday.

Respective estimates from Dow Jones were for rises of 0.6% and 7.9%.

Excluding volatile food and energy costs, so-called core CPI increased 0.3% for the month and 6.3% on an annual basis, compared with respective estimates of 0.5% and 6.5%.

Regular readers will recall I’ve been expecting inflation to ease for months. It didn’t happen. Indeed rates have gone higher than almost anyone predicted this time last year, as market expectations have been repeatedly confounded.

The result has been a brutal 12 months for pretty much everything. Stock-picking has been brutal. Some of the car crash US growth shares already down 80%-90% this year found it in themselves to drop another 10% in a day earlier this week. The proximate cause was yet another crypto crash (see the links below). But it is inflation and rates that have driven most of the de-rating in shares and the crushing of bonds this year.

And so if – and we still can’t be sure – US inflation really has turned, then we could have seen the bottom of this bear market.

US rates lever the (un)attractiveness of US markets. That sets the tone for markets around the world. The rapid pace of US rate rises also sent the dollar to lofty levels, dragging up rates around the world. All this could unwind if the threat of ever-higher inflation has been defeated.

Markets – which look forward – could move more than you’d think in response.

Leave your chickens uncounted

None of this means the interest rate rises are over – in the US or anywhere else.

Market interest rates moved far faster than official rates, as traders bet on the direction of travel. Higher rates from central banks still playing catch-up are baked-in, over there and over here.

But again, the top for rate expectations would be in if inflation is rolling over.

Mortgage rates – much higher than I believe central bankers would prefer – should start to ease too.

On the other hand something dumb1 could happen again and throw this all off course. Or the CPI numbers could get revised. It’s an unpredictable world, and investing is all about uncertainty.

Which is why, despite everything, it’s best to stay mostly invested.

Have a great weekend all.

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1. Like the war in Europe. [↩]

Surrounding yourself with rich friends is a well-known strategy for making more money.

By spending time with rich friends, the theory goes, you will automatically:

• See having lots of money as normal
• Get over negative money beliefs
• Think positively about growing your finances
• Try harder to improve your lot
• Copy what your rich friends do to get richer

In my 20s, I read through books about making money the way others of my generation popped certain feel-good pills.

And most of those books urged their readers to abandon friends who had a ‘poverty mindset’.

Instead, you should look to have rich friends going places.

It’s true that maverick self-made millionaires such as Richard Branson, Duncan Bannatyne, and Theo Paphitis don’t seem to need peers as role models.

What’s more, the modern networked economy has made it easier than ever for unsociable techno-nerds to make serious money. Just think of all the crypto-millionaires who mined made-up money in their basements.

But for most of us, moving in wealthier circles will raise our expectations – and potentially our bank balances.

Even Warren Buffett’s best friends include fellow billionaires Charlie Munger and Bill Gates.

A rich vein of study

There’s plenty of scientific research to back up this folksy-sounding advice.

To give a recent example, in a major study published in 2022 a team led by Harvard economist Raj Chetty studied the social networks of more than 70 million Facebook users to see if they could correlate their social capital with their financial wealth.

As Business Insider reports, out of three ways of measuring social capital:

…the only one actually linked to upward economic mobility is friendships with people from a higher socioeconomic status.

In fact, if lower-income kids grew up in areas that have the same economic connectedness as higher-income kids’ neighborhoods, their future earnings increase by an average of 20%.

According to Hugh Lauder of the University of Bath, Chetty’s research is a call to ensure schools are well-mixed in terms of socioeconomic background – albeit that’s difficult given how some parts of the country are far richer than others.

The alternative – an educational system where a lot of rich kids are segregated into their own schools – is bad for social mobility. (And for our politics).

One kink I noticed from the New Scientist reporting is that the Harvard team estimated income levels via the proxy data of each Facebook user’s mobile phone model.

More than 15 years as a personal finance blogger makes me wonder – were some of those apparently upwardly-mobile friends of richer people just flashing a fancy handset to keep up appearances?

Presumably the academics eliminated the risk of such social striving from affecting their results.

Big fish, small pond

There’s just one snag with the strategy of having richer friends, especially in childhood.

I’ll illustrate it via a slightly stylized story about an ex-girlfriend.

My ex – let’s call her Catherine – is a talented violin player. From the age of seven, she showed great promise with the instrument. By her early teens she was established as the best bow in town.

Catherine enjoyed being the lead violinist in her school orchestra. But she knew she could push her talent further than her school could take her. Most of her friends might as well as have been banging on saucepans for all they could inspire her.

Catherine’s teacher agreed she was being held back. He arranged for her to go to weekend classes in London at a fairly prestigious music school.

At last she’d be among musicians of her own caliber!

To cut a long story short, they were indeed better than her – and she didn’t like it one bit. No longer was Catherine the biggest fish in a small pond. In fact, by her own estimation she was the worst musician at the new school.

Catherine continued to attend the classes, because she was too ashamed to retreat to her old school colleagues. But she admits that her heart wasn’t in it. When she went to university, she didn’t even bother to join the music society.

Could Catherine have tried harder? Perhaps. Many people respond to competition, but some are too timid. A shy person, Catherine wilted in the light of others.

Yet the fact is she can play beautifully compared to 99% of people who ever pick up a violin.

Rich friends when you need them

If Catherine had never gone to the elite music classes, she’d probably have had a happier childhood. She might still be playing her violin today.

Similarly, you will make more money if you meet rich friends, but you’ll likely feel miserable.

As Financial Accountant magazine reported:

Researchers from Warwick Business School in the UK found that people who earned more than others in their “reference group” – that is, those of the same age, gender, religion or nationality – were more likely to feel happy with their lives.

Warwick professor of behavioural sciences Nick Powdthavee said that people actually care “very little” about the actual figure they earn, but they are concerned with how their income compares to those around them.

“For example, their sense of wellbeing is more likely to be influenced by whether they are fifth or 40th highest-paid person in their workplace, rather than their precise salary,” he explained.

So do you want to be rich or would you rather be happy?

Perhaps the best solution is to decide who your real friends are – as distinct from who is in your wealth creation circle.

Spend quality time with your true friends for a pick-me-up, and hang out with your rich friends when you see your income sliding!

Contrived? Maybe. It’s not easy being rich.

What caught my eye this week.

I know we only recently revisited the meme stock mania of 2021, when I reviewed the Netflix documentary Eat the Rich.

But there’s no better post to flag up today than Alexander Hurst’s epic variation on the theme in the Guardian this week.

The title – How I turned $15,000 into $1.2m during the pandemic – then lost it all – sets the stage.

But there’s more than just ‘loss porn’ to Hurst’s account, as we’re shown how suddenly coming into money warps your thinking:

I stopped searching for 50 sq meter one-bedroom apartments in central Paris and instead started browsing €1.5m lofts with rooftop terraces, or scrolling through Sotheby’s listings in French Polynesia, drooling over a small private island I could buy for $890,000 – as in, I could actually buy it.

It wasn’t hard to rationalize it. After all, my Amherst classmates had grown up going to vacation homes and boarding schools, and were destined to inherit large transfers of property or investment wealth.

I would not; instead, I felt the impending burden of my parents’ underfunded retirement accounts looming.

The piece really spoke to me: Hurst feels like a brother from another mother who went down a rabbit hole I avoided only by being born 20 years earlier.

And it takes guts to admit to such losses – and the truths that lie behind them – in public.

As my co-blogger wrote when he revisited the bursting of the 2021 bubble:

The market mints winners and losers every day.

The tricky bit is that failure is silent, while success is noisy.

Generally that’s true – but this time has been different.

The Reddit traders paraded their successes and failures very publicly throughout their epic bender.

Maybe that’s why this time we’ve been given an account of the morning after.

The first trillion is the hardest

Notes from the meme stock boom are not easy reading for the squeamish, what with all the leverage and the roll call of trading tools like options and shorts – as well as plenty of obscure small cap stocks.

But the truth is you can lose a lot of money just fine with everyday investing into some of the biggest companies in the world.

As Ben Carlson says over at A Wealth of Common Sense this week in recounting the fall from grace of Meta (nee Facebook):

I’m not trying to pour salt in the wound here for people who own these stocks.

This is just a not-so-gentle reminder that stock picking is extremely difficult, even over the long run and even for best-of-breed corporations.

On the way up you kick yourself for not investing in name-brand companies with stellar stock performance.

Then when they inevitably crash you begin to wonder if those gains are ever going to return.

For those who don’t follow the market with a magnifying glass like me and Ben, this chart shows how Meta has left the trillion-dollar market cap club:

Despite being one of the most successful and profitable companies of all-time, Meta has now been beaten by a diversified index fund over the past decade.

For love not money

When I used to write more about my naughty active investing – that stands in such contrast to the Monevator house view and the wise posts of my co-blogger – I was sometimes accused of hypocrisy.

Why was I telling people they should invest in boring index funds, when I do something completely different?

Was I keeping all the good stuff to myself? Did I think I was better than everyone else?

That sort of thing.

Follow that link to learn more about why I’m still a stock-picker and an active trader, for my sins.

But let’s be clear about one thing.

I haven’t increasingly told people over the years that they’ll almost certainly do better with index funds despite my being an active investor.

On the contrary, I know all the market’s capricious whims. The agonies and ecstasies, as Ben puts it.

And I say you’ll almost certainly have a more pleasant life if you invest passively because of my experiences as an active investor!

Enjoy the weekend, and the many great links below.

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