Isn’t it kind of amusing when we see a driver in a fancy sports car weave in and out traffic at speed only to find himself held up a little further ahead by a set of red traffic lights? I believe it is called schadenfreude, even if we might not exactly derive any pleasure from the other person’s misfortune.
It makes absolutely no difference to me if the driver wants to behave like a total clown on the road. People can’t help doing stupid things. Sometimes it is because they think they know better. Sometimes it is because they are just inexperienced.
But whatever the reason, they simply haven’t thought things through, properly.
Many people don’t always properly think things through in the stock market, either. The are too impulsive. Warren Buffett once quipped that the stock market is a place where money is transferred from the active to the patient.
We are seeing some evidence of that happening now. The current buzzword in the market is rotation. Traders are rotating out of growth stocks and into value because they have been spooked by inflation. They believe that inflation, rather than being transitory, could turn into something more persistent.
It is true that growth shares tend to do well when inflation is low. So, when inflation is persistent, they could underperform. That’s because their profits are generated long into the future rather than today.
So, if a company doesn’t earn much today but could earn oodles of cash years from now, then those dollars of profit could be worth a lot less if they are eroded by inflation. Consequently, the company should be worth less.
That is a fact that we can’t deny. However, there are a couple of important things we don’t know about the recent spike in inflation.
Firstly, has inflation been caused by too much easy money provided by central banks? That would be a bad kind of inflation. The other is whether inflation has been due to recovery by economies around the world? That, on the other hand, would be a good kind of inflation.
But whatever the reason for the increase in inflation, the stock market is still the best place for our money if we want it to hold its buying power over time.
So, don’t be too perturbed by volatility in the market. Instead, focus on owning a basket of well-chosen shares in companies with pricing power. They should do well regardless of what type of inflation we get.
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David does not own shares in any of the companies mentioned.
