This article about the Federal Reserve Bankers worrying about inflation (submitted by Tom Vandenbosch of Grand Rapids, MI) brings up questions: should we rethink our positions in the market, or ignore the warnings of the bank inflation fighters and keep investing as if nothing is going on?
The answer is this: Buy only wonderful businesses at attractive prices.
In order for me to be that nonchalant about either the threat of inflation or the threat of rising interest rates, the notion of ‘wonderful business’ must be very specific — and it is. A wonderful business, by definition, has a big wide moat which allows the business to raise prices as its costs increase. In other words, a wonderful business can benefit from inflation because it can raise its prices accordingly. So inflation isn’t a huge problem for a wonderul business.
But what happens if the fed raises rates too high and suddenly bad things happen? Like what if the higher rates suddenly kill the real estate market and it crashes?
Some smart people think that a real estate crash will precipitate a stock market crash. But here’s where two aspects of Rule #1 investing really help us.
First, we buy a company at an attractive price – about half of what its intrinsic value or Sticker Price is. That gives us a huge cushion against a market drop so that we can get out without getting burned.
Second, we use technical tools that signal us that the big guys are getting out, and that takes us out of the market, too. So either way we’re outta there as this over-valued market comes tumbling, tumbling down. And when it does, we’re there with our cash to buy that wonderful business back and an insanely low price.
This is why Rule #1 investors do so well across really scary markets, through depressions and world wars: We know a good business from a bad one, we don’t mind inflation, and we’re outta there if the bottom starts to drop out so that we can buy back everything a lot cheaper.
Now go play.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.