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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Swimming in Rough Water the Buffett Way
May 11, 2021

“You might want to think about the investment markets as testing you in ways you’ve not been tested before. Unless of course you’re over the age of 60 or 70, and know what the period ahead entails because you’ve experienced it before. 2021, this year out to 2033, the next decade plus, it’s going to be like an Ironman for the market participant.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.

One of the things I love about working for your family, Dave, is that other people do too. We have had virtually no turnover. This is an amazing company. When I first came to work here, there was a guy named Larry who had already been here, I think six or seven years. I think he came when you were about five years old, to the company. There was another guy who had worked already a year here named Rex. Both of these men have put in a combined amount of years, I think it’s between 35 and 40 years each, so we’re talking 80 years combined. This afternoon, you and I are both bittersweet because this afternoon we’re basically saying goodbye to them, retirement.

David: In the world of finance and money, you understand the time value of money and it ties to dollars and cents. What’s often neglected is the time aspect. It’s so powerful, what takes place over an extended period of time. Certainly if you’re talking compounding a high rate of return over a three-year period is somewhat impressive. But if you can do something over many, many years or many, many decades, the benefits begin to accrue in a very, very powerful way.

Kevin: Dave, years ago, you were making honey when you were in your teen years. I know, speaking of going back to Larry and Rex and the early days, I go back to a period of time like that too, and you were telling me a sweet story this morning about you and your daughter. You had run out of, I think the current honey in the cupboard, and she looked at you and she said, “Could we?” And the “could we” was can we tap back into dad’s honey that you have kept for how many years? 35?

David: Yeah. 35, 36 years. I mean, today it’s kind of clustering all together. We’ve got two guys who’ve been with us three and a half to four and a half decades, 42 years in the case of Larry, and Tess and I are dipping into the 32-year-old stash of wildflower honey.

Kevin: You’re a little nostalgic today. I can see it in your face. I am, too. I am, too.

David: Absolutely. We’d run out of— It was a gift from Morton Blackwell who, when I spoke at his Leadership Institute, he had been a beekeeper for years, and he sent me a batch of honey because he knew the story about Tess. That’s happened on a couple of different occasions. But here we are, we ran out and we’re going back to the sacred treasure, 32-year-old. It’s almost like a single malt scotch. Has a beautiful color.

Kevin: Well, and it’s such a contrast, Dave, because I look at the markets right now and we see cryptocurrency. I know you saw the Saturday Night Live skit where Elon Musk is asked, what is dogecoin? The question, what is it, and everything coming down to, well, if it’s got momentum, it’s going to go up. But one of the things that you and your family have always looked at is, what is the answer to the question of true value? It makes me think of Warren Buffet. This is a man who, if he sees value, he buys it. If he doesn’t see value, he’s even closed down his fund until he did.

David: But the time involved was always a factor for him. I think as we look at— I mean, I’m just so appreciative of both Larry and Rex. I think the value was never in the immediate. The value was in the accumulation of years, the accumulation of memories, the accumulation of what happens in relationship when you spend that kind of time in anything. Buffett, frankly, when he applies the same rubric to investing, requires time for something of real value to reveal itself. I mean, anyone interested in investing knows the name Warren Buffet. Berkshire Hathaway, today, it sits at a market cap of around $668 billion, trades for over $439,000 a share, and has positioned itself with $145 billion in cash [unclear] securities.

Kevin: Just in cash.

David: The market cap can fluctuate. Typically moves in line with your major indices. If the Dow or S&P are up, so is Berkshire. Cash represents 22% of the value of the company relative to current market capitalization. That can change. You fluctuate in price and the percentage which that cash represents is higher or lower accordingly.

What does it mean to go through a major correction for Buffett? He’s taken time out of the equation and said, we own quality assets that throw off a ridiculous amount of cash flow, and we’re happy to sit through any major market downturn. I can imagine a scenario where Berkshire A shares are valued at 30 or 40 percent less, and the cash in the company, he’s still there to spend it, but it’s now 35 to 40 percent of the total value of Berkshire Hathaway.

You look back at the history of Warren, and he started with a different approach. Started by buying a cigar butt company. The original Berkshire Hathaway was in textiles and there was very little life left in it. That’s why it’s referred to as a cigar butt company. He learned through the decades to buy when others were selling—notice he has a large cash position; that’s noteworthy—and only occasionally sell. If you end up with a rotten asset, don’t hold onto it, and don’t be embarrassed by saying, yeah, it was a mistake. Let it go.

But I think value is revealed through time, and it takes patience, and there’s a different process involved. I’d look at the current culture where value is only in the immediate, and it’s a fascinating thing, but I think there’s going to be a lot of disappointment as people discover that there is less substance in the immediate, and more true value in something that has been developed through not just years, but decades.

Kevin: One of the things that you and I were talking about because I’ve watched the age of the people here at this company, obviously we’re seeing layers come in, my son’s here, and you go down even a layer before that. One of the things that’s really concerned me, and I want to be part of, is showing that what we do here is an ideology.

You and I were talking last night and we were watching, my wife and I were watching an episode of The Crown. And you really see the power of Winston Churchill in that series. The episode that we were watching was when Winston Churchill died. I looked at my wife and I said, Winston Churchill wasn’t just a man. He was the ideology of Great Britain for that particular point in time.

There’s an ideology here that’s deep. Larry and Rex represented a lot of the guys who’ve been here for decades. We want to pass that ideology on. I think of Berkshire Hathaway though. There was something that changed Warren Buffett’s ideology, and sometimes it’s chance. I think he wanted to go to Harvard and he ended up at Columbia, right?

David: Yeah. When you mentioned Winston Churchill, I think one of the things that made his leadership compelling was where he set his eyes, the gaze on the horizon. Everybody’s looking to some degree at what they believe to be the horizon line, and it may in fact be the soil right under their feet, which again is a very immediate horizon line. Or you’ve got someone with a farther gaze who can see more of the future, more of what is ahead. And so with a different focus, I think that really is one of the ways in which you have vision tied to ideology. What is ahead, and the ability to grasp perhaps the steps between here and there.

Berkshire Hathaway might be instructive in that respect too. There are times when they’ve made a lot of money and there’s times when the returns have been pretty skinny. He borrowed the value thematic from Graham and Dodd. Those are the two individuals who literally wrote the book on value investing. To them, cash was not trash, and there are prices that are too high to pay for any asset, for an asset, but any one. Patience is a key. You’re looking for quality where others have neglected the search, and then sitting and waiting for the market to recognize what you recognized in advance.

Buffet learned that perhaps in a different way from the very first stock that he bought for $38 a share and began losing money immediately, and holding past that point of pain, declined to $27, he stubbornly kept it, sold it at $40 a share. A small profit and a painful lesson. It was more painful as time went on because he sold it at 40 on its way to 200. So he was right, but there was pain involved and he wasn’t right immediately, and the greater reward was further out on the time horizon. He had to see farther than the, can I just make back my money? Patience is not easy, pain management isn’t either.

Kevin: Pain management, I’ll never forget when you, five years ago you asked the office, if I pay, this is what you were saying, if I pay for your entrance to a Half Ironman, would you try it? A number of us did. I’ll be honest with you, I was a runner and a biker, but boy, I did not know how to swim very well, and I was worried. It turns out that that was the toughest thing for me to overcome mentally. Now, when we got to the triathlon, it was just absolutely beautiful in Hapuna Bay, you remember, it was just beautiful.

David: The easiest part of the race.

Kevin: It was the easiest part of the race, but it actually created so many nights before that of lost sleep because I was building a mental toughness. It really was not the swim, but swimming over a mile in open water was something that I had never done before. I just think about that with Berkshire Hathaway and the ideology of ICA, there’s so much perseverance. We were talking a few years ago about perseverance just here at this company. You’ve got to look further than the next month or the next year.

David: In 1972. This will be 50 years. Next year will be 50 years. Well, today I received an email from a researcher at the University of Arizona. He’s beginning an intake process for a study on triathletes and mental toughness. This is one of the I’m like, I’m thinking—

Kevin: Yeah. You guys are training right now for the—

David: … and thinking. This is why it’s on my mind. Coincidentally, I sat with 10 of the 20 people connected to our office that are heading to Kona again next month to compete in the Half Ironman. We did this last week. It’s been a long road for all of them. It’s been a challenging one to physically reshape a schedule and reshape a body through hours of daily training.

Kevin: Their bodies are being reshaped. I brought that up because I’m not doing it this time, and I’m sitting there going, “Wow, maybe I should have.”

David: Well, we sat in one of our conference rooms, the north conference room, to discuss fueling, which is really critical and an aspect of mental toughness, which most of them had yet to encounter in the training process. It’s the open water swim. Pool swimming in preparation for a 1.2 mile swim, it takes time and it takes routine. In the end, anyone can do it if they have the desire and willpower to do it. Open water swimming is different. There’s no black line to guide you. You have to intermittently sight your course. The water is only calm and flat on occasion. Often you have no visibility at all in the water, and the temperatures are rarely the same as sort of the managed and comfortable temperatures of a swimming pool. So, suffice it to say, there’s myriad factors that play with your mind and can play with your resolve. Can you get it done? Even if physically you’re able to do the distance, there’s all kinds of things that get into your head and create panic and a different decision-making process altogether.

Kevin: Well, and I’ll never forget, Dave, three weeks before the Kona race, I was concerned because I had done some other open water swims and I realized that 44 short-term laps in the pool here in Durango are very different than 1.2 miles out in the open ocean.

David: One continuous stretch. You don’t get to touch the edges of the pool. Well, nothing is insurmountable, whether it’s the waves or the murky depths or the currents or the cold, but those environmental factors can come as a surprise for someone who has done the distance in the pool, but never in an uncontrolled environment. Last weekend, I was in St. George, Utah, and scrambled down the hall at four o’clock in the morning getting ready to go to a race, I’d forgotten my CO2 cartridges, so I had nothing to fill a tire if—

Kevin: If you went flat.

David: —if I got a flat. I had flown there and you can’t fly with them. So just an oversight, I forgot to buy them the day before, I borrowed one from a gentleman who was coming out of his hotel room at four in the morning, also going to the race. Very few people are coming out of their hotel rooms at four in the morning.

Kevin: Yeah. Unless you’re a triathlete.

David: I brought the CO2 cartridge back to him at the end of the day, asked him how his race was. And he said, “I got pulled in the swim. I didn’t get to finish. I’d done the training, but I had no idea that I was going to be disoriented and confused and moving towards a panic attack under circumstances that I had never experienced before.”

Kevin: He didn’t understand that kind of an environment because he trained differently than he performed.

David: Yeah. Encountering wind and chop, experiencing dizziness, even disorientation from the constant movement of the chop and the waves—doesn’t sound like fun, and for the uninitiated it isn’t. But you’ve got about two thirds of the discomfort which is mental. I mean, this is my own approximation, but call it two thirds mental and manageable with practice and preparation. One third doesn’t go away, it just requires grit and determination. It requires a certain degree of mental toughness.

Kevin: Okay. Well, and you had talked about the preparedness. I was very deliberate in saying no on this particular race, because the preparedness you have to take serious. That’s two hours a day, five days a week, and five to six hours worth of training every Saturday. I remember it was a sacrifice, not just for me, but it was a sacrifice for my wife to support me at the time. You’ve got to be proud of the crew that you’ve got going this time around.

David: Incredibly. Each one of them has been digging deep, and I think some are going to have to dig deeper when they get there, because not everybody has been putting in that kind of time. My kids have heard me say it 1,000 times, you pay now or you pay later. The piper is only three weeks away. You might wonder, does this have anything to do with the financial markets? Yes, it absolutely does.

Kevin: After listening to Russell Napier last week, mental toughness is going to— One of the things that he brought out, Dave, was we have to readjust our thinking, including about how we appropriate percentages to assets. He was talking about gold, residential real estate. He was talking about, now you do. If you’re going to own stocks, you better have a manager that knows how to work into and work in the choppy water.

David: Yeah. Last week, we explored the idea of a return to the period like that of 1966 to ’82. The economic backdrop can become suffocating. The financial markets, tempestuous and trying, and that’s different than what we’ve had over the last 30 or 40 years.

Then you had the guns and butter policies of LBJ, and they were directly competing with sort of the previous grand master of state expansion. LBJ was giving FDR a run for his money, and then the bill came due. The bill came due for all of the pet projects—again, why we call them guns and butter projects.

In economics, you have something similar. You pay now or you pay later, but you will pay. So the political class is even as we speak promising a better world, promising cradle to grave benefits, and actually discussing them as rights—rights associated with what I think is a misnomer in that sense, associated with a coincidence at birth. There’s a benefit that they gain: power. Frankly, it comes down to loyalty purchased and obligation created through the dependency of the gift, right?

But what it really is, if you strip it away, is you just happened to be at the right place at the right time. You’re born in the right century. You were born in a period of time where the government has the ability to, and is going to pay for your loyalty, creating a sense of obligation. But Kevin, the bill is still coming due, which is why we discussed inflation at length last week. The debt component is a big piece. Inflation helps cut it down to size.

Kevin: Dave, I’m just thinking out loud here, but talk about being at the right place at the right time, your dad was a stockbroker in the late 1960s, early ’70s. He saw the dollar taken off the gold standard by Nixon in August of ’71. ICA started in 1972. You just talked about, we’re coming into our 50th year. He was able to see that bill come due and be in the one thing that can preserve assets during that time. He was in gold. When it went from $30 an ounce, he thought he was overpaying when he paid 38. I remember him telling this story. But $35 an ounce to over $800 an ounce. Now, he was in the right place at the right time, but guess who else, Dave, guess who else was at the right place at the right time? You. You grew up in a family that talked about this all the time. I mean—

David: It was at dinner table.

Kevin: —didn’t Buffet have a similar circumstance time-wise?

David: We had a similar experience in that respect. Buffet was fascinated with money from the age of six. Not a surprise. His father was a stockbroker before he became a politician, and you can imagine the dinner table banter. So really not unusual to have young Warren as an active stock investor. Bought his first stock at age 11. I mentioned it earlier, paid 38, watched it go to 27, sold at 40 only to regret the decision as it went to 200.

The Buffett partnership started in the 1950s, post-college. You might recall from previous conversations, we’ve had Russell Napier on the program a number of times, but we’ve talked about his book, The Anatomy of the Bear. The bear market of the late 1930s wasn’t resolved until 1949. A new bull market began after price controls had been lifted, and we were off the war footing that was really more or less in the rear view mirror.

Kevin: What a perfect time for a guy like Warren Buffet to be either made or be working in his early years, the 1950s was— that was the beginning of a major bull market.

David: Yeah. Investor capital was just coming out of hiding in the 1950s, and there was a lot of value to be found in the marketplace. Quality companies that had been through a decade or more of profit scarcity and earnings compression related to government control of the economy in wartime, and it was like a catch-up bull market on top of a bull market. It was a big one. And so Warren had been rejected by Harvard, landed at Columbia’s business school, where, again, these are not accidental things. Life is full of—

Kevin: Right. So a door closes, but the bigger door opens.

David: Yeah. And so he studies with David Dodd and Benjamin Graham who formalized the idea of value investing and were teaching it as a part of their curriculum at Columbia. And as I said, they wrote the book on the topic, the actual book, Value Investing. Partway through one of the great bull markets in US financial history, 1949 to 1966, Buffett got his start managing money fresh from the classroom instructions on identifying quality. His timing was nearly perfect for a launch.

Kevin: So between his childhood and the training that he got at Columbia, I mean, it was just the perfect combination, and the timing of when he was investing in stocks during a great bull market.

David: Preparation, again, the dinner table conversations, I think, led into a whole host of interests, and he refined those and owned them and made them his own passion.

Kevin: Yeah. But prices, okay, we talk about momentum, Dave. Most people, right now, if you ask them why they’re buying something, it’s because it’s going up. So price is one of the only reasons. That’s momentum investing.

David: That’s fascinating. That is the primary reason that people are buying what they’re buying today. They don’t know anything about anything as it relates to the underlying value. Identifying the fundamentals, that’s not even a secondary— I’ve got to check that box and make sure this makes sense. You buy it because it’s going up and everyone else is doing it. In that period of 1949, the early 1950s, prices didn’t give you any confirmation. There was no immediate gratification. In the early stages of the bull market, you had—

Kevin: You had to see the value. You had to see the value.

David: Exactly. Recognize the value implicit in the assets and the potential cash flows there. Trend or momentum investing was not a thing, at least until the end of that bull market cycle.

So yeah, I think he started at a great time, and I would say much of his success is attributable to how he came out of the gates.

Speaking of Gates, who’s very much in the news right now for anyone that has read up on the life of Bill Gates, there was an exceptional moment in time for him to be born and develop an interest in computers. Even a five- or 10-year difference in age, earlier or later, and arguably Microsoft would not exist. There might be something else like it, but no Microsoft, no Bill Gates.

The same case could be made for Buffet. The trajectory set by the bull market leading up to 1966 was critical for Buffet. 1966 to 1982 factors in significantly for the Berkshire Hathaway story. I think, for our commentary today, you had the Buffett partnership, which actually quit taking new money in 1969 when opportunities were drying up—

Kevin: That’s amazing.

David: —and equities were not a great value. Arguably money would have been difficult to effectively put to work. The ’70s were a lot harder, and volatility of returns, they were incredible.

Kevin: Okay. This goes back to ideology. I love when I can see somebody stand behind the way they operate to where they’ll say, no, we don’t see value so we’re not going to take any more money. Don’t give us any more money until we see value.

David: Yeah. The way he was operating was according to—we’re going to use the word differently—according to a set of expectations or values, not to be confused with value investing. But he had an expectation of what he can do. And if he could find value in the marketplace, he was going to buy it and hold it and profit by it. But at the end of the cycle, there’s not much that you can buy cheap. And so the point was, we’re just going to stop for now.

Kevin: Yeah. But what’s amazing though, the way he was able to identify value when prices weren’t giving him any instruction back in the ’50s, it was the same value judgment that allowed him to see that the bull market had ended, even though the prices may not have shown that right off the bat.

David: Well, what the prices were proclaiming was, things are over done. I mean, the bull market ended in ’66. And for anyone who was value oriented like Buffet, that kind of investor, you could say, well, it’s obvious, right? It’s hard to compound returns when you start at the end of a cycle, easier when you’ve preserved capital, put it to work at the beginning of a cycle.

’66 was the end of the easy growth cycle. After about two and a half to three years, by ’69, that’s when Buffet temporarily closed up shop. Bear began to take its bite. The unsuspecting investor didn’t realize that inflation was going to be the real killer through that next decade and a half, negatively compounding to its point of critical pain a decade later. So you get to ’76, ’77, ’78 and now all of a sudden it’s incredibly painful because of the negative compounding of inflation.

Kevin: Okay. So the amazing thing is, okay, when Buffet is closing up shop, your dad is opening up shop, in a way. The inflation that the unsuspecting investor didn’t see, that was the one thing that could have actually saved that entire decade for most investors because, if you think about it, gold moving from $35 an ounce up to $800 an ounce, more than made up for the loss in the stock market.

David: Yeah. Well, I mean, from a political standpoint, my dad stood back and said, how can we do this? You can’t pay for everything and have a fixed value in the currency. You have it tied to gold, something’s going to break here. You can’t just keep on making paper promises when there’s actually gold backing the currency.

Kevin: You didn’t need gold before ’71 because the dollar was gold.

David: Well, that’s right. But there was also this tied connection, this promise that gold and paper were going to be one and the same because of the legitimacy of the underlying asset. There were suspicions amongst the French, going back to ’68, that this relationship would not hold. Lo and behold, ’71, it breaks apart. Nixon says we are temporarily, temporarily closing the gold window and suspending that convertibility.

Kevin: Where are we today? Okay. We are looking at this history, and actually, just this talk, Dave, is inspiring me because I’m just looking at these— born in the right time, doing the right thing at the right time. Where are we today?

David: I think we’re similarly positioned in time today. The bull in equities is ending. We can’t yet say the bear has begun, but inflation is not coming. Inflation is already here. That reality has not impacted the crowded investment pools and the indices to date, and it certainly has not impacted the Fed or their policies. I think they’re kind of the three monkeys, see no evil, as in see no inflation, hear no inflation, speak no inflation. But in the end, I think you’re talking about stocks and bonds both being negatively impacted.

Kevin: Okay. But commodities are moving. Even toothpaste is going up.

David: Yeah. Well, you look at across the range and this is where you have to say, this is beyond a post-COVID supply chain concern. You’re dealing with a synchronicity of increase in commodities—soft commodities, industrial commodities, precious metals, oil, natural gas. Commodities are moving. Copper and iron ore are at an all-time high. Soft commodities are moving aggressively enough so that Coca-Cola and Procter & Gamble and Kimberly-Clark and Colgate-Palmolive and 3M and Fastenal and Whirlpool—I mean, I can give you a list a mile long of companies that have already increased prices and are discussing on recent conference calls how pervasive the inflation of prices is in their respective spheres. And that in itself, I think you’ve got to pause and think about.

It’s funny how business operators—they say pervasive, the Fed says transitory—who know something about business operation in the marketplace, right? It’s one thing to be an academic economist. It’s another to be a business operator. They’re not using the word transitory. It’s pervasive inflation for the prices in all of their respective spheres.

So the increases are coming not only from raw materials, yes, commodity increases, but also labor and transportation as well. So the incremental increase in prices for these companies that they’ve already announced in the first quarter are between four and a half percent and 12%, kind of a different number than your 2%, whatever, for CPI, right?

So they are going to reassess, this is talk of the town, they’re going to reassess another hike in prices at the end of Q3. If you listen to these corporate conference calls, the discussion on inflation, this is going back to a report done by Bank of America, discussion of inflation on corporate conference calls in the first quarter tripled compared to a year ago. That’s the biggest spike in concern in living memory for the folks at Bank of America.

This week, we get a fresh look at CPI. CPI numbers on Wednesday, PPI numbers on Thursday, which are going to be higher, but they’re not accurate. Take the shelter component for CPI. That’s 42% of the index by weighting. Okay. This is an index that has different components. Each of those components are given a weighting. The shelter component for CPI is 42% of the index. On the last reading, the year over year increase was marked at, drum roll please, 1.7%.

Kevin: Virtually non-existent.

David: Right. Unconcerning to say the least. Meanwhile, you’ve got the National Association of Realtors, which has data going back 22 years, and they mark the March increase of 17.2% versus last year the biggest spike on record. CPI ignores the market for the preferred model. That’s for existing homes. New homes—we’ve talked about this in previous weeks—the number keeps on growing as the commodity prices keep moving higher. New homes, tack on—this is according to the National Association of Home Builders—$35,872, with materials pushing higher. Again, lumber by 340% compared to a year ago. This is a big deal, existing homes, new homes, and yet the CPI, oh, yawn, 1.7%, yawn. It’s transitory and there’s nothing to be concerned about.

Kevin: Nothing to see.

David: If I was looking at that number, I wouldn’t be concerned, either, but the rest of us live in the real world, with real price increases.

Kevin: Dave, we were talking last night about how you’ve been back here at the office from your stock brokering already 20 years. I mean, we’re coming into 20 years. I remember talking to you, and Barton Biggs was with Morgan Stanley along with you. Barton Biggs is one of those guys who, he was an economic historian, a lot like Russell Napier, and he wrote a book that you turned me on to, Wealth, War and Wisdom.

This morning, I was waiting here in the studio because you had a couple of other things to do. I pulled this book off the shelf, and I remembered a quote. Now, let me just read this quote because he’s talking about Germany back in the early 1920s. And I love the way he puts this. Okay. I’m just quoting from the book, Wealth, War and Wisdom, Barton Biggs. Here is what he said. He said, “No chart can capture the stupendous ascent slope of true hyperinflation. Numbers actually do a better job. From 1919 to 1921, German CPI inflation was gradually rising from virtual price stability of a 2% annual rate. By June of 1922, inflation was at an annual rate of 4%. By September, 22%. By December, 68%.

Then it really took off in March of 1923. It hit 285%, then 765% in June, then one and a half million percent in September, and finally, of course, it’s in the billions.” Let me just read one more little bit that he wrote because it’s fascinating. He said, “The only winners from the hyperinflation were a few sophisticates who had hedged the mark in 1918 or earlier, landowners who paid off their mortgages, and businessmen who repaid their loans and became unencumbered owners of real property.” Isn’t that interesting? Could we be seeing— I mean, the CPI, you said CPI is coming out this week? I’m sure they’ll tell the truth.

David: You’re going to see some movement, but it doesn’t tell the full story. I don’t know that we’ll see hyperinflation, but we are seeing aggressive inflation that’s understated. Labor has yet to factor in in a meaningful way to inflation. Companies are being forced to raise wages to remain competitive with government-subsidized unemployment checks. I mean, think about how twisted that is, where it’s better to stay on the couch playing video games, and between state and federal subsidies, there really is no reason to go back. You’re making more money today than when you previously had worked.

Kevin: So are we really building mental toughness then, right now? Going forward, it looks like we’re going into choppy water.

David: Yeah. Choppy water as a couch potato. I mean, that’s the challenge, is can you go the distance? I’m not even sure they can stay afloat. 1966 to 1982 made the work of investing a labored and difficult project, right? No more tailwinds, lots of headwinds, and that’s when Buffett said, yeah, we’re just going to take a break here, and he was right to do so. Lots of headwinds create a mental grind that simply put is painful.

So we return to the idea of mental toughness. A generation of investment professionals have had it easy. Easy money and disinflation has made for a boom in asset prices. As time has passed, you’ve got the index, you’ve got the momentum trades, which have stripped out the value of analysis and the importance of creating long-term returns on original cost basis. The easier the money and the cheaper the credit, the higher the price for bonds and stocks alike. Not only has value investing gone out of favor, but the trend of momentum has all but displaced the value of recurring cash flow. Who cares about cash flow when you can make a fortune in a matter of days? That’s epitomized by one particular cryptocurrency, dogecoin? It’s unbelievable.

Kevin: Well, okay. Do you remember back in the late 1990s, the stock market, the tech stocks, especially, it just had to have .com behind it and it would go up. The Wall Street Journal, actually, there was an article, it was the dartboard challenge, and you could just throw a dart at anything in the Wall Street Journal and actually beat the investment professionals. I think those days are changing.

David: I think they will change. Now we have a parody on marketplace intelligence captured, and you mentioned earlier this last week’s Saturday Night Live skit, where Elon Musk joins, in person, the actual Elon Musk playing— dressed up as an investment professional. Probably the first time he’s worn a tie in, I don’t know, a decade or more. He’s playing the investment professional who can’t answer the simple question, what is dogecoin? So it’s the wave of the future. But what is it? Well, it’s a revolution in money. But what is it?

Kevin: What is it?

David: It’s not defined well, it’s not understood. As an investment professional, he doesn’t know. He just knows that he should be buying. It’s very funny, in my view, because the masses are buying it, but they don’t need answers to those questions. In a speculative—

Kevin: It’s going up. It’s going up. That’s all that matters.

David: —we’ve moved beyond fundamentals of cash flow or profitability, it’s sufficient to buy the trend because the trend’s up. Never mind that dogecoin is nothing more than a joke, and what I mean by that is literally somebody launched a cryptocurrency just because they wanted to— It’s a dog coin. There’s a picture of a dog on it, so they call it dogecoin. It’s a joke, and yet it’s at 14,000% in a year and that’s not a joke.

Do you really need fundamentals when that kind of money can be made in under 12 months? I mean, think about the contrast. Buffet has earned around 20% a year, 20.9% a year on average, since the ’60s, with recurrent cash flow from his insurance company and low cost basis showing it’s compounding value, again, connected to investing with a long-term horizon. Why would you go through the labored process when 14 to 18,000 percent, isn’t that more appealing? I mean, again, speculation on the performance of a cryptocurrency, which is fundamentally a joke, wins the day, and I would just have to say, but only the day.

Kevin: Talked about ideology earlier, and how Churchill represented an ideology, how this company and your family represents an ideology. If I had to put that ideology into short words, it would be value or intrinsic value. It doesn’t matter how much it’s gone up, doesn’t everything ultimately return to its intrinsic value?

David: Yeah. And I would add to that, take the longer view. Take the longer view. These speculations are going to go to their intrinsic value. That won’t be funny for the latecomers. Buffet in his most recent— You should have heard Charlie Munger. I mean, he was almost unhinged when he was talking about the cryptocurrencies. Buffet was a little bit more polite. He said the gambling impulse is very strong in people worldwide, and occasionally, it gets an enormous shove. It creates its own reality for a while, and nobody tells you when the clock is going to strike 12:00 and it all turns to pumpkins and mice.

Kevin: And so we go back to mental toughness and pain. One of the things that I did learn when we did that Half Ironman— and it’s such a valuable experience, Dave. I really appreciate that you’ve challenged us to that, because it really did, honest to goodness, it scared me. Okay. The bike didn’t scare me. I knew I could run 13 miles. That didn’t scare me. What worried me was swimming over a mile, biking 50 some odd miles. What is it? 54?

David: 56.

Kevin: 56. And then running 13, running a half marathon. I was explaining the other day, too, that swim. Even though the swim became one of the most beautiful, easy parts of the day, it creates a general fatigue that forces you to grind for the rest of the race. You figure you swim for 1.2 miles, you’re going to get out. You may feel refreshed, but actually those muscles have already spent quite a bit of energy.

David: That’s right. In the period of time ahead looking at the markets, I think you’re talking about a different kind of pain, a grinding out of returns, and that’s frankly more common for the long-term investor. This reality is more common still during a period of inflation. It’s a grind. Buffett’s best year was during the inflationary 1970s. 1976, he was up 129%, which if you look at the math of what he lost in 1974, basically just made his money back, right? He lost 48% in ’74, and then a banner year in ’76. But again, down 48, and then over 100% gain gets him back about break even. The ’66 to ’82 period was a period that clarified for investors their priorities. It definitely focused their attention, as pain often does, and look, returns were compressed. Most of it was painful, particularly towards the end, when you were fighting not only deteriorating company fundamentals, but that external tourniquet of inflation and rising rates.

Kevin: Yeah. We’re talking about mental toughness, and we’re coming off of the Napier interview, which really, of all the Napier interviews, this last one was one of the best, because I think he’s trying to communicate: you’d better adjust to a complete new revolution. He said the revolution has already occurred, and this revolution is going to be, how do you survive in a period of time where governments are directing all the money and high inflation?

David: The revolution has already occurred. Inflation is already here. Napier talked about a transition towards inflation, which was not a 6 to 12 month issue, but a 6 to 12 year issue at the minimum.

Kevin: Or more, or more.

David: The mindset doesn’t exist today amongst the investing public or the professional investing crowd to manage or endure a long grinding inflationary period. Mental toughness is not a common characteristic amongst today’s speculating momentum-riding investor. Their metal is going to be tested. And I think for anybody with assets in the market, you are talking about the requirement going forward of practice and preparation. It’s not been necessary to this point. You’re just riding, right. Riding the trend, and the trend has been your friend, but practice and preparation are going to be necessary in the timeframe ahead, a 5 to 10-year period, but also the grit and determination to match it. So whether you’re considering a triathlon, and I’m not sort of soft peddling a pitch as to why you should be a triathlete.

Kevin: Yes. But it is your passion.

David: Send me an email if you want to have that conversation.

You might want to think about the investment markets as testing you in ways you’ve not been tested before, unless of course you’re over the age of 60 or 70 and know what the period ahead entails because you’ve experienced it before. There’s a certain sobriety about what it means to have challenges to your mental constructs. If you’ve ever been on a bike and you’re facing a headwind, it is debilitating—not physically, you can grind through it, but mentally. That’s where the battle lies. And all of the mental battles when you get into the water, that’s where the battle lies. 2021, this year, out to 2033, the next decade plus, it’s going to be like an Ironman for the market participant.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at, You can call us at (800) 525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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