Begin To Invest - Closed End Funds, Inflation, and This Week in Stock Market History
Aug 09, 2021 3:01 pm
This Week in Stock Market History
“There is no better teacher than history in determining the future... There are answers worth billions of dollars in a $30 history book.”
― Charles T. Munger, in Poor Charlie’s Almanack
This week saw the 76th anniversary of the bombing of Hiroshima. The event brought an end to World War 2 with Japan surrendering 9 days later.
It seems traders needed time to process the event as headlines detailed the devastation. US Stocks declined 1% the day after the bombing. But after victory was declared, US stocks would rally 20% over the next 4 months.
Lesson from History - Inflation: As the US economy restructured from the war efforts, and the war-time rations on many goods subsided, the US briefly saw inflation at the highest levels of the century (even exceeding the double digit inflation of the 1970s and early 80s!)
Many see similarities to the end of WW2 and the inflation we are beginning to see today as we recover from the coronavirus shutdowns. Today, despite the highest inflation in a decade, bond yields are remaining low.
The late 1940s saw inflation reach as high as 18%. And even with that, the 10-year treasury never got about 2.5%.
Many people are alarmed at the increase in inflation today, and view it as a sign that bond yields must rise as inflation increases. But the 1940s are a clear example that temporary (or "transitory" to use today's buzzword) inflation can have little to no impact on bond yields.
Of course Henry Ford is famous today for founding the Ford Motor Company. But, what you may not know is that Ford was not the first car company that Henry Ford founded.
This week in history was the anniversary of the founding of the Detroit Automobile Company. The company sold motorized delivery trucks - but not many of them!
Within 18 months the company was shuttered and Ford went back to the drawing board.
It would be another 4 years before Henry Ford founded the Ford Motor Company that we know today.
Lesson From History - Dream big, but responsibly: One thing that I think enabled Ford to fail several times is his conservative nature and unwillingness to go "all in" on his early ideas. He repeatedly built a product, failed, then went back to his day job and building his next idea in the garage.
Today, there seems to be this assumption that if you have any idea you need to quit your job, raise money (and give up equity), and go for broke (YOLO!).
The lesson from Henry Ford seems to point to the opposite. Chase your dreams, but make sure you will always live to see another day.
That is a pretty valuable lesson for investing too!
Today's political polarization is making a lot of headlines. Whether the focus is on income inequality, vaccine rollout, voting rights, or taxes, the distance between our two political parties seems like it has never been wider.
Of course, a quick look back at history shows quite the opposite. Imagine what the headlines would read if QAnon, or socialists, or any other radical party attacked and shut down the New York Stock Exchange today!
As today's low interest rate environment continues on, investors look harder and harder for sources of yield.
Today, that is leading to a lot of attention to closed end funds. These highly leveraged, aggressively managed funds can provide some very high yield. Just to give you some idea, there is rising popularity for long term municipal bond funds that have yields of 8% or higher! Of course, if you have an investment with that kind of yield today, there are a lot of added risks.
The link above directs you to our definition page for closed-end funds. But scroll down about half way where we have an example of a closed-end fund managed by BlackRock (Ticker: BBN) that saw incredible volatility during the coronavirus pandemic. We give a quick explanation for why these funds can behave like the sometimes do.
What We Are Reading This Week
Imagine its February 2021 - While you are researching for your next big investment idea you miraculously refresh your Google News tab and get August 2021's news. You read that the US housing market was going to see its biggest boom in more than a decade, rivaling that of the 2007 bubble. Home prices and demand are up everywhere. Bidding wars, all-cash offers, and homes sold in just minutes.
If that happened, you might think "I'll buy stock in Zillow!". And how would that bet have gone? Terribly.
Today, Zillow stock is down 50% from where it was just 6 months ago, despite the boom in the housing market. In this most, Ben takes a step back to look at why the market can behave like it does.
Just over 10 years ago, HP was the tech industry's largest company by revenue, doing over $127 billion in sales per year.
Fast forward to today, and you'd have to name quite a few other tech companies before you get to HP.
The article is a quick read with some fun history on the rise of HP. With the benefit of hindsight, it is also a great reminder that past performance is no guarantee for future returns, and just how quick things can change.
Thanks again for reading - Happy investing!
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