I am pleased to bring the results of the 5th quarter of this fund. I want to reflect on a few of the statements from the first Jones Fund Update(2020 Q2). One of the changes is that I can now present year-over-year results, as is typical in most financial reports. The last quarter will be in real dollars and the year-over-year will be in normalized(accounting for any changes in capital in the fund).
Results
2021 Q2 results
April 1st
June 30th, 2021
$ change
% change
Jones Fund
$390,653.33
$411,816.42*
+$21,163.09
+5.6%
S&P 500
$3,972.89
$4,297.50
+$324.61
+8.2%
Difference
-2.6%
Year-over-year results
June 30th, 2020
June 30th, 2021
$ change
% change
Jones Fund(normalized)
$112.78
$159.38
+$46.60
+41.3%
S&P 500
$3,100.29
$4,297.50
+$1,197.21
+38.6%%
Difference
+2.7%
* We are currently at around $212,000 in cash.
I also want to apologize as I have been straightening out a lot of the administrative aspects of the fund and realized I made an error in my initial report where I reported that the S&P 500’s return between April 1, 2020 through June 30, 2020 was 20.3% when it was in fact 25.5%, which likewise means that the fund did-12.7% when compared with the S&P 500(in that quarter).
Overall, not much has changed. I have entered us into one additional position in a company I’m very excited about and have exited no positions. Personally, I have continued my own investing research both in professional courses and through extensive reading and am generally pleased with how the performance is doing, and I hope you are as well.
Inflation is here
While it’s my intention for any of my reports to be less dry than the average financial report, it is also my intention to give you my best understanding of what is happening in the financial world and what I currently have my attention on.
Last year my commentary was about the very quick recovery from the COVID-19 crash due to the Federal Reserve’s infusion of money into the markets, which I(and many others) believed would likely cause inflation. In the first quarter of this year I heard a lot of talk about various industries experiencing inflation but nothing“official”. The problem was that they weren’t reflected in the Consumer Price Index(CPI), an index that is considered one of the standards for tracking inflation. Part of the reason is because it’s a lagging indicator, which means that it will only tell us there is inflation well after the fact. There were reports as late as the end of March saying maybe the CPI is obsolete because it wasn’t showing inflation[0].
Finally, in May the CPI indicated a 5% inflation rate, the highest rate since August 2008[1][2]. Specific industries have been more affected than others, such as used cars at 8.2%-9.3% in a single month[3] or housing prices at 14.6% in a year[4].In my research of inflation and hyper-inflation(when inflation is greater than 50% in a month) and its causes and effects and will share some of the basics. I highly recommend When Money Destroys Nations by Philip Haslam and Russell Lamberti for a page-turning(but sobering) understanding of what can happen with hyper inflation.
Most modern economists believe that a little bit of inflation is a good thing. The Federal Reserve aims 2% inflation per year on average[5], which means that more money is around. When people feel like there is more money they are more likely to spend it. When people are spending more freely this keeps the“economic machine” going. The“danger zone”(cue Kenny Loggins), in economists’ eyes, is when deflation happens and people don’t believe there is much money around. When people pull back on spending, getting loans is difficult and businesses go bankrupt. The Great Depression was the most drastic deflationary period in US history.
The Federal Reserve has a few different tactics for inflation. One of the ways they control spending is by controlling the interest rates of US Treasury Bonds(T-Bonds for short). Here’s the simple version: the lower the interest rate is, the more likely people are to put money in the stock market. The higher the interest rate is, the more likely people will spend money on the T-Bonds. The T-Bonds are considered a“risk-free” investment, because worse comes to worst, the US Government can print money to pay you back.
All other investments are compared to this interest rate. If, for example, you can get a US Treasury Bill for 10% interest(absurdly high in today’s standards), why would you risk your money in the stock market which might get as high at 10% but also has a decent chance of losing your money? So, people take their money out of the stock market and put them into bonds, which precipitates a crash of the market(and the economy as a whole).
In line with this belief, but a different tactic, is to infuse money into the economy. The Federal Reserve is infusing $120 billion per month[6]. It’s important to note they do this in a bit of a clever way--this doesn’t mean they are giving this money to you and me(or our friends). One of the ways the Federal Reserve spends this money is by buying up what essentially amounts to mortgages — they now own roughly 1/3 of all US mortgages[7]. Part of the belief is that because they are buying loans they are not infusing money in a place that allow anyone to spend more money(which would trigger inflation), they are just covering if people default on their loans. Theoretically this means it shouldn’t increase inflation, or shouldn’t increase it that much. Theoretically.
But here we are with an inflation rate of 5% that has been on an upward trend for the last few months. The market is now expecting the Federal Reserve to raise interest rates. This would be a“typical response” to curb inflation. Meanwhile, the Federal Reserve is making promises that it is dedicated to the“recovery of America”(which means low interest rates). They originally targeted 2024 as a time when they might begin to raise interest rates, but recently revised their forecast to the end of 2023. The market promptly(andpreemptively) crashed[8].
What does this mean for the fund? We need to be Antifragile, a term from the author Nicholas Taleb and his book Antifragile: Things That Gain from Disorder. In short, some investments do better when everything else is crashing. If you consider something fragile as something that easily breaks, something that is antifragile is something that grows stronger while other things are breaking. I am looking for the types of investments that will be anti-fragile in an inflationary period.
Precious metals such as gold and silver are often considered strong anti-inflation investments. The thing that does best in inflation, however, are strong companies.
You can see from this graph that large stocks do nearly 100x better than their closest competitor(long term treasury bonds) over the last ~100 years. This is because a good company has pricing power and can raise their prices to match the inflation. A good company will also continue to grow its business.
Results
Inflation is here