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Imagine releasing a book called “The Value of Debt in Building Wealth” when U.S. stock markets are at all time highs and U.S. bond markets are near all time highs. Must be a sign of the top of the market.
People often incorrectly believe that my strategy is designed around bull markets and low interest rates. A strategy of buying a bigger house than you can afford or leveraging up your investment portfolio because perhaps, as many people believe, prices tend to go up over time.
Last week on Cheddar TV I explained nothing could be further from the truth.
While many talking heads think that they know the future, what makes me unique is that I know that I do not know. I do combine a passion for economic history, theory, and simple lessons from math to create probabilities which lead me to some simple predictions…and to the bet.
In the Value of Debt in Building Wealth I make the following simple predictions:
- I predict we will see at least one if not two equity corrections of at least 50% over the next 25 years.
- I predict 2008 will not be the worst financial crisis over the next 50 years.
- I predict that “average” lies. That over any 10-year period investors in US stocks are unlikely to get “average” returns. One will either get much higher returns with less risk or lower returns with higher risk.
- I predict that most risk and return data from the past 35 years will have virtually nothing to do with risk and return data for the next 35 years.
I call them simple predictions because they are not that bold. Math, history, and valuations all indicate that they have a very high probability of being correct.
They are also simple because they have little short term impact on your financial life. It is like predicting that over the next 35 years there will be an earthquake in California, a recession, a major hurricane on the east coast, “unprecedented” floods, droughts, and the United States will be at war (all things I also predict).
These are things I consider known. And, because I consider them to be known I value the liquidity and flexibility that an appropriate debt strategy affords me. Counterintuitively, because I believe all of these events are virtual certainties, I believe in the Value of Debt.
So what about a bolder prediction? My research suggests that if you are overweight U.S. assets, and most US investors are, you should consider making a change. My research says that any combination of U.S. stocks and U.S. bonds (from 0%/100% to 100%/0%) will deliver an annualized, real return of less than 3 percent for the next five years.
This is a bold prediction because I know of no other prediction like it. I am so confident in the prediction that I will donate $100,000 to charity if I am wrong.
I place the bet not because I am a betting person but to demonstrate the power of the guide posts.
What does this bet mean to you? Be careful. Many investors around the world in 2017 could be in for a big kick in the teeth. Target date funds and “traditional” asset allocation models are likely to disappoint. Buying over priced assets is always a bad idea, especially if there is debt involved.
How can you participate? Join me. At a recent dinner an individual asked if I would take the bet if they could choose a portfolio of 10 stocks. Yep – I would, which inspired me. As business professionals and individual investors we are taking a view everyday on the economy and the risks around us in the short, medium and long term. State your view and place your own bet to charity. A proper bet will be specific, measurable, and have the right proactive policing mechanisms in place between you and the charity.
My hope from these bets is that we can jointly learn about the power of economic history, math, and valuation as guide posts to better decision making. Many risks that people, and society in general, consider to be exogenous (out of their control) should be endogenous (in their base assumptions).
So much time and effort is spent on discussing assets and asset allocation. While they are important, The Value of Debt in Building Wealth proves that the decisions you make with respect to debt will be as big, if not a bigger determining factor in your long term net worth. Decisions with respect to debt will also be your biggest driver with respect to liquidity and survivability of the twists, turns, and curveballs that life sends all of us. Be prepared.
Supernova Companies: Knowledge Empowering Life.
Full details on the bet as well as disclaimers, risks and citations can be found in The Value of Debt in Building Wealth. This article is not written or intended to provide investment advice.