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invest during high inflation by peter lynch let's get started we recently got new inflation data a week or two ago and it shows that the annual inflation rate in the united states has climbed again inflation is currently running at seven percent per year as a result of increasing inflation jerome powell and the federal reserve are planning to three rate hikes this year aka they want to stifle the economy and slow down business but of course raising interest rates has the unintended consequence of making businesses and stock markets less appealing super safe government bonds become more appealing but this does not necessarily indicate the stock market will fall however a high interest rate environment exerts far more pressure on the stock markets than a low rate environment and this has concerned investors who have had significant gains in recent years but are now experiencing a decline worry that when interest rates rise those advantages would not be sustained and that the opposite may occur especially now that inflation has surpassed seven percent in the media the doom and gloom narrative is gaining traction which only serves to exaggerate the severity of the situation a big negative headline front and center on major news sites is difficult to escape these days that has nothing to do with inflation interest rates or the federal reserve however with all the chatter and concern about inflation and interest rates always reminds me of something peter lynch the author of one up on wall street stated in 1994.
quote no one can predict the stock market they try to predict interest rates i mean this is a if anybody predict interest rates right three times in a row they'd be a billionaire considering there's not that many billionaires on the planet it's very you know i took i had logics i had a syllogism and uh studied these when i was at boston college they can't be that many people can bring interest rates because there'd be lots of billionaires and no one can predict the economy i had a lot of people this room were around in 1981 and 82 when we had a 20 prime rate with double-digit inflation double-digit digit unemployment i don't remember anybody telling me in 1981 about it i didn't read it i studied all this stuff i remember every time we had the worst recession since the depression so what i'm trying to tell you it'd be very useful to know what the stock market is going to do it'd be terrific to know that the dow jones average year for now would be x then we're going to have a full-scale recession our interest rate is going to be 12 that's useful stuff you never know it though you just don't get to learn it so i've always said if you spend 14 minutes a year in economics you've wasted 12 minutes and i i really believe that we feel like we're getting drone into market prediction territory at all times we just watched that and it really drives home the point that market forecast and interest rate estimations are a constant in stock market this is a 1994 lecture and the main topics of discussion were whether the stock market would crash and what interest rates would be but did it make a difference have you ever taken a finance or economic class where the professor discussed interest rates in 1994 and how they influence the stock market's long-term performance no because that was completely irrelevant the s p 500 was at 460 points back then but it is now at 4 600 points that subject was being discussed as if it needed to be resolved or investors would face doom and gloom inflation interest rates like the be all and and all of the markets alan greenspan is a very honest guy he would tell you that he can't predict interest rates he can tell you what short rates are going to do in the next six months try and stick them on what the long term rate will be three years from now they'll say i don't have any idea so how are you the investor supposed to predict interest rates if they had a federal reserve can't do it so i think that's uh but you should study history and history is the important thing you learn from what you learn from history is the market goes down it goes down a lot the math is simple there's been 93 years of century this is easy to do the markets had 50 declines of 10 or more so 50 declines in 93 years about once every two years the market falls 10 percent we call that a correction that means that's a euphemism for losing a lot of money rapidly we call it a correction and uh uh so 50 declines in 93 years about once every two years the market falls 10 all those 50 declines 15 have been 25 or more that's known as a bear market we've had 15 declines in 93 years so every six years the market's gonna have a 25 decline that's all you need to know you need to know the market's gonna go down sometime if you're not ready for that you should known stocks and it's good when it happens if you like a stock at 14 it goes to six that's great you understand the company you look at the balance sheet they're doing fine you're hoping to get to 22 with it 14 to 22 is terrific 6 to 22 is exceptional so you take advantage of these declines they're going to happen no one knows when they're going to happen that is the crucial message for investors and anyone worried about inflation interest rates or a recession should watch that video a million times there are a few things i'd want to know what will the s p 500 be in a year or what will interest rates be in two years but you don't realize it nobody does yes inflation might run a rampant and yes interest rates would be raised to 15 percent the stock market might drop by 30 percent however you will not know if or when this will occur as an investor what you really need to do is accept as peter lynch put it that the market is going to go down sometimes you know market declines happened no one predicted the pandemic boom it hit the u.s and the market tanked 30 percent at the start of 2020.
tell me that series of events was going to occur in october 2019. nobody knew that just a few months later their portfolio was going to be worth 30 percent less so the thing to do as an investor is to accept that these events will occur and accept that they will catch you completely out of the blue if you're at peace with those two things then you can start to get in a better frame of mind as to how to approach your investing and spoiler alert it's to always maintain a long-term mindset well obviously the market's market's gone up tenfold since i stopped running magellan so you make more money on the upside the market's been a lot higher than 10 years from now 20 years from now 30 years from now trying to predict the market is really a waste i don't know what's going to do it can go down when i ran magellan 13 years declined 10 or more nine times the market wow i had a perfect record i went down more than 10 every time where the market went down and went down more but over the long term the upside is more than the downside so you're going to say something do i need the money in the next month do i need money next year do i have kids going to college i have a wedding coming up then you're a bad investor if you if you can keep putting money in your 5 10 15 20 25 year you should do well there you go the market goes down you won't see it coming and it will sting you at some point along your investing journey with that in mind what are you going to do as peter lance just said if you're investing money that you need in the short term to make a quick buck in the market then you're a fool if you're investing money you'll need to pay rent if you're investing money you'll need for your kids tuition if you're investing money you need for the upcoming wedding then you are a bad investor because the market might go down in the short term remember we don't know when it's going to happen and if it does happen to go down in the short term then you're screwed however if you invest money that you don't need you can add to your portfolio over the course of 10 20 or 30 years you should do exceptionally well so and peter lynch's opinion at the end of the day the answer to the topic of how to invest at a period of rising inflation how should we invest when interest rates are likely to rise dramatically is it when is it we should approach it in the same way that we usually approach investing not speculatively but rationally recognize that horrible things will happen you already know you're going to get it at some point that could happen at a time when inflation is high and interest rates are raised off or it could happen tomorrow at 2 41 pm but who cares keep sensible stay focused on the long term and you'll be fine investing in the market at those times but it ultimately boils down to your investment empowerment do not be swayed by the news speculations or fear so they're always something to worry about and the key organ in your body in the stock market is your stomach it's not the brain if you can add 8 and 8 get reasonably close to 16 that's the only level of math you need to know you don't know to need the area under the curve remember that quadratic equation and an integral calculus and the area under the curve i mean whoever kid was under the damn curve but you had to study this you don't need this in the stock market so all you have to know is you're going to see it's always going to be scary there's going to be always something to worry about you just have to forget all about it cut it all out and own good companies our own turnarounds study them and you'll do well and that's all there is and i'm ready for questions so which of the topics for investing tips of peter lynch have you found to be particularly beneficial
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