Zenconomics

The Master Economic Resource

We’re talking about investment themes for building consistent wealth this week.

We covered Bitcoin and gold last Thursday. And we discussed world-class insurance stocks yesterday. Today we have to talk about the master economic resource – energy.

Simply put, nothing happens without energy. Everything we see in our modern world today – and everything we use on a daily basis – is only possible because of energy.

It’s a simple thing. But if we truly ponder it, it changes our perspective.

My investment philosophy is this: I want to own energy in the most advantageous way I can. If we start there, all we need to do is figure out what form that energy should take.

Top-Tier Energy Stocks

The Environmental, Social, and Governance (ESG) movement would have us believe that we should own energy in the form of solar and windmills.

They told us that we’re rapidly moving towards a “carbon-neutral”, “net-zero emission” world. And in that world, we would reduce our dependance on fossil fuels—namely oil, natural gas, and coal.

Countless “clean energy” exchange traded funds (ETFs) popped up support this theme. ESG investing became a hot trend. And Larry Fink, CEO of investment management giant BlackRock, paraded around in media appearances proclaiming the gospel of ESG.

But then reality set in.

The Cornerstone of a Robust Investment Portfolio

Last week we laid out a system for building consistent wealth. Then we outlined seven different investment themes through which one could implement such a system. They are:

Bitcoin
Gold
World-Class Insurance Stocks
Top-Tier Energy Stocks
Gold Royalty Stocks
Consumer Inflation Hedges
High-Technology Stocks

We talked about the ‘why’ for Bitcoin and gold last Thursday. Today let’s cover world-class insurance.

World-Class Insurance Stocks

World-class insurance refers to property and casualty (P&C) insurance companies. Believe it or not, this is one of the best businesses in the world.

To understand why, we have to understand the P&C business model. It sounds boring… but there’s magic hidden within the nuances.

Diving into our investment themes…

Yesterday we discussed a system for building consistent wealth.

The system is rather simple. If we invest a reasonable amount of money each and every time we earn income, we’ll automatically grow our wealth and create financial security.

The big question is – what should we invest in? And to that I proposed seven different investment themes. They are:

Bitcoin
Gold
World-Class Insurance Stocks
Top-Tier Energy Stocks
Gold Royalty Stocks
Consumer Inflation Hedges
High-Technology Stocks

Let’s talk about the ‘why’ for each of these. We’ll hit each from a high level – starting with Bitcoin and gold today.

Building a System for Consistent Wealth

We’re talking about consistent wealth this week. And as we noted, the simplest way to build consistent wealth is to buy quality assets on a regular schedule. Like clockwork.

When we left off yesterday, I promised to share with you how to create a system for this… and exactly which investments to make right now. That will be our topic for today.

I’ll start by acknowledging that everybody’s situation is different. Anything I suggest in these pages should be taken as just that – a broad suggestion. Nothing here should be considered personalized financial advice.

That said, most of us earn income on a regular schedule. The easiest way to create a system for consistent wealth is to set aside a chunk of our income for investing the moment we receive it.

This is the old pay yourself first principle. Invest a portion of your income as soon as you receive it – before you pay any bills or make any purchases.

To make this sustainable, the portion we invest has to be reasonable. It should be an amount that won’t leave us scrimping for quarters under the couch cushions at the end of the month.

At the same time, it should be a material amount. Investing five dollars every two weeks isn’t going to do much for us.

Once we have settled on our investing budget, we should spread it out evenly over several different assets. And we do this first thing every time we get paid – no matter what.

So that leaves the question: what assets should we invest in each pay period?

Consistent Wealth

Last week we talked about how consistency is the key to success.

Success usually doesn’t come from one massive accomplishment. Rather, it comes from many small accomplishments made day after day after day.

All the little accomplishments accrete. That is, they build upon one another. Then one day you wake up and realize they have compounded into something truly impressive.

The same principle applies to investing. It’s a simple thing – but I don’t think this is well understood today.

When I was a young professional, I thought investing was about hitting it big. So I was obsessed with trying to time the stock market. And I primarily invested in the riskiest stocks I could. When I found one with a good story, I would put a big chunk of my investable money into it.

Then I would start counting my gains prematurely. I would think to myself – if it doubles, I’ll turn my $10,000 into $20,000. If it triples, I’ll have $30,000. But what if it’s a ten-bagger? Then I’ll have $100,000!

Of course, it never worked out as well as I had mapped out in my head. Because that approach isn’t investing… it’s speculating.

An investor doesn’t think in terms of hitting it big. He (or she) thinks in terms of compounding money over long periods of time. That’s Einstein’s secret to wealth.

On History and Money – Lessons from the Allegheny Frontier

We took the kids on a field trip to the historic Homestead resort over the weekend. Here’s the view as we approached the grounds:

The Homestead rests in Hot Springs, Virginia. It’s located way up in the Allegheny mountains. The resort’s doors first opened in 1766 – back before the founding of America.

For early Americans, this was the western frontier. What lie west of the ancient Appalachian mountain range was a mystery.

The Homestead’s primary draw at the time was the surrounding hot springs for which the town was named. People believed the natural springs had healing properties. And more than a few traveled to the Homestead for a chance to bathe in them.

Thomas Jefferson was one of them.

Jefferson traveled to the Homestead in 1818. He was 75 years old and suffering from rheumatism at the time.

It’s documented that Jefferson spent three weeks at the Homestead. And he took to the hot springs three times a day to gain reprieve from his illness.

I imagine he spent considerable time browsing the resort’s eclectic library as well. Here it is:

My Phone’s New Superpower

Start off your morning by doing that day’s most important task. And do this every single day – no exceptions.

It’s the WIN principle. What’s Important Now.

I pulled that acronym from retired college football coach Bud Foster. Bud was the Defensive Coordinator for Virginia Tech’s football program for decades. He had his players walk around carrying a beat up old lunch pail with the WIN moniker painted on it.

Bud coached in the 2000 national championship game against legendary Bobby Bowden’s Florida State program. The third quarter of that game ended with Virginia Tech up one point on vaunted Florida State. That’s how close Bud and his philosophy came to the pinnacle of the sport—though Florida State came back to win in the final quarter.

The power of this principle is in consistency.

If you do the most important thing you have to do first thing every morning, every day – that productivity will compound. Over time all those little things will add up to big things.

Darren Hardy spelled out how this works in his book The Compound Effect. It’s a timeless secret of success in any endeavor.

For years I believed the secret of this formula lie in doing your most important task first thing in the morning. But recently I’ve realized that’s not it.

Notes from off the Digital Grid

I went off the digital grid last week.

As I mentioned earlier this month, I’ve been exploring alternative smart phone operating systems recently. But up to this point I’ve conducted my research using a spare phone running on Wi-Fi. I kept my iPhone as my primary device.

Until last week. I ditched the iPhone and went all in GrapheneOS. Now I’m fully off the digital grid.

The transition process was a tad inconvenient. Like all Apple products, the iPhone is elegant, yet easy to use. The iOS interface becomes second nature very quickly.

But now that I’m fully acclimated to Graphene, my only regret is not taking the plunge sooner.

As a reminder, 99% of the world’s smart phones run either Apple iOS or Google’s Android. And those systems send data back to Apple and Google every four and a half minutes on average.

In other words, the operating systems report back to headquarters with information about what we’re doing on our phone. There’s no way to stop this.

Meanwhile, neither Apple’s App Store nor the Google Play marketplace provide transparency around an app’s tracking capabilities. And they require us to give each application we download a host of permissions.

GrapheneOS flips the script.

First, it provides access to several open source app stores. Each gives us a report on every app’s tracking abilities.

It probably comes as no surprise that every app I had on my iPhone came with third-party trackers attached. That means every app I had was sending data on me back to various third-party companies. And who knows what they were doing with my data from there.

Some apps only had one or two trackers attached to them. Others were even more egregious. For example, the Weather Channel app came packaged with 14 different trackers. Have a look:

Bank reserves and the future…

Federal Reserve Chairman Jerome Powell spoke to the House Financial Services Committee last week.

Later in the discussions, the Basel III endgame proposal came up. The proposal pertains to bank reserve requirements for both lending and trading activities.

Interest rates get all the attention when it comes to the Federal Reserve’s (the Fed’s) monetary policy. But bank reserve requirements are just as important.

Bank reserves are simply the money that banks keep on hand to back any loans or investments they make. Greater reserves equate to less risk.

Central banks set reserve requirements as a percentage of a bank’s deposits. There are some nuances to this calculation, but since 1982 the base reserve requirement has been 10% for banks here in the United States.

That means US banks have been free to lend or invest $90 for every $100 they receive in customer deposits. They must hold the other 10% in reserves.

We call this a fractional reserve system. Because the bank’s only need to hold a fraction of their customers’ deposits in reserve.

But that changed on March 26, 2020.

Interest Rate Signals and a Fork in the Path

We’re talking macroeconomics this week – with a focus on the Federal Reserve (the Fed).

Yesterday I put forth the idea that Fed Chairman Jerome Powell is making monetary policy decisions with fiscal responsibility in mind. This is just a theory… and probably not a popular one.

But thus far the theory has held.

Powell clearly recognizes the need for normalized interest rates. He’s been as direct about this as a Fed Chair can be.

The fact is, an economy cannot survive on a permanent diet of cheap money and the malinvestment it fuels. We need real interest rates to help us make informed calculations about which projects we undertake and which we don’t.

This is how the market economy allocates resources effectively – as Adam Smith pointed out in his The Wealth of Nations.

Smith observed that firms and investors make decisions based on their own profits. Yet an invisible hand seems to promote efficient economic growth from their independent actions.