First survival rule: Remember the wise Buddhist admonition which turns the typical Western adage on its head: “Don’t just do something, stand there.”
It’s tempting when a macro shock like tariffs hits the system to think that the best next investment step is action—any action. Western action-oriented philosophy pressures us to think that something must be done, something must be changed: stocks reshuffled, bonds purged, crypto hoarded, shoddy bandwagons jumped on—in order to deal with the new reality. This is garbage. Nothing could be farther from the truth. It relieves tension and makes people feel better to take swift action and have a “plan,” especially when action seems to counter underlying impotence. But the worst investment mistakes are made at such moments—when panicked, sloppy activity substitutes for considered thought and reflection. Whatever people do, they should not act out of fear, dread, agitation, or a misguided attempt to transmute powerlessness into wrong activity. So: don’t just do something, stand there.
While standing there, it’s worth considering Warren Buffett’s single most valuable insight, which could not be more relevant at a time like this: you must always first know what you don’t know. We don’t know—and can’t know—so many things. The list of what we cannot predict is formidable: macroeconomic trends, currency fluctuations, short-term stock-price movements, government policies, interest-rate trends, monetary policy, fiscal policy, the actual underlying value of any currency or cryptocurrency (or any other asset that does not produce cash), etc. These many moving parts must push us to know the only thing that we can know: quality assets trading at reasonable prices. It is this simple but difficult insight that made Buffett the best investor of all time. And it’s the very same simple but difficult insight that must guide our thinking about investing always, lest we succumb to trying to predict the unpredictable—and, by doing so, fail miserably.
Second survival rule: Never speculate, only invest.
Speculation is the act of gambling on what’s inherently unknowable and impossible to value (think: derivatives, horse races, crypto, pork bellies, lottery tickets, and gold) while investing is the act of owning what’s truly knowable and valuable, as measured by the underlying production of cash flows (think: quality stocks, real estate, and bonds).
Third survival rule: As they say, never forget rule number two.
Despite the admonition against predicting the macro, we can make some basic reasonable assumptions about the economics:
- Massive tariffs will try to raise revenue and alter the current account deficit.
- Deep tax cuts are in view, especially to corporations.
The sugar high that has propelled stocks since the election is due to the promise of deeper and longer corporate tax cuts, which will without a doubt add to the value of all domestic stocks by immediately increasing their future cash flows. The post-election rally in stocks is totally logical, but it will eventually give way to the muddier waters of tariffs and protectionism—a policy that was discarded after the Smoot-Hawley tariffs of the Great Depression but somehow is being dusted off as a useful playbook today.
Fourth survival rule: Small-cap stocks.
So what’s the best way to take advantage of corporate tax cuts while shielding yourself from the destructive side of tariffs? Own small-capitalization domestic value stocks. These are generally stocks with market capitalizations of less than $2 billion. They typically have the advantage of operating within U.S. borders (unlike multinationals) and are much less prone to the whims of trade wars. They often have pricing power to hedge against inflation. They also have the wonderful value-oriented advantage of being undervalued going into this mess: at 13 times forward earnings, they are cheap enough to perform well in any environment.
So after standing there for awhile and taking the long view, leave speculation aside and invest in what’s valuable.
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