Investing during a time of high inflation - What are you doing?

[absolutezero]

I think inflation is transitory.

GS

Wot, like QE was?

Strange comment. Care to elaborate?


GS
P.S. To be clear when I wrote inflation above I meant this present occurrence of inflation, I was not making a more general statement about all inflation everywhere. Perhaps that's the source of the weird reply.

There seems to be a view that inflation has been triggered by war and the recovery from the Covid pandemic.
In my view inflation was always going to happen because of the massive devalauation created by QE that started in 2008 in the wake of the financial crisis. Recent events have just supercharged it.

Furthermore, an ageing and soon to be shrinking working global population is going to fuel wage inflation. This will reverse the deflationary impact that the end of the cold war had by introducing the population of China and the whole of eastern Europe into the global workforce. Who needs a fridge repairman when it is cheaper to buy a new one from China delivered by Amazon?

Central Banks deluded themselves into thinking it was their brilliance that elimanated inflation. It wasn't, it was technology (suddenly, thanks to ebay, old stuff could be sold easily, adding to supply) and geopolitics.

The response is simple. Replace long duration assets with those of short duration. Forget price to hope ratios and go back to traditional stock valuations.

Agreed.
Interesting how many fail to link debasement of the currency to inflation in prices.
'But it's the war'.
And if it wasn't the war it would be something else. Covid. Brexit. Trump. Johnson. Wine in the garden of No 10. Whatever the current bogeyman is.
It's been a long time coming. The Russia thing is just giving it a rather large shove.

Would you elaborate on your final sentence?

[BT63]

Last autumn, fearing inflation would not/could not be easily tackled by central bankers, I increased my holdings in precious metals and their miners.

Although PMs have done well - especially since the Ukraine conflict began - my largest shareholdings (AZN, GSK, NG., SSE) also held up well, perhaps because of their relative stability in difficult times.

But as I've said before: I aim to run a less volatile portfolio and it always seems to perform well during difficult times and lags during good times.

[Pendrainllwyn]

Farmland. A difficult sector for investors to access. Fortunately there are two quoted REITs in America (Farmland Partners and Gladstone Land). IMHO Gladstone is seriously overvalued so I've been buying Farmland Partners.

Farmland is a wise investment in my opinion. It benefits from low price volatility and low correlation with with many other assets. Crop prices have been strong of late which is boosting farm prices.
I note that Farmland Partners values their farmland on the balance sheet at cost. I could not find reference to what they estimate market value to be. No doubt higher but not clear by how much.

I have been investing in farmland through Ceres Farms LLC for the past 7 years. It was appreciating steadily but slowly until Q3 2020. Since then it has been a rewarding investment. It's an illiquid investment due to the nature of the underlying asset and LLC structure but I am not worried as I plan to hold long term.

Good luck with Farmland Partners. If I could figure out what premium/discount the REIT is trading at I might invest as it's difficult to get more money into Ceres Farms currently.

Pendrainllwyn

[GoSeigen]

[OT: the OP made it clear he didn't want a discussion on these points; this will be my one and only response to Rob's post]

I think inflation is transitory.

GS

Wot, like QE was?

Strange comment. Care to elaborate?


GS
P.S. To be clear when I wrote inflation above I meant this present occurrence of inflation, I was not making a more general statement about all inflation everywhere. Perhaps that's the source of the weird reply.

There seems to be a view that inflation has been triggered by war and the recovery from the Covid pandemic.

If that is the case it's not a view I have expressed. The idea that the Ukrainian war triggered current inflation is deeply flawed as inflation has risen steadily since long before the war was even thought about. Exacerbated? maybe; triggered? no.

As for COVID being a trigger it's hard to disagree. As a global pandemic it caused supply shortages and disruptions worldwide which were masked until pent-up demand returned, and at the same time the government-backed lending hadn't ended and monetary policy was still rather loose. However these factors are going to reverse at some point or at least they will not persist and get worse IMO so I think this is mistaken:

In my view inflation was always going to happen because of the massive devalauation created by QE that started in 2008 in the wake of the financial crisis. Recent events have just supercharged it.

A devaluation is referred to without elaboration. No idea what this means. QE is said to have started in 2008, in fact it began in 2001. There followed twenty years of some of the lowest inflation in history as well as the lowest risk-free yields in history. I think any sensible reader can judge how plausible it is that QE which has been in operation for over 20 years without achieving its stated aims is the proximate cause of a sudden spike in inflation in 2021-2. Time will tell whether the other prediction -- that inflation will be sustained -- is correct or not.

GS

[Hariseldon58]

Perhaps the question of where to invest in times of inflation might be better expressed as, what do we think others will invest in ?

Akin to Keynes and the beauty contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest

[SalvorHardin]

Farmland is a wise investment in my opinion. It benefits from low price volatility and low correlation with with many other assets. Crop prices have been strong of late which is boosting farm prices.
I note that Farmland Partners values their farmland on the balance sheet at cost. I could not find reference to what they estimate market value to be. No doubt higher but not clear by how much.

I have been investing in farmland through Ceres Farms LLC for the past 7 years. It was appreciating steadily but slowly until Q3 2020. Since then it has been a rewarding investment. It's an illiquid investment due to the nature of the underlying asset and LLC structure but I am not worried as I plan to hold long term.

Good luck with Farmland Partners. If I could figure out what premium/discount the REIT is trading at I might invest as it's difficult to get more money into Ceres Farms currently.

Unfortunately, because Farmland Partners is American we’re stuck with their accounting rules which don’t allow market valuations into the accounts (unlike British property companies). Instead we’re stuck with property value = purchase price, plus cost of improvements, minus accumulated depreciation (no depreciation for land, only for the buildings and improvements). The American authorities take a dim view of companies which provided detailed estimated market values.

It was a bit of a leap of faith. I relied fairly heavily on analysis provided by two people online. Farmland isn’t really in my circle of competence (so I started working on that).

Farmland Partners is fairly well covered on Seeking Alpha, in particular by Brad Thomas (a professional real estate analyst) and Jussi Askola (who runs an alternative investment firm). I’ve been reading their analysis for several years and they clearly know what they’re talking about when it comes to looking at companies which I know well, notably Brookfield Asset Management and SL Green Realty. So I figured that they're going to be fairly good at analysing Farmland Partners.

https://seekingalpha.com/symbol/FPI

https://seekingalpha.com/article/4496300-calling-all-the-bulls-down-to-the-farm

https://seekingalpha.com/article/4488543-i-put-10-percent-of-my-net-worth-in-farmland

Seeking Alpha tends to put articles behind a paywall after a few weeks. I find it to be a excellent resource for American and Canadian companies (I only use the free service)

[Dod101]

Unfortunately, because Farmland Partners is American we’re stuck with their accounting rules which don’t allow market valuations into the accounts (unlike British property companies). Instead we’re stuck with property value = purchase price, plus cost of improvements, minus accumulated depreciation (no depreciation for land, only for the buildings and improvements). The American authorities take a dim view of companies which provided detailed estimated market values.

Strangely old fashioned accounting rules. I find it difficult to accept the way that our property companies are required to put valuation gains or losses through their P & L account, but not to disclose even in a note the estimated value of the farmland seems strange. Obviously they are not required to use international accounting standards.

it is similar to the way that our banks used to be allowed to hold 'hidden reserves' so that there was no real way to value them.

Dod

[OhNoNotimAgain]

I think inflation is transitory.

GS

Wot, like QE was?

Strange comment. Care to elaborate?


GS
P.S. To be clear when I wrote inflation above I meant this present occurrence of inflation, I was not making a more general statement about all inflation everywhere. Perhaps that's the source of the weird reply.

There seems to be a view that inflation has been triggered by war and the recovery from the Covid pandemic.
In my view inflation was always going to happen because of the massive devalauation created by QE that started in 2008 in the wake of the financial crisis. Recent events have just supercharged it.

Furthermore, an ageing and soon to be shrinking working global population is going to fuel wage inflation. This will reverse the deflationary impact that the end of the cold war had by introducing the population of China and the whole of eastern Europe into the global workforce. Who needs a fridge repairman when it is cheaper to buy a new one from China delivered by Amazon?

Central Banks deluded themselves into thinking it was their brilliance that elimanated inflation. It wasn't, it was technology (suddenly, thanks to ebay, old stuff could be sold easily, adding to supply) and geopolitics.

The response is simple. Replace long duration assets with those of short duration. Forget price to hope ratios and go back to traditional stock valuations.

Agreed.
Interesting how many fail to link debasement of the currency to inflation in prices.
'But it's the war'.
And if it wasn't the war it would be something else. Covid. Brexit. Trump. Johnson. Wine in the garden of No 10. Whatever the current bogeyman is.
It's been a long time coming. The Russia thing is just giving it a rather large shove.

Would you elaborate on your final sentence?

Effectively higher inflation means interest rates rise, whether officially declared or informally observed, so discount rates rise too.

In other words future earnings are worth less and more predictable earnings this year and next are worth more in a relative sense.

Which is all a roundbout way of saying value stocks are becoming more attractive than growth stocks.

[SalvorHardin]

Strangely old fashioned accounting rules. I find it difficult to accept the way that our property companies are required to put valuation gains or losses through their P & L account, but not to disclose even in a note the estimated value of the farmland seems strange. Obviously they are not required to use international accounting standards.

it is similar to the way that our banks used to be allowed to hold 'hidden reserves' so that there was no real way to value them.

Yes, it's America's Generally Accepted Accounting Principles (GAAP) that requires property to be valued in this way. It's the continuing battle of two different accounting methods; historical cost vs. current cost aka mark-to-market.

Unfortunately lots of American investors don't see the distorting effect of GAAP as being a problem.

From time to time Brookfield Asset Management, which being Canadian uses International Financial Reporting Standards (IFRS), buys an American company. In the next set of results the properties are revalued, which often produces a big increase in book value, and lots of Americans think that something funny is going on.

[Wuffle]

My understanding of UK farmland is that it is mispriced.
It doesn't have to make any money if you are 40% up by side stepping IHT (from a finance job maybe) and usually doesn't.
The inlaws have been badly running a dairy farm for generations and occasionally generate wages, but often not, trapped by a fear of the unknown and sentimentality.
Every generation the thickest one carries it on and thinks they have won while the smart ones go and do something where they actually get paid.

W (not living with the thick one!).

[Dod101]

Strangely old fashioned accounting rules. I find it difficult to accept the way that our property companies are required to put valuation gains or losses through their P & L account, but not to disclose even in a note the estimated value of the farmland seems strange. Obviously they are not required to use international accounting standards.

it is similar to the way that our banks used to be allowed to hold 'hidden reserves' so that there was no real way to value them.

Yes, it's America's Generally Accepted Accounting Principles (GAAP) that requires property to be valued in this way. It's the continuing battle of two different accounting methods; historical cost vs. current cost aka mark-to-market.

Unfortunately lots of American investors don't see the distorting effect of GAAP as being a problem.

From time to time Brookfield Asset Management, which being Canadian uses International Financial Reporting Standards (IFRS), buys an American company. In the next set of results the properties are revalued, which often produces a big increase in book value, and lots of Americans think that something funny is going on.

That is interesting. I suppose for a purely domestic US company they can decide for themselves what accounting rules to use. Not sure if they were called GAAP or not but I used to have quite a lot of business dealings with US and German companies. They used the lower of cost or market value in valuing for example investment properties. They (and I think I) used to see that as suitably conservative for the Gnomes of Zurich.

Dod

[Dod101]

My understanding of UK farmland is that it is mispriced.
It doesn't have to make any money if you are 40% up by side stepping IHT (from a finance job maybe) and usually doesn't.
The inlaws have been badly running a dairy farm for generations and occasionally generate wages, but often not, trapped by a fear of the unknown and sentimentality.
Every generation the thickest one carries it on and thinks they have won while the smart ones go and do something where they actually get paid.

W (not living with the thick one!).

What you are saying seems to be that it is a hopeless investment (from the point of view of making money here and now) The demand is somewhat artificial and tends to come from those who want to avoid IHT for future generations. That of course requires having lots of spare capital.

I know farmers who make money from their farm but not usually from dairy farming.

Dod

[simoan]

Talking of farmland, I have a largish holding in Wynnstay which benefits from increasing fertiliser prices through it’s plant at Glasson. Even though it’s a low margin business they are able to pass-through most input cost increases. A nice little business with very grounded, savvy management and a strong balance sheet.

[Wuffle]

Yes dod, that is exactly it.

W.

[SalvorHardin]

An interesting article on SeekingAlpha about some REITs which should give some protection against inflation. Whilst they are American, it's a good read and there are quite a few of us on TLF who are happy to buy American shares.

https://seekingalpha.com/article/4498849-cash-trash-3-reits-soar-inflation

Since my last post on this thread, I've bought more shares in all of my property companies/REITs, which are mostly based in London and New York plus CLS Holdings (UK and Europe).

[stevensfo]

Re. What to buy when inflation goes up, a few thoughts (some obvious) are insurance (Admiral car insurance?), supermarkets and maybe health-related companies, such as Pharmas, REITS and medical property cos (PHP?).

To combine some protection against inflation with personal enjoyment, maybe some good wine to be laid down, port, whisky, brandy etc? Plan ahead for the next ten years!

As I discovered many years ago, this particular sort of investing requires strong self-discipline.

Then again, who can blame you for carrying out the occasional audit and quality control?

Steve

[tjh290633]

What to buy when inflation goes up, a few thoughts (some obvious) are insurance (Admiral car insurance?), supermarkets and maybe health-related companies, such as Pharmas, REITS and medical property cos (PHP?).

You might like to look at the way in which shares in my portfolio have moved since 1st January this year:

Epic     Change    Yield 
S32       38.71%    1.81%
BHP       37.26%    3.20%
SHEL      30.61%    2.99%
BA.       29.83%    3.50%
RIO       27.25%    3.63%
PSON      20.84%    2.73%
BATS      18.02%    6.82%
AZN       16.11%    2.07%
BP.       14.66%    4.24%
VOD       12.60%    6.08%
TATE      10.34%    4.23%
NG.        9.74%    4.21%
BT.A       8.40%    4.12%
AV.        8.33%    4.88%
MARS       6.17%    0.00%
SSE        5.06%    4.70%
GSK        3.11%    3.10%
UU.        3.03%    3.85%
IGG        0.62%    5.27%
IMB        0.28%    8.64%
LLOY      -0.86%    4.25%
BLND      -1.13%    8.70%
PHP       -1.65%    4.38%
CPG       -3.33%    0.85%
TSCO      -3.76%    3.32%
DGE       -4.11%    1.91%
RKT       -5.23%   13.75%
SGRO      -5.95%    3.13%
LGEN      -8.84%    6.78%
ULVR     -11.09%    4.23%
SMDS     -16.62%    4.00%
ADM      -18.97%   10.89%
IMI      -21.77%    1.74%
KGF      -23.71%    4.82%
TW.      -25.21%    6.56%
MKS      -31.74%    0.00%
Av.Chg     3.25%    4.43%

Most of the shares that you suggest have fallen so far this year, while miners, oils, defence and certain others have done well.

Pharma in the shape of AZN has done well, GSK less so and PHP is down slightly. REITs and retail are not doing well and two of my 3 insurers are down (ADM and LGEN) while AV. is up.

The market has a mind of its own.

TJH

[kempiejon]

Some of the utilities offer a dividend to pegged to inflation.
Like Pennon

An interim dividend of 11.70p will be paid on 5 April 2022 to shareholders on the register on 28 January 2022. This represents an increase of 4.9% and maintains our sector-leading dividend policy (announced with our full year 2019/20 results in June 2020) confirming growth of CPIH(1) +2%. The dividend policy is underpinned by our sustainable earnings and growth strategy with expectations for continued outperformance during the regulatory period supporting sustainable dividend growth and dividend cover.

(1) Consumer price index including owner occupiers’ housing costs, which aligns with the regulatory inflation measure being used for the K7 regulatory period (2020-25). The CPIH rate used is 2.9% as of 30 September 2021.

https://www.pennon-group.co.uk/dividend ... 2011.70,(1)%20%2B2%25.

No idea what increasing prices will do to the share price but perhaps the dividend will hold it up.

[Walkeia]

My portfolio is VWRL with REITS, investment trusts and infrastructure add-ons. I have run this leveraged (at times highly so) since the middle of the last decade.

What am I doing? - bought VWRL in early March as it was over sold on the CNN greed-fear index & I was optimistic on the outcome of Russia-Ukraine. My optimism was wrong; but the market has rallied nonetheless. I have ORIT on a watchlist and will add at their next capital raising - I find Octopus a class act in the areas they operate. If people want inflation protection both RESI and SIR offer RPI and CPI linked (4.5% capped) rent roll respectively - full disclaimer - I own both but I am not adding here.

Lastly, and after some thinking throughout March, I bought high quality government bonds, IGLH, and am contemplating a mid single digit allocation to a physical gold trust with incoming funds. Effectively - I think it's a good opportunity to begin to add such high quality assets to my portfolio which for years I have considered very expensive. For me, the principal purpose of these additions is to lower the volatility of my portfolio, especially in times of stress, without significantly impacting the return. I actually hope bond yields continue to rise so I can add another clip at better levels (and if real yields rise equities should take note). I feel we are approaching the limits of hiking priced into 2022 vs. what central banks can actually realise in terms of tightening. US @ 2.75%; UK approaching 2% and Europe back to 0% base rate.

[stevensfo]

What to buy when inflation goes up, a few thoughts (some obvious) are insurance (Admiral car insurance?), supermarkets and maybe health-related companies, such as Pharmas, REITS and medical property cos (PHP?).

You might like to look at the way in which shares in my portfolio have moved since 1st January this year:

Epic     Change    Yield 
S32       38.71%    1.81%
BHP       37.26%    3.20%
SHEL      30.61%    2.99%
BA.       29.83%    3.50%
RIO       27.25%    3.63%
PSON      20.84%    2.73%
BATS      18.02%    6.82%
AZN       16.11%    2.07%
BP.       14.66%    4.24%
VOD       12.60%    6.08%
TATE      10.34%    4.23%
NG.        9.74%    4.21%
BT.A       8.40%    4.12%
AV.        8.33%    4.88%
MARS       6.17%    0.00%
SSE        5.06%    4.70%
GSK        3.11%    3.10%
UU.        3.03%    3.85%
IGG        0.62%    5.27%
IMB        0.28%    8.64%
LLOY      -0.86%    4.25%
BLND      -1.13%    8.70%
PHP       -1.65%    4.38%
CPG       -3.33%    0.85%
TSCO      -3.76%    3.32%
DGE       -4.11%    1.91%
RKT       -5.23%   13.75%
SGRO      -5.95%    3.13%
LGEN      -8.84%    6.78%
ULVR     -11.09%    4.23%
SMDS     -16.62%    4.00%
ADM      -18.97%   10.89%
IMI      -21.77%    1.74%
KGF      -23.71%    4.82%
TW.      -25.21%    6.56%
MKS      -31.74%    0.00%
Av.Chg     3.25%    4.43%

Most of the shares that you suggest have fallen so far this year, while miners, oils, defence and certain others have done well.

Pharma in the shape of AZN has done well, GSK less so and PHP is down slightly. REITs and retail are not doing well and two of my 3 insurers are down (ADM and LGEN) while AV. is up.

The market has a mind of its own.

TJH

Well, this is only from January, though I agree that 'The market has a mind of its own'. I tend to think long-term.

Re. ADM according to my ii website, the divi is 5.9%, not 10.8%.

https://www.ii.co.uk/shares/admiral-group/LSE:ADM

Steve

PS Thanks, as ever, for your data and for sharing your experience!!