Venture Capital: A Hedge Against Inflation and Lengthy Bear Markets

My original reason for thinking about including more aggressive growth vehicles in my overall asset allocation was a concern with potential future inflation. While inflation has been extremely tame in recent years, I remember well the hyperinflation of the late 1970s and early 1980s. Back then, prices were rising nearly 10% a year, mortgage rates reached 15% and higher, and if you didn’t get double-digit raises every year, you were falling seriously behind.

Maybe that won’t happen again in our lifetimes, but the near-zero interest rates over the past several years and never-ending government deficits scare me, as they could trigger a big inflation run-up. The experts are already warning that policies expected from the Trump administration, including substantial tax reductions and substantial infrastructure expenditures, are likely to keep government deficits high and drive at least some increase in the recent benign inflation rate.

That’s good reason to include at least some aggressive growth elements even in overall conservative financial plans for anyone who can afford the risk that more aggressive growth investments always entail.

And inflation is not the only worry. I also still remember vividly the sting of the broad collapse in both stock and bond prices in 2008–09.

. . .  Our 2008–09 market scare got me digging through historical data and uncovering some long stretches when the stock market—the place we’ve been taught to look to for reliable growth—either went down sharply or simply went nowhere positive for extended periods.

You may be surprised. I was.

I looked at stock market levels at the start of 2000, the New Millennium, and then again at the start of 2017. Despite all we hear about extended bull markets, the S&P 500 index over that 17-year period grew at just 2.7% per year.

. . .  Then I remembered the economy’s difficulties back when I was still in school in the early 1970s. Fortunately I wasn’t in a position yet to worry about investing and building wealth, so the market’s travails didn’t mean much to me then. The historical data, though, sent a shiver down my spine. The S&P 500 index began a long-term drop at the start of 1973, and that index finally recovered back to its January 1973 level in 1983, and then dropped below that benchmark again later in 1983 and into 1984.

In a presentation Warren Buffett gave at a major investors’ conference in 1999, at the height of the dot-com frenzy, his memory and historical digging proved even sharper than mine. As Alice

Schroeder described so eloquently in her book, The Snowball: Warren Buffett and the Business of Life (published in 2008 by Bantam Books), Buffett reminded that audience, a savvy group made up of many of the country’s most successful movers and shakers, about market risks. . . .

As recounted by Ms. Schroeder, Mr. Buffett’s comments did highlight the timing risks of stock market investing. He explained, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine. Weight counts eventually. But votes count in the short term. Unfortunately, they have no literacy tests in terms of voting qualifications, as you’ve all learned.” He then displayed on the conference room screen a simple PowerPoint slide.

 

Dow Jones Industrial Average

December 31, 1964 874.12

December 31, 1981 875.00

He went on, “During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune Five Hundred companies grew more than fivefold. Yet, during these seventeen years, the stock market went exactly nowhere.”

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund