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In the wake of recent market turbulence and economic uncertainties, we find ourselves grappling with a fundamental truth: the world of finance is often absurd. Here in the Real Income Report, my aim is to explore the peculiarities of our financial system and offer you insights into navigating these choppy waters (and show you how to score a tidy profit while we’re at it).

The Nature of Absurdity

At its core, the concept of absurdity in finance stems from the disconnect between our quest for meaning and the market's apparent randomness. As we sit in our homes, perhaps recovering from the latest natural disaster or economic shock, it's worth taking a moment to jot down some of life's absurdities – particularly those in the financial world.

Consider the following:

• We live in a system that generously rewards long-term growth, yet most market participants focus on short-term price actions.

• Everyone preaches "buy low, sell high," but few actually practice it.

• We quote Warren Buffett religiously but often ignore how he actually made his fortune.

• Retail traders dream of becoming millionaires through day trading, despite overwhelming evidence against its efficacy.

The Roux of Absurdity

When we mix finance with politics, fear, and greed, we create what could be called the "Roux of Absurdity." This potent combination leads to behaviors that defy logic:

• Billions are bet on a quarterly basis on guesses about the accuracy of others' estimates of corporate performance.

• An entire industry thrives on selling advice from individuals with no skin in the game.

• Passive investing strategies, designed to minimize risk, may be creating the seeds of future market distortions.

Navigating the Absurd

So how can investors navigate this landscape of financial folly? Here are a few strategies:

• Apply Filters: Run investment decisions through value, trend, and momentum filters to remove much of the market noise.

• Define Your Safety Margin: Establish and strictly adhere to your personal margin of safety.

• Embrace Time and Volatility: Make these factors your allies rather than your enemies.

• Never Stop Learning: The market is always evolving, and so should your understanding of it.

While we focus on the absurdities of the financial markets, it's worth noting that these issues often reflect larger societal challenges. For instance, our approach to critical infrastructure – such as the power grid – mirrors some of the short-term thinking we see in finance.

Consider this: Instead of investing in more resilient power systems, we continue to patch up an aging infrastructure, leading to recurring outages and economic losses. This has striking parallels to how we often approach investing – focusing on quick fixes rather than long-term solutions.

In the end, recognizing the absurdity inherent in financial markets is the first step toward making better investment decisions. By understanding the forces at play – from cognitive biases to institutional incentives – we can position ourselves to capitalize on market inefficiencies rather than fall victim to them.

Remember, in the words of Albert Camus, the goal is not to eliminate the absurd, but to learn to live with it – and perhaps even profit from it. In doing so, we might just find that the absurdities of the market offer some of the greatest opportunities for those prepared to seize them.

One proven way to offset the inherent absurdity of the financial market is to invest in assets that consistently generate high cash flows and stable long-term returns.

High-quality real estate and infrastructure assets – like our Big Five REITs or the ones in our Total Return and Real Income Portfolios – have long been considered reliable sources of long-term returns for investors. These tangible assets offer several advantages contributing to their stability and potential for consistent returns over extended periods.

Real Estate

Real estate, particularly prime commercial and residential properties in desirable locations, has historically provided steady long-term returns. Key factors contributing to this reliability include:

• Appreciation: Well-located properties tend to appreciate over time, especially in areas with strong economic growth and limited supply.

• Rental Income: Quality properties can generate consistent rental income, providing a steady cash flow for investors.

• Inflation Hedge: Real estate often acts as a hedge against inflation, as property values and rents typically increase with rising prices.

• Diversification: Real estate returns often have low correlation with other asset classes, enhancing portfolio diversification.

Infrastructure

Infrastructure assets, such as toll roads, airports, utilities, and telecommunications networks, also offer reliable long-term returns:

• Essential Services: These assets provide critical services, ensuring consistent demand and revenue streams.

• Monopolistic Characteristics: Many infrastructure assets have natural monopolies or high barriers to entry, reducing competitive pressures.

• Long-Term Contracts: Infrastructure projects often involve long-term contracts or concessions, providing revenue stability.

• Inflation Protection: Many infrastructure assets have built-in inflation protection through regulated pricing mechanisms or contractual agreements.

Own quality assets. Always make time and volatility your friends, not mortal enemies.

These are the keystones that will allow you to overcome the absurdity that is the financial markets.

It is exactly the approach we use at the Real Income Report.

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