Are you ready for some football? How About a Cup of Coffee in 2070?

The Federal Reserve, in its relentless push to re-ignite inflation, might want to check in with Stan Kroenke, real estate developer and owner of the Los Angeles Rams.

Kroenke's Rams are about to move into a new home - the stunning new SoFi Stadium in Inglewood, CA. When fans might be allowed to watch the team play there is pandemic-dependent. At more than 3 times the size of Disneyland, this is much more than a football stadium. The development will include office, retail, hotel and residential components, in addition to the stadium.

The price tag for this property is also stunning. The whole development is estimated to cost $5 billion, making it easily the most expensive sports home in the world.

Coincidentally, the Rams’ temporary home since their move from St. Louis - LA's venerable Memorial Coliseum - is nearing its 100th anniversary. This timeline of significant events held there is fascinating to browse through. Highlights include 2 Olympics, the first Super Bowl, and the first Dodgers game (in LA).

That got us wondering how the cost of building a stadium had changed over the last century. Quite a lot, as it turns out. According to Wikipedia, Memorial Coliseum (constructed from 1921 - 1923) came in at a total cost of $955,000. Even in today's dollars, that is just under $15 million, quite a bargain in comparison.

Admittedly, the new Rams home is so much more than a stadium and has a lot more bells and whistles than the plain-ish Memorial Coliseum (you might be distracted from the action on the field by the 70,000 square foot video screen!). But still, that's a big difference.

This extreme example of cost inflation offers a useful reminder to us of why we invest in the first place; namely, to preserve our clients' purchasing power over an extended period, whether that be an individual's retirement, a trust beneficiary's lifetime, or a charitable foundation's perpetual horizon.

Inflation has receded far into the background of today's financial concerns. As mentioned in the opening paragraph, the Federal Reserve is much more focused on stoking inflation than quashing it. Returning the economy to growth and full employment is rightly on the front burner for now.

But we think it is wise to remember the long-term erosion in purchasing power from inflation. In the last half century, a period mostly defined by declining or benign inflation, a dollar has lost an astonishing 85% of its purchasing power.

A key reason we allocate a majority of our client's assets to a diversified stock portfolio is that stocks are one of the best ways to overcome the long-term effects of inflation and increase the odds your portfolio will be able to meet your spending needs in decades to come.

To illustrate, consider that the new LA Rams stadium cost 5,000 times more than the original LA Memorial Coliseum. What diversified investment could you have made in 1920 to help cover the cost of replacement stadium a century later? It turns out, the S&P 500, with dividends reinvested, produced a 19,000 times return over that same century!

We'll readily concede that stocks are unlikely to deliver those kinds of returns going forward (and stocks don't necessarily offer protection against inflation in the short-term), but over longer periods stocks represent shares in actively managed, dynamic businesses that can adjust to an inflationary environment by raising prices and increasing efficiencies in order to maintain and grow earnings.

Bonds play an important role in client portfolios as well, primarily to cover spending needs in the intermediate term and dampen volatility. But with rates as low as they are today (a reflection of ultra-low current inflation expectations), bonds have little margin for covering an unanticipated increase in inflation.

Now a stadium is no necessity, especially for consumers, so let's bring it back to something more relevant. How much will that cup of coffee cost in 2070? We don't know, but it cost about $0.25 in 1970 and about $1.50 today, reflecting coffee price inflation of about 3.7% annually (slightly lower than the overall rate of inflation). Projecting that forward another half century would put the cost at over $9. And if you want a Java Chip Frappuccino from Starbucks (you might say the SoFi Stadium of coffees) rather than a simple cup of joe, what cost $5 today could be $30 by then. 

Make sure your portfolio is prepared to deliver.

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One of Bristlecone Value Partners’ principles is to communicate frequently, openly and honestly. We believe that our clients benefit from understanding our investment philosophy and process. Our views and opinions regarding investment prospects are "forward looking statements," which may or may not be accurate over the long term. While we believe we have a reasonable basis for our appraisals, and we have confidence in our opinions, actual results may differ materially from those we anticipate. Information provided in this blog should not be considered as a recommendation to purchase or sell any particular security. You can identify forward looking statements by words like "believe," "expect," "anticipate," or similar expressions when discussing particular portfolio holdings. We cannot assure future results and achievements. You should not place undue reliance on forward looking statements, which speak only as of the date of the blog entry. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Our comments are intended to reflect trading activity in a mature, unrestricted portfolio and might not be representative of actual activity in all portfolios. Portfolio holdings are subject to change without notice. Current and future performance may be lower or higher than the performance quoted in this blog. 

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