The Story Comes Alive
Take a look at this picture and tell me what you see.
You probably see rocks and sand colored with a red hue. You might also notice a tiny speck that looks like a fly in the air. Let’s zoom in on it.
Is it a fly? Looks like one right. Let’s try one more picture:
That right there is Ingenuity, a helicopter NASA sent to Mars alongside the Perseverance rover. The picture at the start of this blog was the 4th flight of Ingenuity, 188.47 million miles from Earth.
Humanity has achieved flight on another planet.
On December 17, 1903, two brothers from Dayton OH made four brief flights at Kitty Hawk NC and no one noticed. I’m serious, literally no one cared at all. It took the better part of 5 years for anyone to register what they had accomplished. Everyday people were going about their lives as mankind finally left the confines of Earth to soar among the birds.
Onboard Ingenuity is a small swatch of fabric from the first plane the Wright Brothers flew. Imagine what they would say knowing a tiny piece of their plane would fly on a red dot in the night sky only 118 years later.
It’s been a difficult start to the decade, we’ve lost over 3 million people Worldwide to a disease that swamped our economies and stock markets. For many, 2020 will be thought of as one of the worst years ever, and even now COVID still rampages across the globe.
But as darkness threatened to envelop us, humanity answered the call. We created new mRNA-based vaccines faster than anyone could’ve imagined because that’s what we do, rise to meet challenges. We create new technologies, new ways of thinking, new ways to treat the sick, and quite literally change the future. Vaccinations will spread, hard fought immunity will be achieved, and this chapter will close.
Think of all the everyday things WW2 spawned, another gut-wrenching moment in our history: penicillin, jet engines, synthetic rubber, the microwave oven, computers, just to name a few. It is only when things are the hardest that we take our biggest steps forward.
You might not care that we have a helicopter on Mars, and you might not think it’s a big deal that we’re driving an expensive toy over some rocks millions of miles away. You have bills to pay, the World seems as divided as ever, someone told you inflation could rise, and the stock market might crash.
While the tempest rages on Earth, a group of scientists are taking huge leaps forward on behalf of humanity. It might be hard to see why a helicopter on Mars matters but it’s always been that way. We can’t predict what will happen in the future any more than the people in 1908 could predict how Wilbur and Orville’s invention would change the World.
I implore you, for just this one moment, stop worrying about money or politics or a disease we will BEAT, and let optimism about the future wash over you. Put aside your earthly cares and dream like you used to as a child about all we can accomplish when we put our minds to it.
A piece of the Wright brother’s flyer took to the skies of Mars. It’s enough to make my spirit soar alongside it.
The story comes alive.
The Most Important Question
We all have firmly held beliefs about money and investing. These beliefs are a product of who we are, when we grew up as investors, who our role models were, and what kind of worldview we have.
Morgan Housel once said: “How people manage their money is a window into what they value, who they want to impress, what they think they’re good at, what they’re clearly awful at, what they’re insecure about, and where they see the world going.” He’s right, who you are as an investor is as unique to the World as who you are as a person.
Whether you’re aware of it or not, you view the world and the market through your own lens, amplified by your experiences, which help guide the decisions you make when investing your money.
All of us want to believe that our view of how the World works (or should work) is the right one.
So here is the most important question to ask as an investor:
If you had to choose, would you rather be proven right or make money?
Said another way, are you willing to hold so tightly to what you think should happen in the market that, even when proven wrong, you won’t change your mind?
I field questions all the time that are a product of someone trying to come to grips with how their worldview mixes with investing.
“If this person becomes President won’t that bad for the market?”
“How will we ever pay back the National Debt, aren’t we stealing from our children?”
“Isn’t the Fed distorting markets?”
“Won’t the dollar be worthless if we keep printing money?”
All questions that are born out of a need to understand how the World and markets intersect.
But here is what I need you to understand about the stock market: it is a relentless discounting machine that continually processes information with no regard to how you think it should act.
It looks at a piece of news, or an event, or a tax proposal, or an election and says “got it, what’s next?” It does this nonstop, day in and day out. It doesn’t care what people THINK should happen: it just digests the news, adjusts to the most likely outcome, and moves on. It doesn’t care if you love or hate the Fed, and it doesn’t remember the “good old days” of investing.
If you are talking about a worry to a friend, or your advisor, believe me, the market KNOWS and has been discounting it.
Look, we all want to be right, believe me, I once said that I’d live to see another Chicago Bears Super Bowl, so I know what it’s like to hang on to a view.
You simply cannot let your desire to be proven right impact your ability to make money, they are two different things, and I don’t want you falling into a trap of your own making.
(While you’re here, I‘m starting a new series called “Quick Takes” on Baird’s Youtube channel, check out my National Debt video or my short hit about selling stocks because you’re afraid of something. More great topics to come!)
FOMO (Fear of Missing Out)
“Can I keep everyone focused on the big picture and their true financial objectives in a get rich quick environment that’s turned the markets into a 24 hour virtual casino?” – Downtown Josh Brown
My friend Josh Brown celebrated his 44th birthday on February 25th (Happy birthday Josh) and he wrote that sentence on his blog. It got me thinking about myself, the markets, Baird’s clients, and how we’ve entered this weird World where NBA highlights are selling for thousands of dollars and lines of computer code are worth $50,000 a “coin”.
Now look, I’m not here to rage about that or tell you those things are obvious bubbles. First, who am I to say anything is a bubble and second, if a bunch of people think something is true that is a powerful force. Homes, Bitcoin, NBA Highlights, Digital Art, Gold, Stocks, these kinds of assets (whether they are physical or digital) have value because other people agree they do, and the “price” of something is what other people are willing to pay for it not some future cash flow times a discount rate.
Instead, I wanted to use this blog to examine my own FOMO and some of the stories I’m hearing about people with well diversified financial plans seeking to chase fad investments because one of their friends at the club said they made a ton of money on Stellar Lumens (I literally have no idea what that is but apparently it’s a thing).
It’s really hard to watch other people get rich and not want to join in, especially in this version of the World where throwing money at something requires pushing a button on a phone. Magnify that by the fact that we are ensconced in a 24-hour social media cocoon where people flaunt their “gainz” like they are Cortez who just discovered the New World.
I’ll admit, I get FOMO badly. Why? Because I’m a human being and I have a brain wired for things like envy, greed, and gluttony (I ate half a bag of Cheetos the other day).
The question you (and I) need to ask ourselves is “what kind of an investor am I?” How have I acted in the past because that’s probably the best indicator of how we’ll act in the future.
Did you sell in March 2020 because you couldn’t handle the COVID crash? Did you let politics impact your portfolio last November? If you answered yes to one (or both) how are you going to handle the unprecedented volatility of high beta Growth stocks or crypto? If stock market selloffs and political views can make you course correct are you really geared to invest in stuff like this?
Bitcoin, for example, has had multiple 60% drawdowns in the past three years and 30% selloffs are fairly common. What would happen to the value of digital collectibles if all of a sudden people get bored with them?
Growth stocks, which have caused many investors in well diversified plans to chase them due to FOMO, are getting smashed right now because the market is expecting economic growth to SOAR in the near future and that style of investing would be out of favor. What if you end up with a portfolio of stocks that goes nowhere (or down) while you watch the economy BOOM because that could happen if you’re in the wrong names.
Advisors have a fiduciary duty to their clients to act in their best interests, that means setting investments to meet the goals of a financial plan. If the plan has changed to “I want to get rich quickly on fad investments and chase the hottest sectors of the market” how can those two plans co-exist alongside the fiduciary responsibility?
That being said, there is a more nuanced take to all of this. If you’ve meticulously funded your big picture with a well-diversified plan, basically committed to eating your peas and carrots, it’s ok to dive into that ice cream sundae from time to time, just do it responsibly.
Again, we are only human, we don’t live in financial planning software, if you’re seeking to scratch an itch you must understand that risk and return go hand in hand, so do it in a way that doesn’t threaten your goals.
The absolute best investors have learned to ignore FOMO, in a perfect World no one would care what their friends are invested in or how that person on TikTok did in Gamestop. Warren Buffett once said “It’s insane to risk what you have for something you don’t need” and he’s right, make smart decisions with your money not ones driven by emotion.
The Game Never Stops
By now you’ve probably heard about the action in “meme stocks” like GME and AMC, and while there are roughly 1.2mm takes on what’s been happening in them I thought I’d weigh in on whether you should care or not.
What is a “meme stock” exactly? It’s a stock that gets broad support from retail investors simply by being made into a meme. Remember those hilarious Bernie memes (this one my favorite), now imagine someone did the same for a company stock and that was enough to get people excited about investing in it.
If you plan on being an investor you are going to have to accept the fact that memes can move markets, and if that seems ridiculous to you then I’m sorry, the World changes rapidly. Wait until I write a 400 word blog post on Tendies.
Why did GME, one of these “meme stocks,” rise so rapidly? Turns out it was a heavily shorted name among the Hedge Fund community and all it took was a surge in retail buying (both in the stock and options) from a forum called “Wall St Bets” to set off a feedback loop that ripped the stock higher. Trading in some of these names was briefly halted last week (for Wall St back office plumbing issues) but as of today the action is still frenetic.
Is what we are seeing unique? In one way no, the act of speculation is not new, it's a tale as old as time. That being said, in this era investor attention can be brought to bear instantly by social media, action can be implemented for 0 commission both in stocks and options, then watched in real time on a phone from anywhere in the World. That is new, and we don’t know what the ramifications of that will be going forward.
History is rife with events like we are currently witnessing, manias created in stocks that end up captivating the public's attention. These events usually start small, among a tiny group of investors, but then work their way into the public domain because more and more people start to pay attention. This has been accelerated because we are 1) still stuck in our homes due to a pandemic 2) a bit bored 3) always in contact with each other via social media and 4) have unlimited access to financial markets / instruments.
Here’s the thing though, YOU DON’T HAVE TO PLAY THIS GAME. I know your FOMO is kicking in reading about 34 year olds who turned $50k into $48 million. I get it, I feel it too. I’m on Twitter and in this blog telling people to eat peas and carrots while a buffet of candy and champagne is being gorged on.
This is a fact: one of the central failures of investors is leaving their playing field for a different one because they get scared or greedy.
Imagine your playing field consists of Target Date funds and bonds and cash and you look over at some guy throwing the equivalent of a Vegas pool party, it’s going to take a lot of self-control to avoid wandering over and participating.
Play your game, ensure that you are doing everything you can to reach your goals but look, if you want a little pile of money to play around with trading stocks there isn’t a person whose opinion I respect who would say that’s a bad idea. Just keep it small and contained to scratch that itch. Don’t act recklessly.
In the end we are human beings, we don’t live on a financial planning spreadsheet, the urge to speculate in a frenzy can bring vast rewards but it can also bring pain and regret. The line between success and failure is razor thin.
The investing game, the REAL game, never stops, don’t let events like this one change who you are and what you believe in.
Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. This and other information about the fund can be found in the prospectus or summary prospectus. A prospectus or summary prospectus may be obtained from your financial advisor or the fund website and should be read carefully before investing.
You've Got Mail
We live in a world where people are bombarded with information daily. It’s been said a typical person consumes more information in 24 hours than someone in the 1800’s did all year long.
That information can be found in the media, on social networks, from their friends, in their email, and on and on. Often the story is troubling, playing on peoples’ fears and positing a worst-case scenario happening. You’ve got mail, and it’s super scary.
“The Dollar is set to implode”
“Hyperinflation is near”
“The Stock Market is going to crash”.
Those headlines demand your attention because someone telling you how bad things might get appears as if they are trying to help, even when that’s usually not the case. Fear inducing statements can be dead wrong for months upon months, with absolutely no loss of reputation. Why?
That's why, because fear sells, and humans always want to know what could go wrong. We are risk averse animals by our very nature, we can’t help it. Pessimism is a seductive message that preys on deep-seated fears about an unknowable future. Tell a person to be afraid of something and you will almost always have their undivided attention.
I spend most of my time harping on the antithesis of that idea, writing (and speaking) about certain themes in markets and investing that I believe lead to success: emphasize good behavior, think long-term, ignore the noise, focus on your plan, listen to an advisor.
Most of these ideas are rooted in optimism because investing for the long-term is akin to betting on the world improving over time. Howard Marks said in his latest memo: "To be a good equity investor, I think you have to be an optimist; certainly, it's no activity for doomsayers."
If one of the best investors of all time says investing is “no activity for doomsayers” why would you let these scary stories impact what you do?
So, dear reader, here is my plea to you before you forward an email to your advisor and say, “this seems bad, should we do something?”
Think about the sender and what their motivations are. Does that person know anything about you? What your hopes and dreams are, what kind of investment strategy you’re using to reach those goals? What is the author selling?
How does that person know what the future will look like (at least any more than anyone else)? How many “worst case scenarios” described in an email or a social media post actually end up happening?
If the World is about to end, and the economy is set to collapse, and we’ll be bartering for food with bottle caps, you have bigger problems than how much Microsoft you own (also that gold is going to be really hard to spend).
The fewer scary stories you read, the less likely you’ll be to look at the market every day, the better off you will be on your pursuit to financial freedom.
Just like you wouldn't take medical advice from an email, don't take financial advice from one. Fear always sells, but you don’t have to buy it.