NWP Monthly Digest | July 2020
I started my career in finance in 1999. I was a fresh graduate out of the University of Colorado’s school of business, the mutual fund/securities industry was booming in the Denver area, and I (as well as all of my classmates) were looking for entry-level opportunities to work as customer service reps at Janus, Oppenheimer Funds, Burger Funds, Invesco…even Charles Schwab. The idea was to get your foot in the door, get your securities licenses, and then start a lucrative career printing money for the rest of your life as a portfolio manager or in institutional sales.
I chose a slightly different path and went to work for a small mutual fund firm in Denver so I could work in fund accounting instead of customer service. It was August of 1999 and it was the height of irrational exuberance on Wall Street. I was pricing IPOs (initial public offerings) that would go up 300% in the first day of trading and people would be disappointed. Family and friends couldn’t stop talking about the market and asking me what I thought the next hot fund or stock was going to be. It was the holidays and I was 23 years old with less than 6 months of experience under my belt. Everybody wanted an “in”.
Fast forward a year later, and the market was unraveling faster than you could say “Pets.com”. By October of 2002, the Nasdaq would fall 78% from its peak. A common joke of the day was to tell people that your 401(k) was now a 201(k). As with most crashes, the devastation would afflict a whole generation and some investors would leave the market and never return.
I’m 43 years old and no longer a young man in this world. Grant likes to say one of my best assets is my gray hair. My career in this business has seen many ups and downs, including the Great Financial Crisis of 2008/09, a crash that was much broader in its destruction of wealth. While history doesn’t always repeat itself, it definitely rhymes.
We’re still in the middle of 2020’s crisis, and the stock market is getting close to being fully recovered from the 34% drop that bottomed out on March 23rd — as of this writing, the S&P 500 was “only” down 5.50% for the year, and the Nasdaq was in positive territory, believe it or not.
When volatility spikes and the market is seemingly off its rocker, there are usually two reactions. One is to run for cover, the other is to realize that there might be a generational buying opportunity on hand. Both can be reckless.
If you pay attention to Twitter, you may already be aware of a gentleman by the name of Dave Portnoy. Portnoy is the founder of the incredibly popular website, Barstool Sports, and to say he is outspoken on many issues would be an understatement. He has re-branded himself with the moniker “Davey Day Trader” during the pandemic and has become even more popular than he already was by showcasing his poor trading choices and colossal mistakes for the world to see. He was recently kicked off of E*Trade after absorbing, and then ranting non-stop about, a $220k loss due to what he referred to as “server outages” at the popular brokerage and trading platform. It’s a shtick, and while incredibly annoying, people love it.
Portnoy’s followers (as well as Portnoy himself) are sports gambling aficionados, and the shut-down of competitive sports has forced them to find another outlet. The stock market was a natural choice.
The upstart brokerage firm Robinhood has also been front and center during the pandemic, and often for the wrong reasons. Made popular for it’s no commission stock trades, Robinhood has gathered a legion of young investors and speculators looking for an opportunity to become rich. The trading platform added over 3 million new accounts in the first quarter of 2020 alone, and Instagram and TikTok videos of college students showing the world how to trade stocks have become commonplace and terrifying for their utter lack of understanding about the how the market really works. While losing money is one thing and perhaps the only way people can learn the lessons that only the stock market can teach, there is one tragic story that ended with a more catastrophic result.
A young man, just 20-years old, was somehow approved by Robinhood to not only trade stocks in his account but also options (and with that options approval, a margin account).
Options are complicated and require a lot of expertise and understanding of risk. Because there is margin involved (read, leverage), certain options trades can have an unlimited downside if you’re wrong. If I open a brokerage account with $10,000 and buy a bad stock that goes to zero, I’m out my $10,000 and call it a day. If I have margin attached to my account so that I can trade options, I can lose the $10,000 plus the margin extended to me from the brokerage firm, which is a loan that I have to pay back.
This young man was approved for options trading and extended a margin account of $1 million. That number is correct, and we’ll wait if you need a minute to comprehend that and read it again. While home with his family because the university he attended had moved to on-line learning amidst the pandemic, Alex Kearns woke up one morning to see his account was down $730,000 from options trades that had worked against him. He wrote a note to his family and then took his own life. Tragic and absolutely unnecessary, it never should have happened.
As famed investor Jeremy Grantham of GMO has pointed out in a recent podcast, (paraphrasing) we have a stock market that is valued in the top 10% of all time and an economy that is in the bottom 10% of all time. That’s a cocktail that creates a lot of bad outcomes. It may be easy to sit back and look at the stock price of a company that you think you know well, beaten down from the pandemic, and you believe in your heart-of-hearts that the price of that stock just has to bounce back when things get back to normal…and you get an itchy trigger finger. You start looking for money to invest. Maybe it’s money in your retirement accounts, maybe your kid’s college fund, maybe your emergency savings. And you talk yourself into something that the rest of the market doesn’t agree with. If you’re lucky, the trade won’t work out and you’ll learn a lesson and just lose some money. Sometimes, though, the trades do work, and it creates false confidence that you will continue to be right, even without a process that makes any sense. Remember, the stock market is a zero-sum game. When your bets pay off, someone else is losing money on the other side of that trade.
There is nothing wrong with having a brokerage account and a little money to play around with in the stock market. We even encourage our clients to set aside a small amount of their wealth for these purposes. But there are rules. It can’t be money earmarked for other purposes (like emergency savings), and once it’s gone, it’s gone.
I also think it’s constructive to think about the stock your buying and try and understand if that business has the ability to continue to be profitable in the future. If you look at the best performing stocks of the last 20 years, it’s tough to find any household names on there. Apple, sure that makes sense at #4, but Old Dominion Freight Lines? Remember, the best performing stocks over a long period of time are generally good businesses, not just hot trends.
(Chart courtesy of Charlie Biello, YCharts, and Twitter)
While we had a few clients and prospects suggest that it might be better to go to 100% cash during this most recent market pullback, Grant and I couldn’t be more proud of our clients that all ultimately chose to stay the course and stick to their plan. While it may not feel right at the time, more often than not, the best thing to do in a market drawdown is to simply do nothing at all. If you’re a long-term investor, you’ll experience many market corrections and bear markets over the years. Having a process and a plan helps you get to the other side.
Noble Wealth Pro Tip of the Month
We’re halfway through the year and that’s a perfect time to evaluate and analyze your cash flows. It’s a dirty word to some, but another name for that is your household budget. We spend a lot of time with our clients at this time of year making sure we have a good grasp of their cash flows because it’s truly the most fundamental aspect of your personal financial situation. Your income minus your expenses is your opportunity to generate wealth.
We have detailed a of lot budgeting tools over the years, but here is a list of different services that are worth a look. All come with varying levels of time commitment and complexity.
RightCapital - our financial planning portal for Noble Wealth Partners clients (relatively easy once your accounts are linked, medium time commitment, accurate)
YNAB - You Need a Budget (very time consuming, but people love it)
Mint.com (relatively easy once your accounts are linked, medium time commitment, lower accuracy)
Tiller Money - one of my personal favorites, it combines the discipline of looking at your spending in a spreadsheet with the ease of linking your accounts through a Google Sheet
Things We’re Reading and Enjoying
The Deficit Myth by Stephanie Kelton
A New York Times Bestseller, the leading thinker and most visible public advocate of modern monetary theory -- the freshest and most important idea about economics in decades -- delivers a radically different, bold, new understanding for how to build a just and prosperous society.
Stephanie Kelton's brilliant exploration of modern monetary theory (MMT) dramatically changes our understanding of how we can best deal with crucial issues ranging from poverty and inequality to creating jobs, expanding health care coverage, climate change, and building resilient infrastructure. Any ambitious proposal, however, inevitably runs into the buzz saw of how to find the money to pay for it, rooted in myths about deficits that are hobbling us as a country.
What Have We Been Doing?
On Thursday, May 27th, Grant hosted a webinar with Alan Yu, from My Financial Counsel, to educate their clients on the intricacies of ESG and socially responsible investing. If you are interested in making a difference using the investments in your portfolio, watch this video. It’s packed with great information on the subject.
