The Spice Mélange

Last month I had the opportunity to reflect upon all the things in my life I should be grateful for. This year, topping the list is all the loving, kind-hearted people around me that make life special. If you live in Denver and don’t like shoveling snow, celebrate the wonderful weather. In November, the average temperature in Denver is around 44 degrees, and we are starting December with a beautiful, sunny day with a high of over 70 degrees 🔥 This December, Santa should swap his coat for a mask and tank top. Investors could be grateful for a stock market that is up over 20% from the beginning of the year and an economy that is burning hot - but few mention these blessings. This month, I discuss investor psychology, greed, and some pitfalls you can avoid to protect your wealth.

I Must Have It, the Spice Mélange

The reference to the “spice mélange” comes from the popular science fiction novel, Dune, first published in 1965, with an updated version of the movie released by HBO this year. Mélange, often referred to as “the spice,” is a psychedelic drug that unlocks prescience, among other things. The spice is used as a universal sign of wealth. Harvesting mélange is hazardous and deadly, yet kingdoms across the galaxy go to great lengths in search of the spice. Though fictional, the story of chasing spice is all too familiar for investors. Spice mélange has many forms in the investment world. The spice can represent:

• An investor’s insatiable hunger for wealth

• The constant search for foresight

• The silver bullet to cure the shortcomings of any portfolio

• Exorbitant returns without risk

Like the characters in Dune, some are willing to face nearly certain death and put everything on the line to have the spice. Why do investors risk everything searching for an elusive and unlikely outcome? Inexorable quests for the spice are an aberration and illogical behavior. Most investors know basic investment concepts - one must take risks if they want returns, but it is unwise to risk everything, and hopefully, they know the crystal ball in my office doesn’t work. But the universe does not always follow logic.

“Deep in the human unconscious is a pervasive need for a logical universe that makes sense. But the real universe is always one step beyond logic.” ― Frank Herbert, Dune

It’s easy and human to say life didn’t go your way because the cards were stacked against you. But when the cards are stacked in your favor, many people attribute this to skill and brilliance. Cyclists may take a tailwind for granted and assume they are in great shape only to round a corner and feel like no amount of force could get them home. Investors are no different. Those buying a stock that did not pan out may attribute the mishap to circumstances outside of their control. Meanwhile, those reaping the benefits of a meme-fueled stock market are surely profiting from their keen foresight (meme stocks are those companies with massive appreciation due to the notoriety on message boards and social media but in many times, without regard to the underlying fundamentals of the company) - they must have found the spice.

Incorrectly attributing these fortuitous results to skill implies the result can be repeated - a dangerous assertion. Often, these individuals go on to make larger and riskier bets. As this behavior continues, the chances of financial ruin increase by the day. If you think you are too smart to succumb to this fate, think again. Inexperienced investors that become overconfident from a few successful trades are the likely victims, but all investors are susceptible to these risks. Financial knowledge doesn’t guarantee sustained wealth. Earlier this year, Bill Hwang, a New York-based investor you may have never heard of, lost over $20 billion in just ten days. Mr. Hwang closed his hedge fund in 2012 and created Archegos Capital Management to manage his personal wealth. The famous Jesse Livermore correctly predicted the Great Depression, bet against the stock market, and amassed a fortune of around $100 million. Unfortunately, he chased his success, his bets went sour, and he declared bankruptcy in 1934, then committed suicide in 1940. Sir Isaac Newton cashed out of the South Sea Company as the bubble was forming but proved human when he could no longer sit back and watch everyone around him getting rich. Two months after selling, the FOMO (fear of missing out) got to him - a concept I wrote about in October - and he began purchasing the shares back only to watch the bubble burst. Sir Isaac Newton lost more than $4 million in today’s dollars. All these famous investors, and many more, have shown they could not resist the temptation to chase after the spice. But that does not mean there is no hope. You can take steps to minimize the chance of becoming a victim.

"If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution." - Ale Einstein

A wise man once told me, "If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution." That wise man was my father…but he was quoting Albert Einstein. Although there are disputes about whether Einstein said 55, 50, or 40 minutes defining the problem, with the remaining time dedicated to saving the world, the key message remains the same - it is vital to spend adequate time, if not too much, understanding the issues before jumping into solutions. A doctor spends most of their time diagnosing before prescribing - at least the good ones do. Twenty years ago, I went to a doctor when I had mono (mononucleosis). The doctor did not listen when I told him my girlfriend (and currently my wife) had mono. The doctor was convinced it was strep throat and performed a strep test, which came back negative. Instead of listening to the patient and observing the data, the doctor dismissed the results, stating the strep test was just a formality. Again, I expressed my concern that the sickness was mono, but he suffered from confirmation bias. He prescribed antibiotics for strep throat even after acknowledging the unpleasant side effects of taking this medication with mono. The side effects of this misdiagnosis happened to be a wretched rash from head to toe. Receiving advice from those unwilling to listen to your concerns is often more dangerous than the root issue. A lesson that itches me to this day….

Sorry about the rant. My point is to demonstrate the importance of surrounding yourself with a team that will listen, use all the information you provide, and build you a tailored solution - based on you. Suppose a financial advisor performs an initial consultation, and you explain your goals only to have them provide you with a one-size-fits-all solution. In that case, they are no better than a doctor prescribing antibiotics to every patient they see. Every person has their reasons for pursuing the spice, their values, and objectives for their wealth. So, it is essential to choose an advisor that will provide you with communication and solutions based on your needs. Understanding the plan and knowing it is based on your goals makes you more likely to remain focused on the target, and the mélange will not affect you.

Equally important is the financial plan and choosing an advisor that can help you understand your financial position and outline your path to accomplishing your financial objectives without unnecessary risks. Knowing when you have enough is a vital lesson. If you know financial success will occur if you focus on what you can control, and your advisor demonstrates what this will look like for you, the spice loses its luster and will not influence your financial decisions. Don’t let people with different financial goals guide your financial decisions. When you think about your financial goals and your intention with your wealth, do you want to roll the dice and search for spice even though it may destroy your wealth? Or, would you prefer to implement a prudent plan that doesn’t require the spice to accomplish your objectives and mitigates potential hurdles to your success?

Many investors recognize when they have fallen victim to greed’s gravity. Searching for the spice has led investors astray countless times. Look no further than housing, technology stocks, Enron, the Japanese stock market in the 1980s, the South Sea Company, or Dutch Tulips, but countless examples exist. These bubbles are apparent in hindsight, so it’s easy to assume you will see the next one coming, and it won’t happen to you….again. For all those reasons, it is vital to work with a financial partner to reduce the prevalence of this behavior.

“Hindsight is always 20/20 but foresight is legally blind.” - Jason Zweig

I wake up excited to listen to my clients' knowledge and experiences to understand what they aim to accomplish and help them create a plan to grow and preserve what they put so much effort into building. Being mindful of the issues above can help you recognize when you, or your financial counsel, may drift off course and chase the spice’s allure. Anyone can look back and say what they should have done, but very few have the awareness to reflect and make adjustments along the way. I commend those who have grown their wealth over the years but making money and keeping money are two distinct skill sets. Learn from those before you that have suffered the spice’s wrath.

“Making money is all about risk, optimism, and courage. Keeping money is an entirely different psychological ball game. It’s about humility, frugality, and the fear that everything you’ve built could be taken away.” - Morgan Housel

A Review of Last Month   

The stock market slightly fell in November. The S&P 500 was down 0.8%, but the Dow Jones Industrial Average fell 3.7% due to the heavier weighting of cyclical components within the index. Smaller companies are generally more exposed to a slowdown of economic growth. The Russell 2000, an index of smaller companies is down 9% from the high reached in November.

Earlier in the month, the Federal Open Market Committee made a unanimous yet unsurprising decision to start its taper (i.e., reducing the size of the bond purchases) at a pace of $15B per month, putting it on track to finish tapering in mid-June 2022. Yesterday, Jerome Powell discussed the possibility the Fed reduces its bond purchase at a faster rate than investors anticipated. The news only exacerbated fears of the Omicron variant which rattled investors on Black Friday as the stock market dealt with the worst Black Friday sell-off since 1931 and oil prices fell around 10%. Though health officials have stated the symptoms of the new variant are “extremely mild,” investors may be concerned about the response of officials, the impact on the recovery, and the likelihood current vaccines are less effective against the variant. None of this should surprise investors. A virus’s entire job is to replicate and make more of itself. As this process occurs, mutation is inevitable and the inherent resistance to existing vaccines or treatments is essential for its survival.

The October US Core PCE (the Fed’s preferred measure of inflation) rose 4.1% over the previous year, a level not seen in three decades. In November, the consumer price index (CPI) rose 6.2% over the prior year, highlighting the conversation of whether inflation is indeed transitory. There are certain elements of the inflation readings such as vehicle prices and semiconductors that will moderate as supply pressures wane, while others appear to be more long-term in nature like rising wages and higher demand. Employees are feeling good about their careers as they quit their jobs at record rates. Goldman Sachs forecasts inflation leveling off at around 2-3% in mid-2022 as some of the factors currently lifting inflation turn into a deflationary drag. If inflation is persistent, The Fed may find themselves in a situation where they must hike rates and transition away from accommodative monetary policies faster than previously anticipated. A risk that rattled the market yesterday during Powell’s Senate hearing. Last week, Fed Chairman Jerome Powell was renominated to serve a second term under Biden. The markets took comfort in the continuity at the Fed as we enter a period where the Fed scales back on bond purchases and navigates the inflationary environment.

Investors have turned cautious, and I expect behavior to remain jittery until we have clarity on inflation and the new COVID variant - rinse and repeat. The silver lining is the angst in the market may remove some of the unhealthy euphoria and better position itself for a sustained recovery.

Noble Wealth Pro Tip of the Month

A Home for Some of Your Cash?

The rate on Series I Bonds, or inflation-protected U.S. Savings Bonds, hit 7.12% (annualized) at the beginning of the month. This is the highest inflation rate since the Series I Bond was introduced in 1998 (you have to be a U.S. resident or citizen, or a civilian employee of the U.S. to buy these bonds). New deposits in November are credited at this rate for the next six months.

*These bonds can only be purchased directly from the US Treasury and deposits are limited to $10,000 per year.

Donor-Advised Funds

Contributions to donor-advised funds (or DAFs) jumped to $47.85 billion in 2020, up more than 20% from 2019, according to a new survey by National Philanthropic Trust. Donor-advised funds allow taxpayers to receive an immediate tax deduction while ultimately controlling the timing and location of the charitable gifts at a later date, and the assets grow tax-free until that time. For taxpayers electing the standard deduction, doubling up these annual gifts may be a suitable option.

Interesting Findings

• As of 11/16/2021, there have been 917 US IPOs (SPAC and traditional), beating the previous high in 1995.

• July 30, 1932, Franklin D. Roosevelt said, “Let us have the courage to stop borrowing to meet the continuing deficits. Stop the deficits.” The deficit subsequently rose until the end of WWII.

• Seller’s market - for the 12 months ending June 30, 2021, US homes for sale were on the market for a median period of just seven days before going under contract. That’s the shortest period recorded in data tracked since 1989 (National Association of Realtors).

• In 2020, 63% of homebuyers in the US and Canada made at least one offer to buy a home using only a virtual tour and without ever stepping foot in the home (New York Times).

• The average product purchased by an American consumer today has internal components manufactured in 10 different countries (Jeremy Nixon, CEO of Ocean Network Express).

• US inflation as measured by CPI surged 6.2% year over year in October. Rising at the fastest pace since October of 1990 on the heels of energy prices, vehicle prices, and shelter.

• The ratio between the income top CEOs and the average worker ballooned from 21:1 in 1965, to 61:1 in 1989, all the way to 351:1 in 2020. Between 1978 and 2020, CEO compensation grew 1,322% vs. 18% for the typical worker (Economic Policy Institute).

• The amount of estate tax paid by Americans fell by over 50% from 2018 to 2020 (IRS). The result of a combination of higher estate tax exemptions after the Tax Cuts and Jobs Act and sophisticated estate planning methods (e.g., GRATs and FLPs).

• Tesla has a market capitalization of $1.2 trillion compared with Toyota’s $295 billion - even though Tesla’s revenue is only around 20% of Toyota’s (as of November 5, 2021).

• The cover story of Time Magazine on March 5th, 1984 was “That Moster Deficit, America’s Economic Black Hole.” The deficit for the fiscal year 2021 was $2.772 trillion which was 15 times the deficit of $185 billion in 1984.

• 35 million Americans got the flu during the 2019-2020 flu season (i.e. November 2019 through May 2020). Just 2,000 Americans got the flu during the 2020-2021 flu season (source: The Atlantic).

• On September 28, 2021, two White House economists released a paper (What is the Average American Federal Individual Income Tax Rate on the Wealthiest Americans?), concluding the average tax rate paid by the wealthiest 400 households was just 8.2% over the years 2010-2018. These economists calculated the average tax rate by dividing the taxes paid by the change in net worth over the entire nine years. The methodology results in a misleading figure and is not indicative of what these individuals are paying. Over the last nine years (2010-2018) the wealthiest one-thousandth of one percent (0.001%) of US taxpayers (1,400 tax returns) paid $402 billion in aggregate federal income taxes and reported $1.82 trillion in aggregate adjusted gross income, resulting in an average tax rate of 22.1% (Internal Revenue Service). Perhaps still too low but a far cry from the average rate of 8.2%.

• The Social Security Trustees 2021 Report states unless financial changes are made, Social Security Benefits would drop to 76% of their originally promised levels beginning in 2033 through the year 2095.

• The 64 million Social Security recipients receiving retirement benefits will see their checks rise 5.9% beginning in January. Marking the largest cost-of-living adjustment since 1982.

• 42% of the U.S. population live with it and 30% more are overweight. This means 70% are carrying excess weight, a risk factor for more than 200 chronic diseases (Center for Lifestyle Medicine).

• The top 5% of US households own 71% of US equities, while the top 20% of US households own 93% of US equities (Federal Reserve Board).

• Missed opportunities - on 9/27/1998, Google went public. A year later, Google tried to sell to Excite for $750,000 and was turned down 🤦‍♂️

• Over the last decade, the 2 fastest-growing states were Utah, up +18.4% in its total population, and Idaho, up +17.3% (2020 Census).

• Three out of four Americans (74%) said they would sell out of the US stock market if equities suffered a “moderate or big decline.” 3,000 adults took part in this survey (Vise).

• From 1976-2020, the worst year for the taxable bond market was a loss of 2.92% in 1994 (Bloomberg Barclays). Considering the ascent in rates from 1976-1981, that number is not alarming and may assuage fears of massive bond losses if rates rise.

• From 1936-2020, the S&P 500 averaged 6.7% (total return - price appreciation plus dividends) during the first year of a presidential term, 8.7% during the second, 18.5% during the third, and 9.8% during the fourth year. 2022 will be year number two for Biden (BTN Research).

Things We’re Reading and Enjoying

The Subtle Art of Not Giving a F*ck | Mark Manson

You need to accept your mistakes and insecurities if you want to see positive change.”

The author provides an interesting perspective of how you can avoid anxiety and pursue happiness. Manny around us focuses on the success of others which can inevitably lead to disappointment. Dave Mustaine is a case in point. He was thrown out of Metallica and he worked hard to form the band Megadeth. So he was a huge success, he benchmarked his success to his former band. Those benchmarking their happiness on the success of others are often doomed to disappointment. To be happy one of the first steps is to build your life around good values. These values have to be based in reality, helpful to society, and have an immediate and controllable effect. Honesty is a great example because you can control it, is based in reality, and it provides truthful feedback to others, it's helpful. Some other values that fulfilled these criteria are creativity, generosity, and humility. The book describes several other keys to a more successful life and is worth a read by almost anyone.

When Genius Failed | Roger Lowenstein

The story of the epic rise and subsequent collapse of the largest hedge fund (at the time), Long Term Capital Management (LTCM). Before the collapse, LTCM was four times larger than the second-largest hedge fund.

Noble Prize winners Myron S. Scholes and Robert Merton were hired to the board of directors which blinded the masses of the risks the fund took to achieve profits. Not to mention the possibility of a miscalculation.

Big Mistakes | Michael Batnik

Investing is a dangerous game. Even the most talented players get burned but studying the greats and the greatest blunders allows us to benefit from their mistakes without the price tag. Focus on unforced errors rather than shooting for big wins - a concept I am all too familiar with from tennis. Above all, don’t become attached to your assets as emotions are your portfolio’s worst nightmare.

Google Reviews

When the SEC refreshed their 70-year-old rules on testimonials (created with the Investment Advisers Act of 1940), Jeff and I said we would not ask our clients to provide reviews on Google, Yelp, etc. We still do not want to burden our clients and we want to respect their privacy if they do not want to write a review held out to the public. If you are currently a client of Noble Wealth and wouldn’t mind writing your thoughts about your experience on Google, we thank and in advance for your input and sincerely appreciate your efforts.

Until next month,

-Your team at Noble Wealth Partners

“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” Ernest Hemingway