Many Musings...
This week we discuss big tech investing, dollar cost averaging, FTX, and much more..
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Many Musings
It’s been a while since my last post, sorry for the delay! I’ve had several musings on my mind over the last few weeks and I thought it would be more useful to bunch them together.
Investing is Hard
I tweeted the below out a few weeks ago and it got a decent amount of attention on FinTwit. While the aggregate returns of the mentioned stock basket have improved since then, it illustrated how tough this year has been for many portfolios.
But I think it also captures a broader point, which is that staying invested in large caps that have ‘ruled the roost’ for the past decade may not be the smartest way to invest over long periods of time. This video has an excellent visual representation of the top 10 S&P 500 companies’ over time and there is no overlap between 2000 and 2020 and only mild overlap between 2010 and 2020. I strongly feel hiding in what has worked this past decade will lead to suboptimal returns. Investors will need to work hard to find companies that are just starting to rev their engines and can survive/thrive for years to come.
Why bother?
Often when I bring the above up with people, the rational response for many is to just revert to the passive investing case. As in, why bother stock picking? Just buy the index and invest passively. Again, passive investing did well in the 2010-2019 decade with the S&P 500 rising 257% (inc. dividends reinvested). Often passive investing is done by adding to the S&P 500 (or any other index) each month and dollar cost averaging. Famed financial author Morgan Housel has mentioned that’s really all he does with his investment capital. But what if this decade is not like 2010-2019 and instead like 2000-2009? During that decade, the S&P 500 (inc dividend reinvested) returned -28.4%. Even if you had dollar cost averaged through that period (investing the same amount each month), you would have still lost money.
You would have outperformed for sure, but your returns would have still been negative. You can play around with the data yourself on this site. (Note: I’m not entirely sure if this includes dividends, but I ran a quick analysis myself with dividends and got roughly the same result, so I think it does).
When presented with this data, proponents of passive investing will respond with the (correct) concept that passive investing works over several decades. True, it does. But imagine this: You invest diligently every month, 12 times a year, for 10 years. You work hard, you save, and you are disciplined. But after an entire decade, you look at your investment portfolio and see you’ve lost money. Will you (a rational human being) look at that result and say “Oh that’s okay, let me try for another 10 years?” I’m not sure. If this was any other endeavour, I think most would give up much earlier if after so much effort, they yielded no results. This is my issue with any sort of formulaic investing – often, the formula doesn’t work for long stretches of time and 99%+ of the world does not have the patience to see it through.
The passive investing idea also assumes you picked the right index. If you had picked the Nikkei in the 1990s, breaking even would take nearly 30 years. Similarly, investing in an Emerging Market index during the 2010-19 decade would have made you pull your hair out.
In the end, I don’t know what this decade will look like, but I do strongly feel that riding past waves is not going to get you anywhere. Passively invest if that is best for you, but make sure you have decades of patience.
(I know I’ve used the 2010-2019 as a ‘decade’, some argue that the decade is 2011-2020, but it’s irrelevant, I’m just using the world ‘decade’ as a proxy for a block of 10 years)
Ugh Macro..
I have not paid so much attention to the ‘macro’ environment since 2008-09, but I guess that was a privilege of calmer times.
The Fed minutes released a few days ago point to a slowing the pace of rate hikes, which was sort of expected. It also seems inflation is rolling over, but even if ‘inflation’ is defeated a recession is probably on the way. So, the current market environment seems a bit out of a ‘out of the frying pan into the fire’ type scenario. The below chart (source) does not paint a pretty picture. Inversion of the treasury yield curve, more often than not, signals an upcoming recession. However, past inversions seem to have happened when the index (in this case, the S&P) was in a strong position – not when it was already down 15-20%.
So, what does this all mean? It’s hard to be sure of course but I would put it in the broadest descriptions as I can. Is inflation coming down? Most likely. Is a recession coming? Seems so. Is the recession priced in? Could be. Will everything be fine? Maybe, but unlikely. I know this sounds super unhelpful but when dealing with such an inexact science (if you can call it one) that is macro prediction – using broad terms keeps you out of the most trouble.
I’ve been asked several times over the past few months by a wide variety of investors on how Farrer is approaching the macro environment. My answer remains the same as it has for most of the year – sell what’s broken, buy what’s attractive (business and price!), keep a long-term mindset, and hedge when the VIX is relatively low. (not investing advice)
It’s not just the fraud, it’s also the reaction…
I won’t spend much time on the FTX saga, as most of you, I’m sure, are up to your eyeballs in it. I’ll just say that SBF’s actions amount to somewhere between outright fraud and extreme gross negligence. Until all the facts come out, we won’t know which (although right now it is looking like fraud). But what’s even more fascinating to me is that there are those who would still be willing to back the FTX founder. See this clip in which Kevin O’Leary (of Shark Tank fame) says he would invest with SBF again in the future. It’s a neon flashing sign of greed. It reminds me of the old days on the trading floor where traders who blew up would constantly be rehired/given another chance because all management could think of is how much money they would have made had they not blown up. On top of this, the New York Times is inviting SBF on stage in a few days as part of a panel/conference that includes world politicians, key treasury officials etc. It's mind boggling. It's disgusting. It's why fraud survives.
There is also this ridiculous argument about VCs renewed backing Adam Neumann (of WeWork infamy) and why that should be applied to SBF. Neumann did not commit fraud. WeWork customers did not suffer (it remains functioning and a good product), and as far as I know, its landlords did not really suffer (someone correct me if I’m wrong). Only investors suffered and that’s the risk they take for investing in a startup. Employees lost the value of their equity stakes, but so have those of Meta, Amazon, Sea etc. Don’t get me wrong, I’m no fan of Neumann, he was an egomaniac and was rightfully outed from WeWork. But comparing him to SBF is insane to me.
End of the year…
As we reach the end of the year (I’m not sure if this year went by too fast or not fast enough), I find it’s always productive to look at your portfolio to analyze what’s worked and what’s not worked, and how you might rebalance a bit. A thought I keep coming back to is if having too much tech in your portfolio going into this year was a mistake, is having too little going into the next also an error? What if inflation comes down due to a recession, what if the recession forces the Fed to cut again, what if investors sell out of cyclicals, real-economy stocks, and have cash to spare? What If, indeed…
Thanks for reading all and happy investing!
Farrer Fun Fact
Bitcoin only goes down: Data from this study illustrates that 81% of bitcoin holders/speculators have lost money. Most users only downloaded crypto trading apps after bitcoin crossed US$20,000.
Articles and Videos of the Week
We had shared this post about when not to average down a while ago, but it has resurfaced and is a great read in this environment.
This image on how much Qatar has spent on the world cup vs previous hosts is mind-boggling.
An interesting bull case writeup by Bireme Capital on Meta. Still requires Zuck to make the right decisions though…
A humorous take on Fed’s ‘car’ analogy takes a stab at some of the absurdities in Powell’s last statement.
For those of us still following SEA tech darlings - a quick (but v useful) take on both Grab and Sea's latest earnings.