Bitcoin, FANMAG, and the next "Correction": Your Market Questions Answered

Thank you to those who attended our live webinar, A Year in Review and Looking Ahead to 2021, with Apollo D. Lupescu, Ph.D. from Dimensional. We know time is valuable, and we appreciate you spending it with us.

Here’s a brief recap. We witnessed remarkable market events in 2020 and early 2021, each with a powerful lesson for investors. In his remarks, Apollo provided his perspective on your market questions, highlighting several lessons for investors to keep in mind on the investment road ahead.

Below is a modified transcript of the event.

GameStop, Blackberry, and other stocks have enjoyed strong returns recently. What is happening and how should we think about them?

• The stock market gives us the opportunity to purchase ownership in companies. It gives us a stake in capitalism. It is not a casino, but a place to participate in capitalism and the companies we know and love.
• In the long run, the value of the stock market is tied to the ability of the companies in it to make money.
• In the short run, it is entirely possible that a company will deviate from its fundamentals. This can be caused by a wide variety of reasons, but these anomalies tend to occur more in small, illiquid stocks.
  • In a matter of weeks, the value of GameStop was completely disconnected from the value of the company.
  • Here’s a data point to consider. If GameStop started to earn $1 per share and you bought the share for $400, it would take you 400 years to get your money back.
• For everyone making money, there are people losing money.
• Wheels Up Wealth provides a plan and a partner to get you from point A to point B considering acceptable risk based on academic principles and market expectations.

What about Bitcoin?

• It is understandable to want to investigate if this is something worth investing in.
  • Ask yourself, “Why would I invest in Bitcoin?” Is it a currency? You probably wouldn’t invest in Euros or Japanese yen.
  • “I could make a lot of money!”  But it also lost two-thirds of its value in 2017.
  • “It’s entertaining!” There is an entertainment value, and it could replace a trip to Vegas.
  • “How does it fit into the long-term plan?”
• The entire value of all bitcoins is less than the value of Tesla. So, how much should you allocate to your portfolio? It is a very small piece of the investible landscape.
• We want to buy productive assets. When you buy a stock or a bond, there is a clear stream of value – from where future cash flows will come.
  • Bitcoin is not a productive asset and points more toward a speculative mechanism.
• The technology is probably here to stay. Blockchain is powerful.
• The Palm Pilot was one of the first handheld electronic devices on the market, but despite its trailblazing innovation, failed to survive.
• There are serious security considerations with accessing your Bitcoin. If you forget your password, you will be locked out of the system. An estimated 20% of the existing Bitcoin – worth around $140 billion – appears to be lost.

 
Is day trading any different from gambling?

• There is so much uncertainty in markets, that anything very short-term and involving individual stocks feels more akin to gambling.
• Historically, the market goes up 53% of all trading days; 63% of all months; and 73% of all years. The longer you invest, the higher your likelihood of success.
• The longer you give it, the more it becomes investing rather than a coin flip.

 
How did the markets react to events through 2020 and what are the lessons learned?

• Had we been shown on January 1, 2020 all the headlines for the year 2020, we likely would have doubted that the market would end the year up.
  • Even with perfect foresight into the news, you can still make the wrong decisions.
• In the span of five weeks, the market lost about one-third of its value. These times are incredibly emotional. It is important to have an advisor with a consistently disciplined approach to investing, who can coach and help you keep your sanity during turbulent markets.
• There was a huge flight to quality as the market dropped, and many people sold their stock positions and sat on cash. Most of these people missed the recovery. Even if they did re-enter the stock market, they had likely already missed a large piece of the recovery.

 
Are the markets infinite? Should we expect a correction at some point?

• The market goes up and down. “Corrections” happens on about half of the day.
• Like with Earthquakes. Living in California, we know earthquakes will happen, but we have no idea when.
• The good news is, you can prepare for the earthquake. It will not be pleasant, but you can make a plan to get through it. Likewise, there is no doubt that markets will go down, but like your earthquake plan and emergency supply kit, you have an investment plan to get you through the shakes and aftermath.

 
What is the best strategy: should I dollar cost average or just buy-in at the bottom?

• If we knew where the market bottom was, buying in at the bottom would be great.
• Statistically speaking, it is best to put all your investment money in the market at once, because the market is likely to go up. You are more likely to miss a good month by dollar-cost averaging, than a bad month.
• Behaviorally speaking, it may be easier to invest with dollar-cost averaging. In the long run, investing over several months will probably not make a large impact. It is more about time in the market, rather than timing the market.
• It’s hard enough to know when to get out of the market, but you also have to know when to get back into the market. Investors often forget that timing the market requires two correct decisions. And when to jump back in is often more frightening and stressful than acting on the impulse that caused your first decision: to sell in a panic.

 
What is going on with FAANG or FANMAG stocks? Are they here to stay?

• By the end of the 3^rd quarter of 2020, the S&P 500 was up about 6%. Apple, Amazon, Netflix, Google, and Facebook were up 40%. The remaining 495 companies in the index were down about 5%.
• We have had dominant companies in the economy for a long time. We can track the top 10 companies back to the 1930s.
• While it is not unreasonable to think that the top tech stocks will stay in the top 10, the better question is: will these companies be great performers for your portfolio?
• On their way to inclusion in the top 10 stocks, companies do have remarkable performance. But, once they are in the top 10, they start to underperform the market over the next 5- and 10-year periods.
• Risk and return are related – these companies become much less risky and consequently deliver lower returns.

 
What does it mean to be an ESG friendly company?

• More and more, Investors are asking not just about their financial goals, but how to align their financial goals with their personal values.
• ESG investing isn’t new, but historically most of the solutions were expensive and not well-diversified. Newer solutions allow investors to maintain a similar investment experience and also align their assets with their values.
• “E” is for Environmental considerations, namely climate change. Wheels Up Wealth employs solutions that rank companies based primarily on carbon emission – both current and potential.
• “S” is for Social considerations based on investor values, like child labor, tobacco, or weapons.
• “G” is for Governance, which has to do with steering the company, of which you are a shareholder, in the right direction. We’ve seen more and more large investment firms begin to influence companies in this way.

 
I have large equity investments, but markets are fickle. What is the appropriate mix of investments?

• Stocks give you ownership in companies. Stocks have delivered 9-10% returns on average but have had tremendous fluctuations.
  • $1 invested in the S&P 500 in the 1920s would have been worth about $9,000 today.
  • Stocks provide a good opportunity for growth but offer a lot of volatility.
• Bonds offer much more stability. They are contracts that spell out the future stream of repayments.
  • If you lend to the government on a 1-month basis, for example, you would have earned 3-4% a year in the long term.
  • You never would have had a negative calendar year with this particular investment.
  • $1 invested in 1-month Treasury bills in the 1920s would have grown to $22 today.
• The mix of stocks and bonds is likely the most important decision in determining your long-term returns and volatility and is something that should be considered carefully with your financial advisor, based on your unique situation.

If you have any questions, please don't hesitate to reach out.

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