Stock_Market_Mania
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai.
00:00:02.560 | And man, every time I try to get out, they pull me back in.
00:00:08.040 | And who's they in this case?
00:00:09.880 | They is the stock market and the mania
00:00:12.640 | that's going on with GameStop, AMC Entertainment, Bed,
00:00:16.200 | Bath, and Beyond, and a whole bunch of other stocks.
00:00:19.880 | Several hedge funds have shorted.
00:00:22.100 | And the Reddit horde have gone long
00:00:25.640 | and pumped it up to short squeeze
00:00:27.640 | and crushed these hedge funds.
00:00:28.920 | Did you know that Melvin Capital lost 53% in January 2021 alone?
00:00:35.640 | 53%, folks.
00:00:37.280 | That is ridiculous.
00:00:39.040 | You and I probably outperformed being down less than 53%
00:00:44.040 | in January 2021.
00:00:45.840 | So maybe we should start hedge funds ourselves.
00:00:48.520 | If you want to make money, you need
00:00:50.800 | to start or join a hedge fund, preferably a reputable hedge
00:00:54.320 | fund, because it's other people's money, folks.
00:00:57.520 | You just whip it around, take huge leverage bets.
00:01:01.360 | And if you win big, you get 2% or maybe even 3%
00:01:05.160 | of assets under management as a fee.
00:01:07.120 | And then you get 20% to sometimes 30% of the profits.
00:01:10.880 | So let's say you make a billion dollars in profits.
00:01:13.560 | Well, OK, that's a lot.
00:01:15.440 | You're going to be able to rake in 200 to 300
00:01:18.400 | million of those profits.
00:01:20.240 | And then if the fund goes bust or goes down 50%
00:01:24.000 | the following year, well, what you do
00:01:26.600 | is you strategically start a new fund within the fund,
00:01:30.560 | because you cannot make that carry unless you get back
00:01:34.760 | to the high water mark.
00:01:35.960 | So you start a new fund.
00:01:37.680 | You market it and say, this is a one-off black swan event.
00:01:40.440 | You start a new fund, and you just
00:01:41.860 | talk about your previous track record.
00:01:44.000 | And then you make more money, because if your fund is down,
00:01:47.680 | the beauty of this business model
00:01:49.720 | is that you don't have to give any of the money back.
00:01:53.120 | You just stop making more money.
00:01:55.320 | How sweet is that?
00:01:56.600 | So from 1999 to 2001, I used to work on the 49th floor
00:02:01.240 | at One New York Plaza in New York City.
00:02:03.840 | The 49th floor was the international equity sales
00:02:06.120 | and trading floor at Goldman Sachs,
00:02:08.120 | and the atmosphere was electric just like it is today.
00:02:12.240 | However, the mania in the stock market today
00:02:14.920 | feels at least two times greener than it ever
00:02:17.640 | did in 1999 and 2000 during the time of the first dot com
00:02:22.320 | bubble burst.
00:02:23.960 | Therefore, I implore investors to be careful, especially
00:02:28.320 | speculative investors in all these type of names.
00:02:32.040 | I remember buying $3,000 worth of a company called VCSY.
00:02:36.280 | It was a Chinese microcap internet stock in early 2000.
00:02:40.560 | I told my friends on the Latin America desk,
00:02:43.160 | who then bought the name--
00:02:44.680 | you know, it's just a small cap.
00:02:46.000 | They buy several thousand shares.
00:02:48.000 | Then they told their friends on the US equities desk
00:02:50.300 | upstairs on the 50th floor, and they bought.
00:02:53.000 | And then within a week, everybody I knew in my analyst
00:02:55.120 | class had bought VCSY.
00:02:57.200 | Then they told their roommates and friends
00:02:59.640 | who worked at Morgan Stanley, Merrill Lynch, and Lehman
00:03:02.720 | Brothers as well.
00:03:03.840 | As a result, VCSY promptly went up 55x within a few short
00:03:08.560 | months, and then went right back down by the start of 2001.
00:03:13.240 | So what I realize is every year there is some type of VCSY.
00:03:18.740 | It gains a lot of interest, a lot of momentum,
00:03:21.600 | and then explodes, and then it goes right back to where
00:03:24.760 | it was before all the mania.
00:03:27.400 | I'm pretty confident within three to six months,
00:03:30.320 | most of these names like GameStop and AMC Entertainment
00:03:33.680 | will drop back down to their pre-mania levels.
00:03:37.000 | Think about this in terms of earnings.
00:03:39.720 | All this price action has nothing
00:03:41.940 | to do with short-term earnings.
00:03:44.400 | And these companies have to report quarterly earnings.
00:03:47.600 | So if the stock goes up 10x in a quarter,
00:03:51.840 | the earnings are obviously not going up 10x.
00:03:54.880 | Therefore, once these companies report earnings,
00:03:58.640 | fundamentals should slowly take over at least.
00:04:01.960 | And if not, these bubble stocks have a lifecycle of their own.
00:04:07.440 | And once people start selling, it's down 3%, 5%, 10%,
00:04:12.760 | then the stampede gets out quick.
00:04:15.680 | Therefore, if you've been able to benefit from the insanity,
00:04:19.080 | I highly recommend you take some profits.
00:04:21.480 | You can never lose if you lock in a gain.
00:04:24.040 | Remember this mantra when you're investing,
00:04:26.360 | especially when you're day trading or speculating.
00:04:28.680 | You can never lose if you lock in a gain.
00:04:31.380 | Once you take profits, I suggest converting
00:04:33.680 | some of that funny money into real assets,
00:04:36.960 | hard assets like real estate that
00:04:39.360 | will continue to hold value long after these stock
00:04:42.560 | bubbles have burst.
00:04:44.000 | From 1999 to now, I've consistently
00:04:47.160 | used the funny money I've made to buy real estate.
00:04:50.520 | Real estate not only provides utility,
00:04:52.640 | it also generates income, which is much more valuable today
00:04:56.160 | because interest rates have declined so much.
00:04:58.800 | It simply takes a lot more capital
00:05:01.280 | to generate the same amount of risk-adjusted income.
00:05:04.600 | The 10-year bond yield, it went from 0.51% to now around 1%.
00:05:11.320 | It's not moving up.
00:05:13.080 | I've got a call that it's going to average about 1.25% in 2021.
00:05:17.720 | And even then, I think that might be aggressive.
00:05:19.840 | I don't think the 10-year bond yield or interest rates
00:05:22.120 | are going to go up much at all in 2021 and maybe even in 2022.
00:05:27.840 | Therefore, if you've got tremendous capital gains,
00:05:31.600 | convert some of those gains into income-producing assets.
00:05:36.280 | Sure, you can convert it into a Lamborghini if you want,
00:05:40.180 | or a handbag, or some shoes, or whatever.
00:05:42.840 | But I just like to buy real assets because over time,
00:05:46.440 | over time, I think they're going to do you good.
00:05:49.560 | And you know what?
00:05:50.320 | Despite the insanity in some stocks today,
00:05:53.560 | I still think it's worth trying to take a punt with a minor
00:05:56.480 | portion of your portfolio.
00:05:58.360 | Talking 1% to 5% of your portfolio, take a punt.
00:06:01.800 | See what happens.
00:06:02.800 | Looking back, all of my big wins and big losses
00:06:06.240 | have come from investing in individual stock names.
00:06:09.080 | And in terms of what percentage of your investment
00:06:12.520 | portfolio should be in active versus passive, well, I think
00:06:16.920 | all of us can agree that investing passively
00:06:19.920 | in index funds and ETFs is the way to go long term
00:06:23.040 | because active fund managers have a very difficult time
00:06:26.040 | of outperforming their respective indices.
00:06:28.960 | And if you look at the retail investor track
00:06:31.080 | record from 1998 to 2018, I think
00:06:35.560 | we're generating like 1.9% on average returns a year,
00:06:38.720 | which sucks.
00:06:39.760 | That's like the bottom of the barrel.
00:06:41.480 | So you can't really trust ourselves
00:06:42.960 | to do good over the long term.
00:06:44.920 | Sure, over the short term, we can just
00:06:46.460 | crush it, get lucky, whatever.
00:06:48.440 | But over the longer term, three to five to 10 year track
00:06:51.240 | records, it's really difficult to outperform.
00:06:54.480 | So I recommend investing 80% to 90%
00:06:59.200 | of your investable assets in passive index funds or ETFs.
00:07:03.760 | And then go actively invest 10% to 20% of your portfolio
00:07:08.120 | in single stock names.
00:07:09.960 | Are you really going to blow yourself up
00:07:11.680 | if you invest in Apple Computer with $100 billion
00:07:14.440 | plus cash hoard and just cash flow out
00:07:17.200 | the wazoo every single quarter?
00:07:19.040 | Probably not.
00:07:19.840 | Could you lose a lot of money investing in GameStop
00:07:22.280 | at $400 a share when it's over $22 billion in market cap
00:07:27.120 | from just a couple hundred million dollars a month ago?
00:07:31.800 | I would say the chances are high.
00:07:34.200 | So you've got to figure out what type of single stock
00:07:37.440 | investments you're trying to invest in,
00:07:39.600 | knowing that every single company
00:07:42.160 | has a different level of risk.
00:07:45.200 | The same thing goes for buying real estate.
00:07:47.760 | If you think about it, buying a property
00:07:49.720 | is like going all in on a single stock,
00:07:53.520 | and usually with leverage, because you're
00:07:55.320 | going to take out a mortgage most of the time.
00:07:57.920 | If you hit it right over, let's say, a 10 year period,
00:08:01.720 | you could become very wealthy with this single investment.
00:08:05.800 | Today, I've decided to go all in on big city real estate again.
00:08:10.480 | I live in San Francisco, so I'm going
00:08:12.160 | to be buying San Francisco real estate,
00:08:13.760 | and I'm also looking at Manhattan real estate.
00:08:17.160 | I'm pretty certain the herd will flock back to big cities
00:08:21.040 | once there is herd immunity.
00:08:22.680 | I remember clearly San Francisco feeling like a ghost town
00:08:25.920 | when I arrived in 2001.
00:08:28.200 | Then things started taking off in 2003,
00:08:32.120 | and it continued to take off until about 2008.
00:08:36.160 | And then I remember things getting really dire
00:08:38.200 | in 2008 and 2010.
00:08:40.320 | Traffic was down, restaurants were closing down.
00:08:43.480 | I could always get a reservation anywhere I wanted to go.
00:08:47.120 | Then things started looking up a little bit in 2011.
00:08:52.200 | And then by the end of 2011 and 2012,
00:08:55.480 | things started picking up again.
00:08:57.440 | Therefore, I think the same thing
00:08:59.000 | is going to happen with 2020 and early 2021
00:09:03.600 | being relatively slow.
00:09:05.520 | But then that fear of missing out, that FOMO,
00:09:09.440 | that desire to get back in and be where the action is,
00:09:13.440 | and the job opportunities, and the networking
00:09:16.400 | is going to come back.
00:09:17.880 | So there's really only a one to two year window of opportunity
00:09:21.040 | before prices start running away from us again.
00:09:24.880 | The thing with real estate is that for most all of us,
00:09:29.120 | the piece of real estate we want to buy
00:09:30.960 | is way more expensive than our annual income.
00:09:34.240 | So let's say a property costs $500,000
00:09:37.520 | and your income is $100,000.
00:09:39.880 | If the property increases by 10%, that's $50,000.
00:09:44.040 | If your income increases by 10%, that's only $10,000.
00:09:47.480 | So you're always going to lag behind real estate
00:09:51.080 | when you compare the property you want to buy
00:09:53.520 | and your income.
00:09:54.240 | For most people.
00:09:55.640 | Therefore, when there are windows of opportunity
00:09:58.960 | and you want to go long real estate,
00:10:01.040 | you need to take advantage.
00:10:02.440 | Because frankly, once that window closes,
00:10:06.200 | real estate is going to go up in a sense
00:10:08.200 | that it's going to pass you by.
00:10:10.200 | You're not going to be able to catch up
00:10:11.820 | unless you have a really glorious career
00:10:14.560 | and you just crush it out of the park
00:10:16.200 | and your income goes up much faster
00:10:18.360 | and it grows much larger.
00:10:20.000 | So what about thoughts on the overall stock market
00:10:23.000 | and whether we're in a bubble or not?
00:10:25.080 | Well, valuations are certainly expensive.
00:10:27.880 | We need to see at least 25% to 30% earnings growth in 2021
00:10:33.920 | to see valuations at around 25 times, 24, 25 times earnings.
00:10:39.480 | And that's already on the top 15% high end
00:10:42.680 | of historical averages.
00:10:44.560 | Melvin Capital, the hedge fund that
00:10:46.400 | was short GameStop and other names,
00:10:48.520 | supposedly lost 53% in January, right?
00:10:51.320 | That's according to the Wall Street Journal.
00:10:53.160 | Not only is 53% a massive percentage loss,
00:10:56.480 | but it's also a massive absolute dollar amount loss,
00:10:59.960 | given Melvin Capital had over $10 billion in assets
00:11:02.920 | under management.
00:11:04.280 | So Melvin Capital would have to rebound by 113%
00:11:07.840 | just to get back to even.
00:11:10.040 | If Melvin Capital doesn't get back to even,
00:11:11.960 | its fund managers and analysts don't
00:11:13.520 | get paid a portion of the profits
00:11:15.080 | that I was talking about.
00:11:16.680 | In such a scenario, it's easy to see Melvin Capital shut down
00:11:20.560 | because it could take years, maybe never,
00:11:22.960 | for Melvin Capital to get back to even.
00:11:25.320 | So the worry on the street is that Melvin Capital
00:11:28.520 | and a bunch of other similar hedge funds
00:11:30.680 | will have to liquidate positions, long positions,
00:11:33.840 | in a fire sale and close up shop.
00:11:36.360 | As a result, there will be continued selling pressure
00:11:39.320 | in the broader markets until enough of these hedge funds
00:11:42.240 | close down or wind down their positions.
00:11:45.200 | And actually, this happened in the past.
00:11:47.640 | In 1998, when long-term capital management
00:11:50.920 | run by John Merriweather, who was an ex-Solomon Brothers
00:11:54.200 | bond trader, blew up because it had too much leverage
00:11:58.160 | in wrong-way bets.
00:11:59.520 | The markets definitely took a hit in 1998.
00:12:02.600 | A lot of uncertainty, a lot of front-running
00:12:04.920 | on these positions.
00:12:06.200 | And what we learned was there were a lot of one-way bets.
00:12:09.480 | A lot of these funds who market themselves
00:12:12.400 | as having a secret black box, algorithmic trading,
00:12:14.960 | scientific equity, all that stuff,
00:12:18.040 | they were all shorting and longing
00:12:19.880 | very similar securities.
00:12:21.640 | So when one had to unwind, it's just a domino effect.
00:12:25.480 | And right now, there's even more leverage and more capital
00:12:28.800 | chasing similar types of positions.
00:12:31.560 | So the volatility is going to increase right now,
00:12:34.440 | which is why you need to be very, very aware
00:12:36.680 | and be very, very careful.
00:12:38.880 | If you want to read a great book about hedge funds
00:12:41.280 | collapsing and roiling the markets,
00:12:43.160 | check out When Genius Failed by Roger Lowenstein.
00:12:47.240 | This is about the long-term capital management situation.
00:12:50.840 | And I think it's going to happen in 2021 and probably
00:12:53.920 | many, many years to come.
00:12:55.880 | We all knew going into this year that equity valuations are
00:12:58.920 | rich.
00:12:59.600 | Therefore, a sell-off, although disappointing--
00:13:02.120 | I mean, it really is disappointing that we basically
00:13:04.200 | round-tripped January's gains--
00:13:06.280 | should not come as a surprise.
00:13:08.440 | I've also shared with you my 2021 stock market prediction
00:13:12.040 | and real estate market prediction, which
00:13:13.840 | is decidedly tamer than my old shop's prediction of 4,300
00:13:18.000 | on the S&P 500 by year end.
00:13:20.280 | I've had a month to think about my 2021 prediction of 4,088
00:13:24.680 | on the S&P 500.
00:13:26.320 | And at this point, I'm sticking with it.
00:13:29.200 | It's not a huge gain, but it's still a gain.
00:13:32.560 | And since there is upside from current levels to my 4,088
00:13:36.360 | price target, I'm rationally going
00:13:38.520 | to be buying stock whenever there is a sell-off.
00:13:41.360 | So whenever there's a 2-plus percent sell-off,
00:13:43.760 | I've been buying.
00:13:44.920 | And I'll continue to buy so long as my thesis doesn't change,
00:13:49.440 | because I will continue to have cash flow coming
00:13:51.840 | in every single month.
00:13:53.280 | One thing I do strongly believe is
00:13:55.040 | that there is a lot of savings, a lot of liquidity
00:13:57.560 | on the sidelines ready to buy.
00:13:59.320 | We saw the US personal saving rate jump to 33% in April 2020.
00:14:04.880 | And it's since come down, but it just
00:14:06.400 | shows that Americans, we can save if we want to.
00:14:09.600 | And we have been saving during the start of the global
00:14:12.200 | pandemic every single month.
00:14:14.400 | So I believe the more the stock market goes down,
00:14:17.560 | the more it'll capture some of this liquidity
00:14:20.440 | off the sidelines.
00:14:21.680 | Further, I've used this latest sell-off as an opportunity
00:14:24.720 | to fund my kids' 529 plans for the year.
00:14:28.120 | You can contribute $15,000 a year, which is the gift tax
00:14:32.040 | exemption amount.
00:14:33.280 | So the other day, I sent checks, $10,000 for my son,
00:14:36.480 | $10,000 for my daughter.
00:14:38.240 | Thank you very much, market sell-off.
00:14:40.560 | And if you have a Roth IRA, traditional IRA, solo 401(k),
00:14:44.760 | SEP IRA, or 401(k), I'd use this opportunity
00:14:48.520 | to contribute to these funds as well.
00:14:50.680 | These investment accounts are for the long term.
00:14:53.480 | Therefore, short-term sell-offs provide opportunity.
00:14:56.760 | For example, I won't be tapping my kids' 521 plans
00:14:59.720 | for at least another 14 years.
00:15:01.960 | I think we can safely predict that there's
00:15:04.800 | going to be 5% to 10% corrections in 2021,
00:15:10.680 | at least one or two times.
00:15:12.480 | Therefore, to take advantage of these corrections,
00:15:15.440 | you have to monitor your liquidity.
00:15:17.920 | You have to have capital in order to invest.
00:15:20.920 | Therefore, please take some time to analyze your net worth,
00:15:25.440 | your current asset allocation of various asset classes,
00:15:29.600 | your stock and bond allocation, and get
00:15:32.920 | an idea of how much cash you have to tap
00:15:35.960 | and how much cash flow is coming in over the next several
00:15:38.360 | months.
00:15:39.120 | As for me, I have mentioned that most of my funds this year
00:15:42.800 | will go to a venture debt fund, a private equity fund,
00:15:47.960 | and to real estate.
00:15:49.280 | However, I'm still going to be maxing out my solo 401(k),
00:15:53.400 | SEP IRA, and also my kids' 529 plans.
00:15:56.800 | I'm still bullish on the stock market.
00:15:59.000 | I'm very bullish on the real estate market.
00:16:00.920 | And I'll definitely let you know either through this podcast
00:16:03.880 | or through a newsletter or through a post
00:16:06.360 | if I change my mind.
00:16:08.040 | Because I'm definitely invested in the economy, the stock
00:16:10.880 | market, the real estate market, and the bond market.
00:16:13.560 | So I don't want us to give back a lot of our gains
00:16:15.840 | that we had from 2020.
00:16:17.720 | I want us to continue to try to win at the investing game.
00:16:22.360 | So if you feel that I'm missing something,
00:16:24.240 | that I have some blind spot that I should talk about,
00:16:27.040 | let me know in the comments section of any single post.
00:16:30.520 | It's definitely worth talking about everything.
00:16:33.520 | It's important that we have humility as investors
00:16:36.800 | to not confuse brains with the bull market
00:16:40.000 | and to have the proper risk exposure.
00:16:42.600 | Thanks so much, everyone.
00:16:43.800 | I hope you enjoyed this podcast.
00:16:45.240 | And if you really did, I'd love a positive review
00:16:48.200 | wherever you listen to this podcast.
00:16:50.600 | Thanks, folks.