Hello, everybody, it's Sam from Financial Samurai. And man, every time I try to get out, they pull me back in. And who's they in this case? They is the stock market and the mania that's going on with GameStop, AMC Entertainment, Bed, Bath, and Beyond, and a whole bunch of other stocks.

Several hedge funds have shorted. And the Reddit horde have gone long and pumped it up to short squeeze and crushed these hedge funds. Did you know that Melvin Capital lost 53% in January 2021 alone? 53%, folks. That is ridiculous. You and I probably outperformed being down less than 53% in January 2021.

So maybe we should start hedge funds ourselves. If you want to make money, you need to start or join a hedge fund, preferably a reputable hedge fund, because it's other people's money, folks. You just whip it around, take huge leverage bets. And if you win big, you get 2% or maybe even 3% of assets under management as a fee.

And then you get 20% to sometimes 30% of the profits. So let's say you make a billion dollars in profits. Well, OK, that's a lot. You're going to be able to rake in 200 to 300 million of those profits. And then if the fund goes bust or goes down 50% the following year, well, what you do is you strategically start a new fund within the fund, because you cannot make that carry unless you get back to the high water mark.

So you start a new fund. You market it and say, this is a one-off black swan event. You start a new fund, and you just talk about your previous track record. And then you make more money, because if your fund is down, the beauty of this business model is that you don't have to give any of the money back.

You just stop making more money. How sweet is that? So from 1999 to 2001, I used to work on the 49th floor at One New York Plaza in New York City. The 49th floor was the international equity sales and trading floor at Goldman Sachs, and the atmosphere was electric just like it is today.

However, the mania in the stock market today feels at least two times greener than it ever did in 1999 and 2000 during the time of the first dot com bubble burst. Therefore, I implore investors to be careful, especially speculative investors in all these type of names. I remember buying $3,000 worth of a company called VCSY.

It was a Chinese microcap internet stock in early 2000. I told my friends on the Latin America desk, who then bought the name-- you know, it's just a small cap. They buy several thousand shares. Then they told their friends on the US equities desk upstairs on the 50th floor, and they bought.

And then within a week, everybody I knew in my analyst class had bought VCSY. Then they told their roommates and friends who worked at Morgan Stanley, Merrill Lynch, and Lehman Brothers as well. As a result, VCSY promptly went up 55x within a few short months, and then went right back down by the start of 2001.

So what I realize is every year there is some type of VCSY. It gains a lot of interest, a lot of momentum, and then explodes, and then it goes right back to where it was before all the mania. I'm pretty confident within three to six months, most of these names like GameStop and AMC Entertainment will drop back down to their pre-mania levels.

Think about this in terms of earnings. All this price action has nothing to do with short-term earnings. And these companies have to report quarterly earnings. So if the stock goes up 10x in a quarter, the earnings are obviously not going up 10x. Therefore, once these companies report earnings, fundamentals should slowly take over at least.

And if not, these bubble stocks have a lifecycle of their own. And once people start selling, it's down 3%, 5%, 10%, then the stampede gets out quick. Therefore, if you've been able to benefit from the insanity, I highly recommend you take some profits. You can never lose if you lock in a gain.

Remember this mantra when you're investing, especially when you're day trading or speculating. You can never lose if you lock in a gain. Once you take profits, I suggest converting some of that funny money into real assets, hard assets like real estate that will continue to hold value long after these stock bubbles have burst.

From 1999 to now, I've consistently used the funny money I've made to buy real estate. Real estate not only provides utility, it also generates income, which is much more valuable today because interest rates have declined so much. It simply takes a lot more capital to generate the same amount of risk-adjusted income.

The 10-year bond yield, it went from 0.51% to now around 1%. It's not moving up. I've got a call that it's going to average about 1.25% in 2021. And even then, I think that might be aggressive. I don't think the 10-year bond yield or interest rates are going to go up much at all in 2021 and maybe even in 2022.

Therefore, if you've got tremendous capital gains, convert some of those gains into income-producing assets. Sure, you can convert it into a Lamborghini if you want, or a handbag, or some shoes, or whatever. But I just like to buy real assets because over time, over time, I think they're going to do you good.

And you know what? Despite the insanity in some stocks today, I still think it's worth trying to take a punt with a minor portion of your portfolio. Talking 1% to 5% of your portfolio, take a punt. See what happens. Looking back, all of my big wins and big losses have come from investing in individual stock names.

And in terms of what percentage of your investment portfolio should be in active versus passive, well, I think all of us can agree that investing passively in index funds and ETFs is the way to go long term because active fund managers have a very difficult time of outperforming their respective indices.

And if you look at the retail investor track record from 1998 to 2018, I think we're generating like 1.9% on average returns a year, which sucks. That's like the bottom of the barrel. So you can't really trust ourselves to do good over the long term. Sure, over the short term, we can just crush it, get lucky, whatever.

But over the longer term, three to five to 10 year track records, it's really difficult to outperform. So I recommend investing 80% to 90% of your investable assets in passive index funds or ETFs. And then go actively invest 10% to 20% of your portfolio in single stock names. Are you really going to blow yourself up if you invest in Apple Computer with $100 billion plus cash hoard and just cash flow out the wazoo every single quarter?

Probably not. Could you lose a lot of money investing in GameStop at $400 a share when it's over $22 billion in market cap from just a couple hundred million dollars a month ago? I would say the chances are high. So you've got to figure out what type of single stock investments you're trying to invest in, knowing that every single company has a different level of risk.

The same thing goes for buying real estate. If you think about it, buying a property is like going all in on a single stock, and usually with leverage, because you're going to take out a mortgage most of the time. If you hit it right over, let's say, a 10 year period, you could become very wealthy with this single investment.

Today, I've decided to go all in on big city real estate again. I live in San Francisco, so I'm going to be buying San Francisco real estate, and I'm also looking at Manhattan real estate. I'm pretty certain the herd will flock back to big cities once there is herd immunity.

I remember clearly San Francisco feeling like a ghost town when I arrived in 2001. Then things started taking off in 2003, and it continued to take off until about 2008. And then I remember things getting really dire in 2008 and 2010. Traffic was down, restaurants were closing down. I could always get a reservation anywhere I wanted to go.

Then things started looking up a little bit in 2011. And then by the end of 2011 and 2012, things started picking up again. Therefore, I think the same thing is going to happen with 2020 and early 2021 being relatively slow. But then that fear of missing out, that FOMO, that desire to get back in and be where the action is, and the job opportunities, and the networking is going to come back.

So there's really only a one to two year window of opportunity before prices start running away from us again. The thing with real estate is that for most all of us, the piece of real estate we want to buy is way more expensive than our annual income. So let's say a property costs $500,000 and your income is $100,000.

If the property increases by 10%, that's $50,000. If your income increases by 10%, that's only $10,000. So you're always going to lag behind real estate when you compare the property you want to buy and your income. For most people. Therefore, when there are windows of opportunity and you want to go long real estate, you need to take advantage.

Because frankly, once that window closes, real estate is going to go up in a sense that it's going to pass you by. You're not going to be able to catch up unless you have a really glorious career and you just crush it out of the park and your income goes up much faster and it grows much larger.

So what about thoughts on the overall stock market and whether we're in a bubble or not? Well, valuations are certainly expensive. We need to see at least 25% to 30% earnings growth in 2021 to see valuations at around 25 times, 24, 25 times earnings. And that's already on the top 15% high end of historical averages.

Melvin Capital, the hedge fund that was short GameStop and other names, supposedly lost 53% in January, right? That's according to the Wall Street Journal. Not only is 53% a massive percentage loss, but it's also a massive absolute dollar amount loss, given Melvin Capital had over $10 billion in assets under management.

So Melvin Capital would have to rebound by 113% just to get back to even. If Melvin Capital doesn't get back to even, its fund managers and analysts don't get paid a portion of the profits that I was talking about. In such a scenario, it's easy to see Melvin Capital shut down because it could take years, maybe never, for Melvin Capital to get back to even.

So the worry on the street is that Melvin Capital and a bunch of other similar hedge funds will have to liquidate positions, long positions, in a fire sale and close up shop. As a result, there will be continued selling pressure in the broader markets until enough of these hedge funds close down or wind down their positions.

And actually, this happened in the past. In 1998, when long-term capital management run by John Merriweather, who was an ex-Solomon Brothers bond trader, blew up because it had too much leverage in wrong-way bets. The markets definitely took a hit in 1998. A lot of uncertainty, a lot of front-running on these positions.

And what we learned was there were a lot of one-way bets. A lot of these funds who market themselves as having a secret black box, algorithmic trading, scientific equity, all that stuff, they were all shorting and longing very similar securities. So when one had to unwind, it's just a domino effect.

And right now, there's even more leverage and more capital chasing similar types of positions. So the volatility is going to increase right now, which is why you need to be very, very aware and be very, very careful. If you want to read a great book about hedge funds collapsing and roiling the markets, check out When Genius Failed by Roger Lowenstein.

This is about the long-term capital management situation. And I think it's going to happen in 2021 and probably many, many years to come. We all knew going into this year that equity valuations are rich. Therefore, a sell-off, although disappointing-- I mean, it really is disappointing that we basically round-tripped January's gains-- should not come as a surprise.

I've also shared with you my 2021 stock market prediction and real estate market prediction, which is decidedly tamer than my old shop's prediction of 4,300 on the S&P 500 by year end. I've had a month to think about my 2021 prediction of 4,088 on the S&P 500. And at this point, I'm sticking with it.

It's not a huge gain, but it's still a gain. And since there is upside from current levels to my 4,088 price target, I'm rationally going to be buying stock whenever there is a sell-off. So whenever there's a 2-plus percent sell-off, I've been buying. And I'll continue to buy so long as my thesis doesn't change, because I will continue to have cash flow coming in every single month.

One thing I do strongly believe is that there is a lot of savings, a lot of liquidity on the sidelines ready to buy. We saw the US personal saving rate jump to 33% in April 2020. And it's since come down, but it just shows that Americans, we can save if we want to.

And we have been saving during the start of the global pandemic every single month. So I believe the more the stock market goes down, the more it'll capture some of this liquidity off the sidelines. Further, I've used this latest sell-off as an opportunity to fund my kids' 529 plans for the year.

You can contribute $15,000 a year, which is the gift tax exemption amount. So the other day, I sent checks, $10,000 for my son, $10,000 for my daughter. Thank you very much, market sell-off. And if you have a Roth IRA, traditional IRA, solo 401(k), SEP IRA, or 401(k), I'd use this opportunity to contribute to these funds as well.

These investment accounts are for the long term. Therefore, short-term sell-offs provide opportunity. For example, I won't be tapping my kids' 521 plans for at least another 14 years. I think we can safely predict that there's going to be 5% to 10% corrections in 2021, at least one or two times.

Therefore, to take advantage of these corrections, you have to monitor your liquidity. You have to have capital in order to invest. Therefore, please take some time to analyze your net worth, your current asset allocation of various asset classes, your stock and bond allocation, and get an idea of how much cash you have to tap and how much cash flow is coming in over the next several months.

As for me, I have mentioned that most of my funds this year will go to a venture debt fund, a private equity fund, and to real estate. However, I'm still going to be maxing out my solo 401(k), SEP IRA, and also my kids' 529 plans. I'm still bullish on the stock market.

I'm very bullish on the real estate market. And I'll definitely let you know either through this podcast or through a newsletter or through a post if I change my mind. Because I'm definitely invested in the economy, the stock market, the real estate market, and the bond market. So I don't want us to give back a lot of our gains that we had from 2020.

I want us to continue to try to win at the investing game. So if you feel that I'm missing something, that I have some blind spot that I should talk about, let me know in the comments section of any single post. It's definitely worth talking about everything. It's important that we have humility as investors to not confuse brains with the bull market and to have the proper risk exposure.

Thanks so much, everyone. I hope you enjoyed this podcast. And if you really did, I'd love a positive review wherever you listen to this podcast. Thanks, folks.