Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly at firstname.lastname@example.org . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Spotify, or your favorite podcast service. Let the financial fun begin!
A hare was making fun of a tortoise one day for being so slow. “Do you ever get anywhere?” he asked with a mocking laugh. “Yes,” replied the tortoise, “and I get there sooner than you think. I’ll run you a race and prove it.”
The hare was much amused by the idea of running a race with the tortoise, but for fun he agreed. The fox, who had consented to act as judge, marked the distance and started the runners off. The hare was soon far out of sight of the tortoise and wanted to make the tortoise feel deeply just how ridiculous it was for him to try to race a hare. So, the hare lay down beside the course to take a nap until the tortoise could catch up. Meanwhile, the tortoise kept going slowly but steadily and after a time passed the place where the hare was sleeping. The hare slept on peacefully, and when at last he woke up, the tortoise was near the finish line. The hare now ran his swiftest, but he could not overtake the tortoise in time. The moral of the story? The race is not always to the swift. Or, slow and steady wins the race.
You may recognize one of Aesop’s Fables, which are quite old. They go back many hundreds of years. And even if you’ve never heard that exact reading before, you’ve probably heard at least allusions to The Tortoise and the Hare. It has a lot of applications for life and your money.
This last week the big news in the world of finance was that a bunch of people online—enabled by social media—teamed up and went after the big guys, meaning the hedge funds. Often, one of the hedge fund strategies is to short stocks to companies that they think are bad and will go down further in price. The people on social media got together and colluded. They said, “Alright, we’re all going to buy these stocks like crazy.” One of them was GameStop. One of them was AMC. Both companies have been struggling greatly this last year, and their prices were down. There could even be bankruptcy in the future. We don’t know, but that’s why somebody would short a stock, because they think that it’s bad and about to go down in value. So these hedge funds were shorting stocks, which means they were selling stocks that they didn’t own. In other words, they borrowed the stock, then sold it. What that means is that later on, someday, they have to buy that stock back to return it to the shareholder they borrowed it from. It’s perfectly legal, but there’s some risk because if the price goes way up, that means you’re losing money the more it goes up.
Well, the folks online on Reddit and other social media platforms got together and said, “Hey we’re going to make money doing this if we all start buying these stocks like crazy.” If the prices went up and up, it would eventually force these short sellers to cover their trades. They would have to actually buy in and then end up losing a bunch of money. Meanwhile there were people that made millions and millions of dollars by doing this. It was also enabled by a lot of trading platforms.
There are companies, like Robinhood for example, that have popped up and offered commission-free trading. One barrier to entry on trading is that there used to be a cost to buy or sell something, whether a stock, a bond, or a mutual fund. There used to be a transaction charge. Now, that’s largely gone away. Big companies such as Fidelity, TD Ameritrade, Charles Schwab, have all followed suit now from a competitive standpoint. They still make lots of money other ways, but it’s important to recognize that that used to be a barrier to entry; that people buying and selling stocks would end up losing money every time they placed a trade. Now, that doesn’t happen.
The Robinhood trading platform was meant to be something for the little guy, the little investor, and what they’ve done is to gamify it, which is smart from a business strategy standpoint. They’ve gamified it and made it very attractive and fun. It makes it look like, “I should be trading all the time.” They’re encouraging trading activity on their platform and making it seem as if “Hey, that’s how you make money—by placing lots of trades.” Now meanwhile, in full disclosure you should know that they make money by people placing more trades because they have the ability to direct that traffic to different market makers. And the way those market makers make money is that they have a spread, meaning there’s a difference between the buy and the sell price, always. There’s always some spread, even if it’s tiny, and that’s how those market makers make money.
Where does all this come from? There are two big emotions that drive personal finance decisions: fear and greed. And there’s a thing called FOMO. I’m sure you’ve heard of it, the Fear Of Missing Out. That’s a big thing, not just in our personal lives. Social media is a big driver of FOMO. We see stuff on social media that makes it look like everybody else is having fun and we’re not. This drives some decisions, because we’re greedy. You know, we don’t want to lose out on an opportunity when it seems like everybody else is out there making money.
Now, one thing to be aware of: There’s always a bubble forming somewhere. Where’s the bubble today? I don’t know. I can just tell you what I’m hearing from individuals and what I read on the news and so forth about certain things that have gone up in price a whole lot. And the more that goes on, the more people start to think they’re missing out, that maybe they don’t have enough of whatever. Some of the things I’ve noticed would be gold, Bitcoin, Tesla, and the FAANG stocks, which are Facebook Apple Amazon Netflix Google stocks—because looking at the last year, an outsize portion of the market increase that we’ve seen has been tech stocks. Not that there’s anything wrong with these companies. Most of us use them and they’ve got great business models and so forth. But it’s helpful to recognize that sometimes prices can get bid up so much on certain companies that it can form a bubble. And ultimately a company is only worth its earnings.
A stock is just a piece of a business. When we own shares of a company, we own stock in that company, and it’s great that we have the ability to do that. It’s very democratized because anybody can go out and start looking at stocks and buy little tiny pieces of a public company. Historically, you had to be big to own a whole company, or a whole piece of real estate or something like that. We can own bits and pieces of them, so there are some big advantages to that.
But it’s important to recognize that sometimes these things can get into bubble territory. Meaning the prices can get bid up so much because so many people are buying them that it can drive the prices much higher than what the company is really worth. When has this happened in the past? I can tell you because I started at a very interesting time in the financial planning and investment industry—the late 90’s. You might remember, those of you who were around and investing, that the late 90’s was a big time for tech stocks. In fact, a massive bubble formed, largely from Internet stocks. The Internet was fairly new at the time. There were so-called “dot com” stocks that had come out. Some of them had very good business models. Amazon was around at the time. But there were other companies that don’t exist anymore. In fact, most of them don’t exist anymore because they didn’t have business models that were sound. They never made money, never had earnings to begin with. It was pure speculation that those companies were going to make money—and people didn’t want to miss out. Therefore, many people ended up losing money in the dot com crash in the year 2000. People made some big assumptions at the time. One of those was, “Hey, this is going to just keep going up forever so it doesn’t matter what I’m paying. It doesn’t matter that they’re not profitable. We don’t care.” There was some disregard of what a stock really is. A stock is earnings that determine what a company is worth. It is what their current earnings are and what their future earnings are expected to be.
Back then, a lot of people were assuming that companies would figure out a way to make money because, “This is a no-brainer. It’s the Internet. The Internet is not going anywhere.” I advise being very careful if you hear, “This is a no-brainer. This can’t go down.” Everything can go down, and everything will go down eventually. I feel confident about that. In any kind of risk asset—and most Investments would be considered some type of risk asset—there’s always risk associated. Eventually, if you hold onto an investment long enough, it will go through a period of time when it loses value, even if it’s just temporary. So, recognize that there is no sure thing, even if an idea is sound. For example, if we look at Bitcoin, that’s one area getting a lot of press these days. It’s a crypto currency. Essentially, it’s a currency created by computers. Not backed up by any government or anything like that. And so, when you buy Bitcoin, if you put your money into that, what you’re counting on is somebody else coming in to buy it for a higher price later on. That’s how you could potentially make money. You are not really buying anything. You’re not buying earnings. It’s not a company. You’re not buying debt. You’re not buying something that’s paying interest. Simply, it is a speculative vehicle. Somebody’s counting on the price going up, or at least not going down.
Now, is Bitcoin, or crypto- currency going anywhere? I don’t think so. Probably not. I think it’s a legitimate investment. It’s probably going to be used for some type of currency in the future. Maybe it’s an alternative investment we could consider as part of somebody’s portfolio. The underlying technology, Blockchain technology is very sound. It’s being applied in lots of different areas with companies that aren’t even tech companies. So basically, it’s a way of tracking transactions and information. A big innovation that’s not going anywhere. Does that mean Bitcoin is guaranteed? No. It’s important to recognize that even if an idea is sound, that doesn’t necessarily mean it is a safe investment that can’t go down in value. Same thing with the dot com’s in the late nineties. I know this is this is dating me a little right now. But of course, the big assumption then was, “Hey, the Internet’s not going to go anywhere.” And people were right. The Internet didn’t go anywhere. Did that keep most of those companies from going broke? No.
Another thing that came out in the mid 2000’s was a real estate bubble. Not all areas of the country got caught up in this. But I think the poster child for these things was South Florida, where people were flipping condos. They were speculating on big high-rise condominium complexes, and in a lot of these buildings they didn’t even have anyone signed up to buy and yet people were speculating on whole buildings. The other big assumption was that people are getting older and Florida is going to be a big deal. They were right, but that doesn’t mean the bubble didn’t form. And that did not end well. In many areas—Florida, Vegas, some parts of California—property values in some cases went down over half—and that was for an asset that someone could have lived in and used and paid rent. The assumption was, “It’s real estate. It’s safe. It’s not ever going to go away.” That’s right, it didn’t go away. That doesn’t mean that there isn’t risk associated. I throw all this out to you simply because there’s always risk with an investment and there’s always a bubble forming someplace.
Warren Buffett is one of my heroes from an investment standpoint. He’s one of the most famous investors of all time. 90 years old now, with a net worth of 86 billion dollars making him the fourth richest person in the world. He would be a lot richer, but he’s given a lot of his money away to charity. He’s got some great quotes about investing. Here’s one: “Only when the tide goes out do you discover who is swimming naked.” In other words, when the tide goes out, when that bubble bursts, you don’t want to be the one who’s swimming naked because those are the people who will lose a lot of money. And people serious about building wealth are not the ones getting caught in the bubbles; they’re not the ones that would fall for that and get caught in that greed cycle.
So it’s important to recognize the difference between speculating and gambling and trading. I would equate that all to the same thing because that’s what’s happening on a lot of these online trading platforms. With any kind of bubble activity, it’s really about trying to get rich quick. It’s not about buying things to be held over the long run. Going back to The Tortoise and the Hare, it’s trying to be the hare. I would exhort you to be the tortoise, which relates to being a long-term investor. Not always the most exciting thing, but is it more reliable? Is it much more likely to work out for you? Yes.
If you look at Warren Buffett, there’s a couple things he said in the past, and I think it’s wise for us to pay attention. He said that if the market was only open one day a year, that he would be happy and he could do all the trading he would need to do. He’s also said that if you can’t buy an investment that you’re willing to hang on to for 5 or 10 years, you shouldn’t be buying it to begin with. Obviously, that’s the polar opposite of what we’re talking about with these trading platforms and people trying to make money very quickly. It’s tempting to be the hare. But I would exhort you to be the tortoise.
Warren Buffett also said that he’s never met a person who can consistently time the market. He readily admits that he is not a market timer; he’s not somebody who’s going to be doing a lot of trading. Berkshire Hathaway is the company that he has been operating for years and years, and he still works every day. He does a lot of reading and a lot of thinking. I think that’s instructive for a lot of us as far as how we spend our time. He says that’s one of the ways he keeps from making impulsive decisions—by spending most of his time thinking and reading, not jumping around trading.
Warren Buffett is not the only successful investor out there. There are many. And it’s very unlikely to find people who can consistently time the market. Some people get lucky and continue to get lucky for a while. It’s the same as the casino. You could go out there and gamble and unless you’re cheating you will eventually lose because the casino knows the odds. They have a business model that works. They know that most people, if they play long enough, will lose. That’s why they are able to build these big fancy casinos and give people free hotel rooms and things like that. They know their business. They know how it works. Same with the stock market, if you let it use you or you get caught up in one of these manias.
I don’t want you to be caught up in the people swimming naked. I don’t want you to be caught up in something that could end up hurting you financially over time. We all have our own biases and if somebody is saying, “There’s no risk, this time it’s different,” or things like that, I would run the other way. I would be afraid of those assumptions. Be aware of your own biases and other people’s biases and recognize that there are things that we know but there are a lot of things we don’t. Remember that there are people who get lucky but of course they don’t talk about their losses. They talk about their big wins.
Being like the tortoise, although it’s more boring, is more successful long-term. There are a lot more long-term successful investors than there are people who have consistently traded and done well. The short-term is a game that you are not likely to win and neither will I.
In financial planning and successful investing, what does being a tortoise actually mean? It means spending less than you make. It means paying off debt as fast as possible (except for the home mortgage, which we’re not as concerned about; that’ll take care of itself over time). All other debt paid off as fast as possible and then automatically investing between 10 to 30% of your income, putting it someplace that’s diversified. It means knowing the amount of risk you’re comfortable with, investing accordingly and having the discipline to stick with that plan—especially during extreme times, especially when you’re hearing extremes of fear or greed. Don’t get caught up in individual companies. Don’t feel like, “I’ve got to buy stock in Tesla,” or something like that. If you do buy stock, you will not own all Tesla. You will not have all your eggs in one basket. That’s a good thing.
On the fear side of things, remember it wasn’t that long ago in the spring of 2020 the market dropped about 30% very quickly. The stock market was down considerably when there was a lot of fear about the pandemic, and before the government stepped in and injected trillions of dollars into the economy, the market was down 30%. I think it would have gone down a lot more had he Federal Reserve and Congress not stepped in with trillions of dollars of support for the economy. There are consequences for that too, which we’ll talk about at a different time. But ultimately, if they hadn’t stepped in, things would have gotten very ugly before they bottomed out.
Being the tortoise means you’re electing to get there by going slow. I’ve been able to meet with hundreds of people over the years, thousands in group settings, and there are a lot more people that have gotten wealthy and stayed wealthy by being the tortoise than by trying to be the hare.
I hope you’re doing great. Hope you have a wonderful week and if there’s anything we can do to support you or your family or your friends, let us know. And please share this if you think it would benefit someone else. Be well and God bless.
The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.