Everyone knows they shouldn’t drive through the rear-view mirror when investing. It was obvious that a lot of people were doing this during the Bull Market that ended poorly in 2000. This was known as the dot-com bubble. Many investors were chasing the latest investment fad which was technology in the late 1990’s. We were once again reminded what Sir John Templeton mutual fund pioneer and iconic investor said:
“The four most expensive words in investing are: ‘This time it’s different.’”
Apparently, everyone could see where the market had been and it looked good, I mean, good. It looked too good to be true, and for many investors it was. Unfortunately, many investors are a lot poorer for the experience. They all jumped off the cliff together.
Regrettably, many financial services companies were kind enough to accommodate this bad investor behavior by bringing out more mutual funds and products to capitalize on these hot markets. I’m sorry, I should clarify; capitalize for their benefit of course, not the investors benefit, heaven forbid. These investment firms were only too happy to rollout the latest Internet, IPO, or Biotechnology fund.
This happened again beginning in 2007. Which resulted in the 2007-2009 Great Recession. This was, of course, poorly labeled. Everyone, and I mean everyone, had to buy a house. In many cases, even one they couldn’t afford. For some reason, it appears the mortgage industry had laid off the folks that had ran the numbers to see how much you could afford. Back in the day, these were called underwriters. And they were nowhere to be found.
As someone once said to me, “there is a lot of ink in this world.”
Indeed, there is. And many folks signed on the dotted line…. only to regret it later.
Charles Duell the Commissioner of the U.S. Patent Office in 1899 said, “Everything that can be invented has been invented …” Wow! Did this guy get it wrong or what? What was he thinking? Was he trying to talk himself out of a job? At any rate, the financial services industry certainly has never heard of Mr. Duell. They’re never done inventing more investment products to sell.
Following the herd is as old as the hills. Don’t follow the herd.
Find your own grass to graze on.
When the herd is on the move, group think runs rampant and, well, everyone needs to be doing the same thing. With this herd it was buying stocks, lots of stocks, as many as you can get. Just keep buying stocks, no matter what the valuation.
For a great book on bubbles see Reminiscences of a Stock Operator Extraordinary and the Madness of Crowds by Edwin Lefevre. You’ll be enlightened about the South Sea Bubble and the Tulip craze in Holland.
Hula Hoops and Pet Rocks
What’s the latest craze? Well, recently it was:
• Special Purpose Acquisition Companies (SPAC’s). However there has been a SPAC Attack (What’s That)? on these so-called ‘Blank-Check Companies.’
• Non-Fungible Tokens – Whatever the heck these things are.
However, there has been a massive long term love affair with technology stocks. In 2007 the Technology Sector was about 15% of the S&P 500 Index. In 2024 it was about 33%. In other words, the Technology Sector more than doubled in over 17 years.
I should expand on this. Now it’s not all technology stocks. Recently it’s been primarily the so-called Magnificent Seven, which are:
• Alphabet (GOOGL)
• Amazon (AMZN)
• Apple (AAPL)
• Meta Platforms (META)
• Microsoft (MSFT)
• NVIDIA (NVDA)
• Tesla (TSLA)
All these companies are leaders in their industries as they have over time, apparently become almost nonregulated monopolies. As of November 30, 2024, the leader of the pack had been NVIDIA with a market capitalization of $3.4 Billion. Yes, that’s with a ‘B.’ They have currently dropped down as the second most valuable company to Apple with a market capitalization of $3.7 Billion. This jockeying, along with others in the leaderboard, will continue. 1)
NVIDIA continues to find a way to make the picks and shovels for the gold miners’ chips that folks racing to develop Artificial Intelligence (AI) need.
AI is clearly being pursued by many as the next Holy Grail. Currently the AI in 2024 is estimated at $235 Billion. This is projected to increase to $631 Billion by 2028. 2) That is a whole lot of B’s!
You can’t get out of mentioning the latest craze without bringing up cryptocurrencies.
What can you say?
When we can look back, perhaps the poster child of crypto will be MicroStrategy (MSTR). This stock is listed on the NASDAQ Exchange. With its heavy population of technology companies, this index is seen as a proxy for the technology industry. Due to its tremendous run up, it was recently added to the NASDAQ – 100 Index. Most of the stocks on this exchange, like MSTR, have four stock or ticker symbols.
Here, as we will see below, the symbol MSTR appears to be short for Monster.
The stock has gained over 400% in 2024. Yes, that’s in one year. What started out as technology company, has changed their approach, and has become the largest Bitcoin (BTC) holder with about 2% of the total supply. In the company’s terminology, they have become a ‘Bitcoin treasury company.’ I see…. Well, not really…
The issue is with the stock trading around $400, investors are paying about $240K for each Bitcoin owned by the company. Yikes, that’s when Bitcoin is going for about $100K. If you are going down this path, you should strap yourself in and pack your parachute!
If that wasn’t enough, like a late-night commercial will say when they are near wrapping up:
“But wait, there’s more.”
Let’s look at the Beta of MSTR. Beta is a measure of volatility. A stock with a Beta of 1.0 would be as volatile as the market. A Beta of .50 would be half as volatile and a Beta of 1.5 would be 50% more volatile.
MSTR currently has a Beta of over 3.2. 3) So, the stock is 2.2 times more volatile than the market. Currently within the Magnificent Seven, Tesla leads the way with a Beta of 2.0 followed closely by NVIDIA with a Beta of 1.8.
That should be way more than enough volatility for you. If it’s not, the ‘more”, mentioned above, is to check out the T-Rex 2X Long MSTR Daily Target ETF (MSTU). The Exchange Traded Fund (ETF) does not have a Beta. This ETF is designed for short-term trading and therefore a measurement like Beta is not helpful.
Fortunately, however, at least in this case, there is some clarity in the labeling of this ETF. Rex Share is name of the mutual fund family. I’m not sure why they added the “T” to the name of this ETF, for anything other than, perhaps, marketing. To be clear, this mutual fund family:
Is not a bunch of dinosaurs with their innovative financial products.
The 2X means the fund uses leverage and targets to get twice, yes 200% of the daily return of MSTR. Long, in this case, means they use complex derivative contracts, hoping the price increases. A ‘Short” would be doing the opposite and betting on a decline in the price.
Remember, there will be times when growth investing easily beats value. There will be times when large cap shines. There will be other times when small cap tears the cover off the ball and large caps look like a bunch of slackers. There will be times when Real Estate Investment Trusts (“REITS”) are on a roll. And other times when they rollover and play dead. There will be times when emerging markets are hot. Other times emerging markets should be called submerging markets. So, what is the point? Chase the current investment fad, ride it out and then move onto the next one? No, not really. It’s the opposite of this.
Have a plan and stick with it.
Do you really know what the next hot investment will be? There are plenty of people who think they know where the next hot investment is, and they have already piled into it. Leave investing in the next fad to the know-it-all-crowd.
Don’t forget about the 6 Black Swans That are Easy to See.
Au Contraire
One way to invest is contrarily. This means doing the opposite of what everyone else is doing, which isn’t easy to do. What do most people do?
Usually, they just follow the crowd.
When the market is going up, they just dive in and buy more stocks and mutual funds. The higher the market goes, the more they want to own. Conversely when the market is declining, nobody wants to own stocks. The sell orders start coming in fast and furious now. Suddenly stocks are too risky; maybe after they come back up it will be time to buy again. It’s unclear if the market has hit bottom yet. So, some investors decide to wait to buy stocks until they come up again. They end up buying high and selling low, which guarantees a loss.
This is the opposite of what should be done. Isn’t this the opposite of how you buy many other things? When shopping, don’t you wait for things to go on sale? Of course you do. Why pay retail? You know when the sales are, so you wait. Sure, the selection isn’t as good, but that’s OK, you saved 30%! And you’ll tell everyone about the great bargain you got. Even if it’s not on sale you haggle with the car salesman, look for “new” skis at the high school ski swap and offer cash to your plumber if he will give you a discount.
Why’s it so different when buying stocks or mutual funds? Perhaps it’s the two primary emotions, greed, and fear. Many people get greedy during the Bull Market. They just can’t seem to enough stocks during this time. Then when the Bear Market kicks in everyone starts running for the hills. Fear takes over and everyone is dashing towards the exit signs. This encourages you to do the exact opposite of what you should be doing and what you do with most every other facet of your life. Investors shouldn’t invest contrarily with their whole portfolio.
Remember, everything in moderation.
As Warren Buffet, Chairman and CEO of Berkshire Hathaway said, “We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.”
Conclusion
If you would like help so that you don’t keep chasing performance, give us a call at (860) 645-1515 or e-mail Thomas.Scanlon@Raymondjames.com
1) Companiesmarketcap.com
2) Blogs.idc.com-August 21, 2024
3) Stockanalysis.com – December 10, 2024
This article is original content written by Manchester, CT Financial Advisor, Thomas Scanlon, CFP®, CPA.
Any opinions are those of Thomas Scanlon and not necessarily those Raymond James Financial Services, Inc., or of Raymond James. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT’s will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.
Prior to making an investment decision, please consult with your financial advisor about your individual situation. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment and a potential total loss of their investment.