April 2021 Client Letter
To the Clients of Resilient Asset Management:
Greetings from World Headquarters in beautiful Downtown Memphis, Tennessee. I hope you all are well. I am sure some degree of COVID-Fatigue has set in for most of us - mine ebbs and flows, sometimes more of one than the other.
To take some stock of the current situation: at worst, the news is generally less negative regarding COVID; and at best, things have turned decidedly better. While no one can say with certainty when we will be back in jam-packed movie theaters, there is at least more hope that the day draws nearer every day. Pretty soon, it appears we will all be channeling our inner Choirboys and will be able to "Run to Paradise".
Before delving into meatier topics, a few words about Income Taxes. 2020's Income Tax deadlines - with the notable exception of Hawaii, who apparently has borne an alternate meaning for the colloquialism "Island Time" - have moved to the right a month. As some of you are aware, I am more involved with certain Client Income Tax preparation than others. Regardless, the offer stands - as it does each year - to review anyone's Income Tax Return prior to filing. Please contact me directly if you would like a review.
It seems the Capital Markets never cease to find new ways to generate drama. The current, though somewhat fading, flavor is Short Selling, embodied in the dramatic valuation swings in (among others) GameStop and AMC. I never thought I would receive a Client Call about short selling, but that happened - so much for predictions.
For those interested in a pretty short read about a short squeeze based right out of Memphis, you can look no further than Piggly Wiggly - please read all about it here.
The short answer on Short Selling is very concise, don't.
The reasons to avoid short selling are several. However, the primary one is a simple Risk vs. Reward calculation. Recall, with Short Selling, you are betting the price of the stock will decrease. Well, no matter what quote a stock fetches, the markets still have not figured out a way for stock prices to be negative. So, the mechanics of Short Selling require that you borrow a share from an existing owner and then sell it. Then, you are indebted to that owner not for a specific amount of cash. Rather, you own him/her the same one share. In the best case, the price of the stock reduces by 100%, the best outcome for the Short Seller. In that case, the Short Seller replaces the previously borrowed share with the now worthless share, thus pocketing the difference. Again, this is the best case.
In the other "non-best" case scenarios, less than 100% is made AND you can lose big-time. In these cases, the price of the stock will vary between $0 and every other positive number. Believe it or not, your analysis could be wrong and the price of the stock could actually increase from the point you borrowed and sold it. In this instance, you would have to re-purchase the share you sold for more than you sold it for, thus producing a loss. The potential losses are theoretically unlimited. While the losses to the Short Sellers of GameStop earlier this year were not unlimited, they were quite large.
In short (no pun), why enter into a transaction where your upside is limited AND you can lose a fortune? Leave Short Selling to the limited number of professionals who practice it.
And never forget the prescient words of John Maynard Keynes: "the markets can remain irrational longer than you can remain solvent."
Fear of Missing Out (FOMO)
An increasing Stock Market comes along with many stories from friends, mere acquaintances, and (sadly now) Social Media. Predictably, the more markets swing upward, the more success stories you hear. While such tales make for great storytelling - one of my favorites is a picture of one's brokerage account balance - I caution you against acting on ANY of them. Recall, what you hear (or see) is most likely the best of the tales - the losses don't seem to make it to the Zoom screen for some reason.
Moreover, if the teller is bragging on his/her own investing prowess, the opportunity is most likely past. This storytelling contributes to what is now commonly called the "Fear of Missing Out" (FOMO for short). While some may find it vexing to learn of others' investing success, as I mentioned, you are most likely seeing some varnished version of the truth. Moreover, make a note of the individual tooting his/her own horn. As a rough comparison, you need look no further than our country's lucky Lottery Winners....typically shuttled out (by law) by the state with an oversized check for the media to consume. We all know the rest of the story for most lottery "winners".
BitCoin and Tesla
Some may be enticed to enter into a new arena by committing funds to opportunities that have recently done well. Today's examples are the several iterations of Cryptocurrencies (BitCoin and the like) and Tesla. For a broad overview of the current economic conditions including BitCoin and Tesla, and a wide array of pithy comments to boot, I recommend watching the Daily Journal Annual Meeting - HERE.
About BitCoin - I'm skeptical. I understand and appreciate the technology, though I stop short of agreeing that it will become a replacement for currency as we know it today. For one, it seems much too volatile - price swings from below $1,000 to over $60,000 don't spell stability to me. Imagine if I agreed to purchase your home for 10 BitCoins and you woke-up one morning to learn you were receiving 10% less than you thought. Moreover, if the owner of BitCoin risks losing it merely by forgetting his password or losing his disk drive, I would not imagine this type of instrument would unseat our established systems. And more to the point, governments like having control over their currencies, period. I don't know much about Economics, though I am pretty sure about that statement. Not to tempt fate with my knowledge of Economics, I will also add the following: I think it is pretty safe to say that of the 4,000 digital currencies in existence as I type, it seems the great many of them are doomed to fail.
For those looking to commit funds here, it is hard to argue with the cryptocurrencies' recent success. However, while the overall value of BitCoin has increased dramatically, it is important to draw a distinction between INVESTOR and INVESTMENT returns. This is a subtle distinction that is all-important to the new crypto investors of today.
Opinions on this subject tend to be somewhat polarized. In my view, an extreme amount of caution is warranted in this asset class...only commit funds for which you have - and will never have - another purpose. If you wind up a Crypto-Millionaire, please thrash me...I can take it! However, this outcome is perhaps not the likely one for all crypto buyers.
As for Tesla, there is absolutely no doubt that this company, and more specifically its founder Elon Musk, are truly remarkable. Clearly, electric vehicles - many of them - are in Our future. That said, great technology in the automotive world does not always equal investment success...you need look no further than the "Conventional" Automobile corporate cemetery - it's packed! Check-out the Wikipedia entry on Preston Tucker.
Again, I am opinion-less about Tesla Stock in particular. However, when you look at the Electric Vehicle (EV) market in its entirety, there are some interesting facts:
(i) EV-only Car Makers are worth about 80% of the market value of "Conventional" Car Makers;
(ii) Over 50% of ALL EV Cars are made by the "Conventional" Car Makers;
(iii) "Conventional" Car Makers make over 100 Times as many vehicles as EV-Only Companies
These facts would seem to point to some rather dramatic comedowns in market value for the EV-Only car makers. Whether the reckoning comes in the form of the "Disruptor" like Tesla being disrupted by a newcomer like Lucid, or from the established players (Toyota, Audi, etc) introducing a superior product is anyone's guess. As with Cryptocurrencies, the future fogginess in this space suggests extreme caution is warranted. These are real businesses, though so were many of the DOT COM bombs in 2000.
I use these two examples not to frighten you - BitCoin and/or Tesla may go to new heights from here. Rather, I mention these examples because it is absolutely okay to put both these assets in the "too hard" bin and ignore them completely.
That is a beautiful aspect of investing...there are no called strikes. An investor need not have an opinion about every asset, asset class, or whatever....you aren't penalized for saying "I don't know", as you would on a Jeopardy Daily Double. Instead, an Investor can center efforts around his/her core competencies and leave other assets alone. Very simply put, if you don't understand it, stay away.
Regardless of which investment course you choose, almost undoubtedly someone will achieve better investment results than you...only 10% of investors can be in the Top 10% - it's undeniably and absolutely true. This is also important: you don't need to have Top 10% investment results to be a successful investor. If you do, re-framing your goals is in order.
The key takeaway is to realize that winning the recent performance game is not the goal. Instead, achieving your individual goals defines success. So long as you are marching towards your goals and they remain achievable given reasonable investment return assumptions, you're winning!
As always, if you have any questions about your personal situation, I stand ready to discuss it and address whatever concerns you have.
Thank you for your time and being part of the best group of Clients any Financial Planner could ever hope for.
Are you considering investing in Cryptocurrencies or EV Companies?
If you are new to these asset classes, perhaps a review of your overall financial situation is advisable before you enter into new investment commitments.
Here at Resilient Asset Management, we can help you determine an appropriate asset allocation for you and help you implement it as part of an overall Financial Plan. Schedule a 30-minute introductory meeting or contact us at firstname.lastname@example.org or (901) 318-3423 to get started.
Christopher Flis is founder and financial planner at Resilient Asset Management, a fee-only Registered Investment Advisor (RIA) based in Tennessee. Chris graduated from the United States Naval Academy with a bachelor’s degree in computer science, earned a Master of Science in Computer Science from the University of Minnesota, and attended flight school in Pensacola, FL, launching a fulfilling and distinguished military career. Chris spent 20 years in the Navy as an F/A-18 Strike Fighter Pilot, which included tours in Japan, Australia, and California, combat missions in all areas of the Persian Gulf and Afghanistan, and time spent as the Executive Officer of Naval Base Guam and Director of Navy Casualty in Millington, TN. When Christopher was ready to make a career change, he turned to a passion he held since high school when he attended a lecture on personal finance and started managing his own investments. He earned his Certified Financial PlannerTM (CFP®) designation and now combines his passions and experience by serving military, retired military, business owners, and retirees. Chris provides comprehensive, customized financial services, helping his clients overcome their challenges and take opportunities so they can achieve financial independence.
Chris lives in Downtown Memphis with his wife, Christine, and his son, Emerson. He is an avid runner and when he is not jogging for exercise, he is usually chasing his son around or walking his 3 dogs. To learn more about Chris, connect with him on LinkedIn.