None of the following is investment advice.
The year is 2030. The pandemic is in the past, and so are hundreds of thousands of non-tech companies. For the past decade, we have experienced so much volatility on a virtual daily basis that most investors stopped trying to ‘play the market’, mostly losing large amounts of money effortlessly. To wit, most investors today gauge success as a 4% nominal return of a 70/30 portfolio, versus the roughly 8% historical average from 1932 to 2018. Let’s dig a little deeper.
It all started in 2020 with that wretched coronavirus. That year, the investment world changed forever, and not only because people found markets as a way to escape the everyday horror of the virus. Fact is, people were disillusioned into thinking that there were no risks in stocks, bonds, SPACs, and currencies. Real losses in epic proportions mounted that year, and yet, people took more and more risks nonetheless.
2020 was a year of incredible growth, though, because we realized how far we needed to come as a society. We learned how little direction we had as a people, and how much we really needed. The technology boom from around 1990 when America Online allowed people to access the internet for the first time broadly. AOL provided for society to become extraordinarily decentralized and empowered anyone with a laptop to do things they never believed possible.
With that great power should have come great responsibility, but the coronavirus escalated that broad empowerment further and for even more people. Many of these people, unfortunately, were not ready to deal with that much power, and although they were allowed to do anything they wanted, there were very little guardrails protecting them from danger. This was bittersweet for capitalistic democracies overall, which were of course built on granting general supreme freedoms while attempting to further private profitability. Many of the people that weren’t capable of harnessing that power spun out of control and hurt themselves while those that could harness that power stayed in control and became even stronger. This led to the beginning of the massive wealth inequality we see today.
In the end, those same freedoms, manifesting in the investing world and everywhere else, led nearly to the annihilation of that very capitalistic democratic system. What followed was very painful to those that could not harness that power, but necessary for society to continue, as it always had through such adversities. Symptoms abounded at the time, and those that paid attention were the heroes of the day.
The most obvious symptom of 2020 was the leadership during the crisis. Most people around the world, especially in the US, were left to fend for themselves throughout the crisis-
- To manage their own money
- To invent/reinvent themselves to get new jobs
- To learn how to responsibly operate technology
- To determine whether the virus was real or not
- To provide safety against homelessness and starvation for their loved ones
- To have faith in an argumentative society while wealth inequality reached extremes
- To see a brighter future for their loved ones.
That year, my family was confident that 2020 would be my year. But in April, a wrench came in the form of broken security markets, and for the first time in almost a decade of investing, I didn’t have any good ideas. So I started looking at all kinds of different things. I invested largely for the first time in airplanes, gold, and individual bonds.
What I learned was that nobody else had any good ideas either, and they were scared to death about inflation, even though most people didn’t know it at the time. So instead of the finance industry giving people better advice, they made it even easier for people to invest on their own.
It was hard to watch, since even after all the tests I had taken, I was constantly worried about the volatility in the market. Very often I lost sleep worrying about my loved ones. For these new investors, it was like giving a kayak to someone without experience and sending them down the Colorado River. Nonetheless, they entered markets with a force.
Despite all that apprehension, I came to the conclusion to generally stay invested mostly for two trends nobody really picked up on in anything I ever read.
<Population growth correlates with rising markets>
<Ease of Investing correlates with rising markets>
This meant that more people that were alive and the more markets opened up, the higher they tend to go over time. For example, many people today would have bought Microsoft in the 90’s but couldn’t – they weren’t alive or they didn’t know how to invest.
But even though free markets are great for society in the long run, it was painful for several years as these new investors entered markets.
We were quarantined for 3 months basically throughout the 2nd quarter, meaning that technology shares jumped in a very big way. This was the first time that Fractional Shares were created, allowing even the smallest investor to put money in the market. Many people thought this was haphazard, but I believed it was the right thing to do in the long run. Even more new investors entered markets.
Not only did these new investors trade more than ever, but they were also met with many new investment options. Of course, hunting season opened in 2020 and suddenly it was a seller’s market with so many unsophisticated buyers entering. Promoters took advantage in huge ways through IPOs, Mergers and Acquisitions, and Special Purpose Acquisition Corporations (SPACs).
Of course, because these trades had no explicit costs, it was impossibly easy for someone to buy any of these things, so often there was no research. I even had a prospective client invest on his own because he said I wasn’t confident enough to bet on penny stocks! Daily, I was getting stock recommendations from retired clients I had served for years. Looking back, I guess I was a bit too conservative, but I was looking out for the future of my clients. I’ll never regret that.
IPOs of the smallest companies were tripling on day 1 to mind-boggling valuations. Investment banking firms that took those companies public had their best year ever because everyone was selling, and all these people were blindly buying. I didn’t enjoy watching these things happen very much, because at the time, I didn’t realize that it was exactly what our society needed to survive.
The narrative of the year was safety first, and while free markets were what we needed, many people lost everything because the power overwhelmed them. Even with 13 postgraduate tests, I almost fell into a lot of those traps;many of these new investors must have felt like an undersexed man entering a harem.
SPACs were the perfect example of such seduction. For decades, SPACs were viewed as predatory and borderline fraudulent, but in 2020, somehow people thought they were different. The marketing was absolutely dynamite.
A SPAC is essentially the reverse of a take-private buyout fund. The goal was to raise money to form a public company whose sole goal was to acquire private companies. The benefit was that this provided enormous liquidity to private markets and under-capitalized companies. Most new investors believed it was a chance to get 1000% profits in a private equity-like investment.
The downside was that the capital came primarily from these new retail investors. Not only that, but fees at the time were roughly 30% at minimum on these investments, and almost all of it went to the Investment professionals at the top, even if the whole thing was worthless in a year, which wasn’t an infrequent event for SPACs.
There was one situation that just made me laugh. One week, this SPAC was raising hundreds of millions to buy a bankrupt mining operation, and the very next week, a different SPAC was being sued by investors for hundreds of millions after buying a different mining operation. To think that the regulation of those investments was almost nonexistent. What were we thinking?
And of course, uncertain times always bring about leaders and false idols. The Kardashian family was at the top of the world in 2020, and they came to exemplify everything that was wrong with the M&A space at the time.
Many companies were shut down and needed to find ways to stay relevant in a tech-driven world, so naturally they just threw money at the problem. Coty fragrances became a cautionary tale in 2020, since its growth had hit a wall and was in decline as of 2019. In February, Coty agreed to buy into Kylie Jenner’s fragrance company, jettisoning Kylie into Forbes’ billionaires club and making her, at 22 years old, one of the 5 wealthiest women in the world. In that respect, many of my colleagues were deluded into thinking that this was a bad thing, but I embraced that! How great was it that someone so young could have so much influence? And now she was put in a position to really grow into that leader we expected her to be!
In July, only 5 months later, Kylie turned on Coty and sued them for taking advantage of her in the transaction. When I read this, I was crestfallen because it spoke volumes about and made very public what people thought our society might become. This was a woman given a leadership role in society and given the privilege to build an incredibly positive future to an industry we all thought she believed in. But instead she acted against becoming a leader and acted against society for seemingly selfish reasons. Even worse, she had misstated her net worth by nearly 100% and was taken off the Forbes list.
So was the fallout her fault or was it Coty’s fault? Coty empowered her without understanding what she really wanted. Coty, from what the lawsuit implied, used her to get to her audience of mostly Teenagers. If only the transaction could have been successfully navigated, perhaps Kylie would have been a true leader of society (maybe even POTUS?). Coty was a bad actor, because the money that paid for that deal in part came from those same new, unsophisticated investors. Also, that money probably could have employed tens of thousands of workers for years! Yet in only a few months, it was lost or stuck in the court system.
Moral of the story is that corporations were haphazardly throwing money around and destroying future leaders at a time when people needed more leadership than ever. Investors fueled it all because nobody told them the risks that could happen if these corporations were enabled more money than they knew what to do with.
In nearly every meeting I had that year, I was supremely positive! Most people thought I was absolutely crazy, but I had so many reasons to be excited about the future. During that 3 monthslong quarantine, I thought endlessly about these things and watched documentaries about people who overcame adversity. This was one of the best decisions I have ever made. Once I saw what Ulysses S. Grant overcame during the Civil War – fighting and killing his former comrades – to make a step into a future the Union believed in, I realized what a preposterous concept it must have been to believe USA would survive, much less thrive in the future.
Nobody knew computers would bring us all even closer, that airplanes and cars would make the world smaller, or that a telephone was even possible! The future, as U.S. Grant might have known all along, was something to fight and kill for, whatever it might be. Those were the greatest American heroes, because they truly led a country from the brink all the way toward becoming the greatest nation of all time, without any selfishness; their duty was to the country and not to themselves!
So it seemed like the world just needed more leaders and better accountability, but our futures were generally brighter than ever! In fact, it was 2020 that I positioned myself mentally to be the leader that I’ve become. Today, I’m proud to be among the bright leaders that truly care more about the future of the country and our future generations.
But, all existential constructs aside, the question you’re probably asking is, how could you consider investing when everything stopped making sense by traditional historical standard?
More to come in Part Two.