Controlling Time
Another Cancer Update
We have officially hit the halfway point (at least on the radiation…chemotherapy is going to last quite awhile longer). Three weeks in and three weeks to go. Also did a blood test last week and passed with flying colors (which just means my blood numbers were all in the acceptable ranges).
Now for the fun part. Through the first 2+ weeks, my hair was pretty much the same. That changed this weekend as Saturday I started losing some hair, noticeably more on Sunday (first pic) and then a lot more on Monday. My hair, man!!! Okay, it was expected so actually surprised it was only this much. The last pic was after a trim by my ever gracious wife!
Don’t Be a Jerk
Tonight my wife and I went to Arby’s (hey, sometimes you gotta eat in style!). Anyway, when we got to the checkout window, the clerk apologized for being late because they were short-staffed. My wife told her it was fine and made a comment about a lot of places dealing with fewer employees…no worries. The cashier replied (approximating) “Not according to quite a few people!” Seriously people, you are at an Arby’s. If it takes an extra couple minutes, your life goes on. BE NICE TO PEOPLE!!
Your Superpower — Time!
This last week saw some HUGE movements in big name stocks. We aren’t talking small caps, but instead some of the largest cap stocks out there. Facebook (Meta…nope, not gonna do it) dropped by 25%, Netflix dropped by 20%, Google (Does anyone actually call it Alphabet?) rose by almost 10% on it’s earnings day, Amazon dropped by 7% one day and then rose by 15% the next. Snap saw their stock price drop by 25% one day and then rose by 50% the next!
Peloton was up by 20% yesterday, then another 25% today (typing this as of Tuesday, February 8th) on possible takeover rumors, then an. Of course, it’s still down by about 75% from it’s peak of 151.72 back on Dec. 1, 2020. Things move in the financial markets.
Look at the story with Tesla. In May 28, 2019 it traded at $37.03 (split adjusted). Today it trades at $907.34. That means that in roughly 2.5 years, it has effectively gone up by over 2300%! It’s also down about 25% from it’s highs just a couple months ago. And we’re not even going to get into Bitcoin (which went from $911.20/dollar on the January 1, 2017 to $44,053.16/dollar on Monday…a mere 4700% return in just over 5 years) or NFTs (there are too many to delve into here). If you choose the right investment AND ride the waves (Bitcoin is still down just over 30% from it’s highs), you are going to do quite well.
The Problem
The problem with all this is (a) choosing the right investment (remember, I’m cherry picking stocks AFTER they’ve moved, not before) and (b) riding the waves (did you notice Bitcoin on 11/26/2017 at $11,323 and then give up on it 2.5 years later at $5392 for a 50% haircut?). Are you aware that 96% of all stocks since 1926 have a return that exceeds the S&P 500? When compared to the “risk-free” (there’s some debate on this) Treasury Bill rate, 73% have not just failed to beat the market, but have failed to exceed Treasury Bills from 1926 - 2016 (based on random simulations)! You can find all the details of Hendrik Bessembinder’s paper here. However, the basic gist of the paper is that real wealth creation comes from relatively small subset of firms where value is generated beyond the risk-free rate. The rest are primarily spinning their wheels.
So, given that there are (a) extreme examples of ways to get rich in a quick manner (assuming we get to pick the start/stop times in hindsight), (b) the number of extreme examples goes way down in reality, and (c) the evidence suggests that picking good stocks is far easier in hindsight than it is in practice, what are we to do about this?
The Solution
There are two solutions. Here’s the easiest — assume that markets are reasonably efficient and just go with an efficient market solution. There are a few variations on this, but assuming you are reasonably young, you should just expose yourself to a mix of US and international equities, some real estate, and some fixed income. Do this as efficiently as possible (low expenses, tax-sheltered, minimal transactions, etc.) and keep your costs as low as possible. If you are under 30, you could probably go with a 90/10 or 80/20 portfolio (80-90% international — mostly US — equities along with about 10-20% real estate). Add to it on a regular basis. Somewhere between 30-50 years old and you can add some fixed income (keep it small…maybe 10-20% maximum). After 50, you can think about when you are going to retire and how much you’ll need for retirement and then target that goal (don’t forget to check out honestmath.com for a great simulator to help you meet your target…and don’t wait until you’re 50). The idea is that there are enough checks and balances that sometimes you’ll be right and sometimes you’ll be wrong, but you’ll have the stocks that underperform the market, perform with the market, and outperform the market because you’ll have all the stocks. This is your best bet in that it requires virtually no effort (literally, you’ll spend about an hour or two a year on your financial planning…if that) and allows you plenty of time to read, listen to music, watch TV, go for a hike, etc. Seriously…this is a hard plan to beat!
The second solution is to take advantage of your superpower — time and the power to ignore random noise. The upside is it allows you to not get washed out on every movement up/down in the markets. If you own Amazon, you OWN Amazon through the ups, downs, and in-betweens. You aren’t getting out when there is a quarterly earnings announcement that causes you to panic. You aren’t getting out when the EPS for the quarter comes in 10% worse than expected. Instead, you are owning that position. This has worked great for Amazon, Apple, Tesla, and many other positions. Amazon has essentially grown since it became public (despite the 90%+ drawdown from the late 1990’s when the stock broke through $100 per share to the $6 level in late September 2001).
So, what do you do with Facebook? Let’s look at Facebook as an example (and there isn’t a “right” or “wrong” call). Instead it is mainstream, controversial stock that serves as a great example. Is it broken or is it still in an uptrend? That depends on your point of view.
Option 1 — Facebook is Still Climbing
Facebook’s core business is still growing. Their basic business is still growing (see advertising and revenue by geography).
These represent a company that is still growing and has room to run.
Option 2 — Facebook is Declining
On the flip side, we have evidence of a decline in Facebook. Specifically, Daily Active Users declined for the first time in the most recent quarter.
In addition, their capital outlays are not just growing, but accelerating.
You can see that the Capital Expenditures grew from $6733 in 2017 to $14,000-$18,000 per year in 2018-2021. That’s a pretty big jump, but most of it occurred in 2018 (capex went up by just over 100%). However, it is expected to really jump next year (another 62%) and stay there for quite a few years. This is the infamous “metaverse” that Facebook is building towards. So maybe it’s time to bail on Facebook.
So You’re Betting on Zuckerberg
This ultimately means that you are betting on Mark Zuckerberg and Team. Obviously, Mark may be overseeing the metaverse growth, Reels transition, dealing with changes in Apple’s iOS system, etc. However, he’s got teams of engineers and support crew that are helping. So this means that you are betting on whether the team running Facebook is up to the task of managing this change or not. If you think they are, then this is an opportunity to buy more. If you think they are NOT, then it is time to get out of Facebook. The key is on management and the team to make the correct decisions (or at least the majority of them) over time to maximize shareholder value. For the record, I did buy 75 additional shares after the drop and will probably put in another buy order down around $200. That does NOT mean it is the “right” call. The biggest factor in success is not what happens from quarter to quarter or even year to year. Instead, it is what happens over five, ten or fifteen year time frames.
Don’t get caught up in the short-term fluctuations, but try to focus on the longer-term factors…easier said than done!
Note that you could always go back to Option 1 and assume markets are efficient and not worry about this (which is the recommended approach). However, if you have the desire to learn about companies, business strategies, work through a Discounted Cash Flow model, practice your forecasting, etc., you are going to gain enough (even if it costs you a percentage point) in better understanding, entertainment, etc. You could even do a mix of 50-75% of your portfolio in an efficient markets perspective and the other 25-50% (or some other mix) in an actively managed portfolio. Either way, find the strategy that works FOR YOU and be willing to modify your approach if active management isn’t for you.