Tag Archives: Investments

Where Can We Hide in a Financial Crisis?

Markets are booming today, but just 18 months ago, things looked like this:

Ouch.

I lost about 22% of my portfolio in less than five weeks. It certainly made life interesting.

Today, markets sit near all time highs and jobs go begging. It’s a far cry from the darkest days of the COVID disaster.

But the next financial crisis is coming. It could be in a month, a year, or ten years. But as investors, we need to be prepared.

One of the best ways to protect ourselves is to own assets that are not correlated with stocks. That way, when the market is falling off a cliff, a part of our portfolio is preserved.

People often look to overseas stocks or real estate to diversify. I own those myself. But although they can deliver nice returns, they are highly correlated with US stocks.

Global stocks have a 0.97 correlation with the S&P 500, a near perfect match. Even Real Estate Investment Trusts (REITs) show a very strong correlation (0.70).

Investment grade bonds (-0.06) and cash (-0.17) show low correlations with stocks. But the yield to maturity on that Bloomberg investment grade bond index is just 1.42%, way below inflation. And cash in a bank account returns about enough to buy a candy bar at the end of the year.

So where do we go? Here are some options:

Litigation Finance

This arcane corner of the financial world gives plaintiffs and lawyers money to sue people. The lawsuits usually involve a small company suing a larger one.

Returns can be eye popping. But it’s difficult for those of us who aren’t lawyers to understand what we’re investing in. Are these good cases likely to win? Or suckers’ bets?

It probably only makes sense as a small portion of a portfolio, at most. And minimum investments can be high, making it less attractive to many.

Farmland

Ya gotta eat, right?

New platforms have sprung up to help people invest directly in farmland. Returns can exceed those of stocks, and correlation with US stocks is almost nonexistent (-0.05).

This could be an attractive area, but it’s quite unfamiliar to me, and probably to most other investors. I’d have to research it a lot more before jumping in.

Dividend Aristocrats

Dividend Aristocrats are blue chip stocks that have increased their dividends every year for at least 25 years. They’re household names like Coca-Cola, Exxon, and IBM.

They generally have higher returns than the S&P 500 with lower volatility. That’s a win-win.

But they’re highly correlated with the rest of the index (0.9). That said, they’re still better than overseas stocks in this respect, and not dissimilar to real estate.

Wrap Up

We have some interesting options for keeping our portfolios safer in the next bear market while preserving yields today. I encourage you to dig deeper into your favorite categories.

What asset classes do you favor in a crisis? Let me know in the comments at the very bottom.

More on markets:

Will Evergrande Spark a Global Financial Crisis?

Should Anyone Own Bonds?

How Solana Could Wipe Out Visa and MasterCard

Photo: “Tomb of Lehman Brothers” by futureatlas.com is licensed under CC BY 2.0

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Save Money on Stuff I Use:

Amazon Business American Express Card

You already shop on Amazon. Why not save $100?

If you’re approved for this card, you get a $100 Amazon gift card. You also get up to 5% back on Amazon and Whole Foods purchases, 2% on restaurants/gas stations/cell phone bills, and 1% everywhere else.

Best of all: No fee!

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! 

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order.

Congress Is Investigating Wallstreetbets Over GameStop, But the Law’s On Their Side

Congress is investigating whether traders on Reddit’s Wallstreetbets colluded to drive up the price of GameStop, possibily illegally. But two major legal precedents are on the side of Wallstreetbets:

In the DRW case, the CFTC argued the defendants’ orders for a swap contract were “inherently manipulative” because the defendants “understood and intended that their bids would affect the settlement price” of that contract. As the court summarized, the CFTC’s position was that the defendants “had intent to affect the prices, and because they had intent to affect the prices, that means [the prices] were illegitimate, which means that the prices were artificial.” The court rejected that logic as “circular,” concluding the government’s “theory, which taken to its logical conclusion would effectively bar market participants with open positions from ever making additional bids to pursue future transactions, finds no basis in law.”

More here.

The way I view this is people saying “You should buy GME!” on an online message board are exercising their free speech. Period.

For more on the Wallstreetbets phenomenon, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Short Sellers Lost Almost $1 Billion on Rocket Companies Yesterday

As Rocket Companies jumped over 70% yesterday, short sellers are feeling the pain:

A surge in the shares of U.S. mortgage provider Rocket Companies on Tuesday is estimated to have inflicted losses of $813 million on short-sellers, data from financial analytics firm Ortex showed.

More here.

Given that this is one of the most shorted stocks in the market and yet has big profits, I could see short sellers losing even more on this one. How long until they give up and frantically cover their bets to avoid the fate of Melvin Capital?

For more on Rocket Companies and Wallstreetbets, check out these posts:

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Photo: “Key West, Feb 2012 – 08” by Ed Yourdon is licensed under CC BY-NC-SA 2.0

How Bitcoin Could Reach $400,000

I came across an interesting stat today: the estimated value of all the gold in the world is $7.5 trillion. Gold and bitcoin are often compared as stores of value with a limited supply. What if bitcoin became as widely accepted and highly valued as gold?

At the current market cap of $949 billion, bitcoin would have to multiply in value eight fold in order to equal the value of all gold reserves. Bitcoin’s price is already heady at over $50,000, up from under $9,000 a year ago. But this stat makes me think it may have more room to run. If it reached parity with gold, one bitcoin would be worth $400,000.

Bitcoin is much easier to store and exchange than gold. On the other hand, gold has a much longer track record as a store of value and also has some industrial uses.

I prefer cash flowing stocks, bonds and real estate to either one, but for someone like me who is used to dismissing cryptocurrencies, this information did give me pause.

For more on cryptocurrencies and financial markets, check out these posts:

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Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

Check out the Stuff I Use page for some great deals on products and services I use to improve my health and productivity. They just might help you too! 

Bitcoin Is Worth More Than Double All US Gold Reserves

When it comes to storing value, what could be more iconic than Fort Knox, where the US keeps a large portion of its gold reserves? It’s heavily guarded and contains gold worth over $290 billion.

But that along with all other US reserves, at $456 billion, are worth less than half of the value of all bitcoin, at $948 billion.

The value of all bitcoin worldwide still pales in comparison to the value of gold, however. Were they to reach parity, bitcoin’s value would have to multiply many times.

(I arrived at the value of all US gold reserves by taking the reserve amount here and multiplying it by the price per metric ton here.)

For more on cryptocurrencies and financial markets, check out these posts:

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Check out the Stuff I Use page for some great deals on products and services I use to improve my health and productivity. They just might help you too! 

Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

GameStop Tanked, So Wallstreetbets Is Moving to Pot Stocks. They’re Headed for Trouble.

Vice President Kamala Harris introduced a bill to decriminalize marijuana as a senator.

GameStop was the darling of the merry band of traders on Reddit’s Wallstreetbets. Then this happened:

Ouch. Now the community is looking for its next play. I nosed around the message board a little today to see what that might be.

Wallstreetbets users are increasingly enthusiastic about marijuana stocks, in particular two companies called Sundial Growers, Inc and Tilray, Inc. Though both took a hit today, they are up significantly in the last month as the online buzz builds.

Reddit seems to have two main theories on why these stocks will continue to rise: a short squeeze and/or decriminalization of marijuana at the federal level in the United States. (If you’re not familiar with short squeezes, check out this post for a quick explanation.)

But their position here looks much weaker than with their last love, GameStop.

GameStop was much riper for a short squeeze than Sundial or Tilray. As of Dec 31, 2020, 71 million GameStop shares had been sold short. This is more than all the shares in GameStop that exist (70 million)! This can happen because the same share can be borrowed and sold short many times.

Meanwhile, Sundial and Tilray are nowhere near as heavily shorted. Sundial has 5% of shares sold short, and Tilray is at 19%. Compared to over 100% for GameStop, the likelihood of a short squeeze looks much, much lower.

Maybe marijuana gets decriminalized in the US. But maybe not. In any case, the Reddit traders aren’t likely to have any special information on that (nor do I). Everyone buying and selling Tilray and Sundial know about that possibility already. So it’s hard for the Reddit traders to get an edge.

Even if marijuana is legalized in the US tomorrow, Tilray and Sundial may not make a dime on it. Why? Both companies are based in Canada! To say that marijuana may be legal in America is one thing…to say we’re going to let it come across the border rather than favor our own domestic producers is quite another. Remember that we’re in a jobs crisis, so the good move for politicians is to (at least appear) to support jobs in the US.

So these are two possible rational cases to buy into these money losing companies. But what I notice over and over on Wallstreetbets is the lack of any justification at all, with people simply repeating the names of stocks over and over. Maybe Wallstreetbets doesn’t need much of a theory…they just need to get their fellow traders involved. (Or maybe it’s increasingly populated by bots.)

Thing is though, without any real rational basis for holding the stock, that same group of traders will have to get out eventually. What’s supporting the stock then?

Wallstreetbets would be better served buying broad index funds and waiting for corporate America’s money machine to work its predictable magic. But that’s just not as fun, is it?

I find this roving band of Reddit traders a very interesting phenomenon in markets. But I won’t be joining them any time soon.

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Photo: “Kamala Harris” by Gage Skidmore is licensed under CC BY-SA 2.0

A Professional Investor Explains GameStop in a Few Text Messages

This morning, my friend Bill* texted me asking if I knew anything about what’s going on with GameStop, whose share price has skyrocketed recently. I may have told him a bit more than he wanted to know! But I thought this text thread might be useful to others too, so I published it below:

This type of trade is too speculative for me, but I do find it interesting. The link to the post explaining the suspension in GameStop trading is here.

P.S. Since I use Signal for text messaging, I can’t take screenshots, so I recreated this conversation using this interesting tool.

*Not his real name