#142 - If You're Going Through Hell, Dont Stop.
In this week's episode of Reformed Millennials, Joel talks about the opportunity found in recession, his favorite investment ideas as the fed normalizes and the TikTok Top.
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
Some thoughts on crypto:
From a mathematical perspective, rising interst rates have a greater effect on assets that are likely to generate most of their cash flows a long, long time from now. Like "disruptive innovation" stonks.
It can be even worse for assets that will never produce any cash flows, ever.
I'm not sure how many casual investors understand why this is. Best explanation w/o using math is "bird in the hand is worth two in the bush" analogy but the math is hardly complex.
It is logical for tech stocks years away from +FCF to get hammered in a rising rate environment.
It's the same reason longer duration fixed income securities fall more in rising rate environments and why long zero-coupon bonds fall most of all.
The basic principles of investing are not complex but essential to understand or people get bewildered by very obvious things.
For assets that will never generate CF you cannot produce valuations using discounted CF models. This is true for gold as well as crypto assets. Gold, however, has nonetheless had value to humans for thousands of years. Crypto? Not even ten years of mainstream consciousness.
So crypto, for a very long time to come, must be viewed as a speculative risk asset, not a safe haven store of value. When rates rise, there is more of an opportunity cost to holding crypto which will logically have a negative effect on price. The idea that crypto can be useful as a safe haven in a rising rate environment is ludicrous to me.
Unlike Buffett (or Munger even more so), I will not say definitively that BTC will go to zero. I don't know. But I know the opportunity cost of holding it increases as rates rise. I have tremendous admiration for Charlie Munger, but he was visibly angry when discussing Bitcoin this year. He considers it not only worthless (quite possible) but immoral because it threatens central banks. And that's a viewpoint that I don't agree with.
Theory Of Reflexivity
Corporeal knowledge aka “Listen to your gut” When so-called "rationalists" shirk their emotions as silly, they're usually being... silly. Emotions are not data-free. In fact they contain A TON of data. People need to understand the difference between endogenous & exogenous variables.
Exogenous variables are explicitly modeled; they're "known knowns" and "known unknowns." But no modeler/trader really knows the weight of "unknown unknowns." Just because you didn't include a variable into your model, doesn't mean it doesn't exist. Emotions are a soup of endogenous variables.
The only truth is that nothing stays true. Soros refers to any moment in time as a “cut” of reality. What are the prevailing assumptions? The flaws of popular thot? W/o knowing the flaws, how do you know when to take profit? aka when a "truth" inflects into "non-truth"
How to spot a false trend?
Analyze assumptions to determine if they’re true or not. Identify which drivers on each assumption are most prone to flip-flop at any moment. Evaluate how feedback loops form and affect the fundamental reality (i.e. reflexivity + random walk)
Don’t busy-work when there’s nothing to work on. I asked an earlier question, "where does retail have an advantage over fund managers?" Some of you said "retail can stay out of the market when there's no good opportunities."
Understand the boom-bust cycle. The archetypal boom-bust has 7 stages:
5.1 "Lull period": prevailing bias is present, but a trend is not yet recognized.
5.2 "Acceleration period": trend is recognized & reinforced by the prevailing bias.
5.3 "Testing period": prices suffer a setback. If the bias and the trend hold, prices emerge stronger than before and become more exaggerated.
5.4 "Spiritual inflection": moment of truth when reality can no longer sustain the exaggerated price expectations.
5.5 "Twilight period": ppl continue to play the game, but they no longer believe in it. They hope to be bailed out by greater fools.
5.6 "Market inflection": Trend goes belly up. Even the last fools give up hope.
To maximize risk-reward, get in at 5.2 or 5.3. Acceleration/testing periods are the Balmer's peak. Getting in at 5.1 is 99% luck. Anyone who says otherwise is hindsight 20-20'ing. Soros initiates positions with tiny trades to test hypotheses. If things go smooth, he goes big.
To spot new trends/ideas look for “experimental economics”
What's that? “the accumulated drawbacks of specific imposed economic models simply provide a playground for financial market speculators”.
💸Reformed Millennials - Post of The Week
So many headwinds and so little hope. If you are in hell, keep going. Hell is not a good place to stop.
As of the close on Monday the S&P 500 is now down almost 17% from all-time highs.
The Nasdaq 100 and Russell 2000 are both already well past 20%.
Bear markets are normal.
They can be painful.
The reasons are always different but the emotions are the same.
No one knows how long they will last.
They do come to an end eventually.
The length of the current iteration probably depends on how long inflation stays elevated, how resolute the Fed and Bank of Canada are with tighter monetary policy and if these two factors combine to throw us into a recession.
Things could surely get worse before they get better or this could all end with one sentence from Jerome Powell if he decides to tap out. The bottom will look obvious in hindsight but, as always, predicting these things in real-time is not easy.
Historical comparisons cannot provide the blueprint for the present situation but they can help put things into perspective in terms of the length and duration of past bear markets.
Here’s a look at every bear market for the S&P 500 going back to 1950 that shows the drawdown, peak-to-trough number of days they lasted, and how long it took for the S&P to reclaim previous levels:
Over 15 bear markets, the average downturn is a loss of 30%, lasting just under a year to reach the bottom and taking a little more than one-and-a-half years to break even.
The last three bear markets have all been relatively short-lived. Eight out of the 15 bear markets broke even in under a year. The worst-case scenario is the 1973-1974, 2000-2002 and 2007-2009 crashes which all took more than four years to recover.
I’m not sure how this one will play out.
Every time stocks fall a little it feels like they could fall a lot. Every time stocks go into a correction, it feels like they could go into a bear market. And every time stocks go into a bear market, it feels like they could tailspin into an all-out crash.
The bad thing about bear markets is you never know how bad they’re going to get because we human beings can panic under duress.
The good thing about bear markets is they come to an end and offer the opportunity to buy at lower prices.
Successfully navigating a bear market requires patience and a good handle on your emotions and time horizon.
Best Tweets From The Podcast
Dan Rose Thread
TikTok Has Peaked
🔮Best Links of The Week🔮
👎 Tech giants lost more than $1 trillion in value in the last three trading days
🎵 Kendrick Lamar’s ‘The Heart Part 5’ video deepfakes Kanye, Kobe, and more
Uber CEO tells staff company will cut down on costs, treat hiring as a ‘privilege’
TIKTOK IPO - Rumors swirl
Fashion and NFTs - NFTs are not having a great week in the markets, but the fashion industry (which knows a lot about selling things with no tangible value for lots of money) remains interested.