Blackouts and Basics

The modern world makes it easy to forget what's really important. But slow WIFI interrupting your favorite Netflix show doesn't seem nearly as annoying after you've spent a few days shivering inside your house, wondering if it's safe to drink the tap water.

Many of us have come to take the three basic survival necessities of food, water and shelter for granted. Modern society provides us with access to these resources so reliably that we barely consider what we'd do if they suddenly became scarce. Many of us are simply not used to wondering where we can find safe drinking water or whether we'll be able to stay warm during the winter. As a quick reminder, here is Maslow's hierarchy of needs:

simplypsychology.org

Looking at the five levels in the pyramid, I don't typically spend much of my time worrying about the two at the bottom. Last month's ice storms gave many Texans a reminder of what is truly important. I'm a big fan of yoga, margaritas and self actualization. I love watching basketball, reading epic novels and having dance parties with my girls. But when it comes down to it, we can only enjoy those things if we know that our basic survival needs will be met. When most people think of the stock market, they think of big payoffs. Buying low, selling high. Finding the next Amazon and getting in on the ground floor. These are worthy goals. But they don't matter nearly as much as locking down the investing basics. Here's a guide to the food, water and shelter of investing:

1. Do you earn more than you spend?

2. Do you save what's leftover?

3. Do you invest those savings with a diversification strategy that suits your long-term plan?

If you answered yes to all three questions, congratulations. You have achieved the investing survival basics. If you answered no to any of them, you need to think about how you can get to "yes" on each before worrying about cashing in on the next GameStonk or falling into the "buy low, sell high" trap. The basics aren't sexy. They're just really, really important.

You Don't Have to GameStonk

A Reddit-fueled trading drama captured the world’s attention last week as thousands of individual traders banded together to drive up the stock of a company many had never heard of before -- GameStop (NYSE: GME).

This strange episode makes for great socially-distanced dinner party chit-chat, but it's not a template for good investing. GameStop is a video game retailer that has spent years on the wrong end of an economy that continues to pivot away from physical stores and physical video games.

For months, hedge funds had been betting that shares would fall in value as fewer and fewer customers showed up at GameStop stores. If an investor thinks shares will fall in value, she can take a “short” position by borrowing the shares, selling them at today’s price, and promising to give the shares back to the owner at some future date. If the price goes down, the short seller buys the shares back at the lower price and keeps the difference between the higher sales price and the lower purchase price. That’s how short sellers make money.

But if the stock goes up, then the short seller has to buy back the shares at a HIGHER price, and she can lose a lot of money very quickly.

Enter a handful of Reddit users who decided that they should intentionally push up the price of GameStop stock and cause a lot of pain to those investors who were taking large short positions in the stock. Whether to punish hedge funds for their amorality, make a quick buck, stick it to the man, or give the middle finger to the global financial system, we witnessed the strange and intense power of orchestrated market manipulation. On January 20th, GME closed at $39.12.By January 25th, GME had reached an intraday high of over $159.Elon Musk sent the Twittersphere into overdrive on January 26th by tweeting one word – GameStonk!! – and investors took it as a rallying cry to keep pushing the price up. On January 27th GME closed at $347.51. Over 600,000 people opened trading accounts at Robinhood in just one day to get in on the action. On January 28th, Robinhood and other brokers were forced to stop trading in GME because of the crush of volume. (We still don’t know exactly what happened or why.) The stock traded between $112 and $483 during the trading day. Today the price of GME is around $59.This new type of trading is now referred to as “meme investing.” It’s a fascinating corner of the market, but should you participate? My strong belief is that every investor needs to chart her own path and implement her own strategy.

So if you can answer “YES” to the following questions, then meme investing might be for you:

1. Do you have a Reddit handle?

2. Can you explain what a “short squeeze” is?

3. Do you get a secret thrill from watching someone light a pile of money on fire?

4. Is your retirement account the ideal avenue for bringing high-risk excitement into your life?

If you felt your adrenaline start to race just reading these questions, you might be a natural meme investor. If not, it probably makes sense to sidestep this phenomenon. It’s okay to steer clear of speculative and/or "battleground" securities. It’s okay to focus on mutual funds or ETFs that hold a large number of securities, minimizing the risk of any one holding. Asking the question, “Should we get in on this [insert meme] trade,” is similar to the basic market timing question, “Is this stock going to go up or down from here?”

It’s already the most difficult question in investing. The big difference with meme investing is that the investor's prediction about which way the stock will go is not based on the value or efficiency of the company, its products or its services. The investor's prediction is based almost entirely on what other investors will do, and exactly when they will do it. I have no problem encouraging my clients to consider certain investments based on my own research about a company's long-term value. But I would never encourage a client to make an investment based purely on the future actions of other investors. In the short-term -- and with meme investing, I'm talking about days, hours or even minutes -- it’s just too difficult to predict.

The stock being manipulated could keep charging up or it could crash, literally at any minute. After all this, GameStop is still a company that sells video games and consoles from physical stores in malls. If that sounds like a business you want to own, then go ahead. But if you’re trying to make a quick buck, be careful. Who do you think was buying GME at $400 and now owns it at $59? My fear is that it was a lot of people who could not afford the loss.

One Small Step for 2021

December is here and what a year it's been. From the pandemic to the market crash to the election, this has simply been the craziest, most turbulent year in living memory. Here's one thing you can do to make 2021 a little bit easier.

There's no denying the tragedy and hardships that our country has faced this year. I hope that however depleted you might be feeling, you are also feeling at least some sense of relief as the year winds down and the holidays approach. After such a tough year and with 2021 holding so many question marks, I'd certainly understand if you don't have any bandwidth for New Year's Resolutions.

But let me give you one idea for your consideration. Consider blocking off one hour on your calendar this month to think about your finances. Don't put any pressure on yourself to make breakthroughs or have a financial epiphany. In fact, go the other way. See if you can make it a fun, low-stakes meeting with yourself. Have a good cup of coffee or tea. Maybe it's an hour to check one modest item off your to-do list, like check in on your 401k. Maybe it's a brainstorm for your 2021 financial goals. Maybe it's time to email your accountant. Maybe it's an hour to search online for a good budget template spreadsheet. If you've had money stuff on your to-do list for a while, it'll be a relief to carve out some time to take care of it. If you're all caught up, it might be nice to start thinking about 2021. And of course this is just an idea. If you don't have time for a financial date with yourself, give yourself the gift of not feeling bad about it. Happy holidays, and I hope you have a peaceful New Year.

Election 2020: Uncertainty and the Markets

With early voting already underway around the country, you can probably guess the questions I’m hearing most often: “Who is going to win?” and “What does it mean for the market?”

I don't make political predictions but I do position portfolios to survive short-term uncertainty and perform over the long run, whatever the political landscape might look like. Elections bring enough uncertainty, even in normal times. But in the past, the uncertainty only revolved around who would win the election. For the first time in living memory, many Americans are uncertain about whether the election will produce an outcome that all candidates will accept. As polls showed the presidential race tightening throughout September, investor anxiety over a potentially disputed election increased, causing prices to fall. The S&P 500 fell by just over 4% in September. In October, with polls showing Biden's lead widening after the first debate, investor optimism for a decisive outcome on election day has risen, calming the markets. As of today, the S&P 500 is back within ~1% of all-time highs.

But October 2016 brought plenty of surprises, and the last few weeks have been full of them, too. I’d be surprised if we don’t see another bombshell or two between now and election day. I’m a “stocks for the long run” person, not in spite of uncertainty but because of it. No, we've never seen a year like this one. No, we've never seen an election like this one. But we have seen events that brought massive uncertainty to the forefront, and we can look back to see how investors and the markets responded. The stock market is like life: It’s made up of a series of seasons and cycles, all strung together, one after another.

We don’t need to be fortune tellers to be good investors. But we do need to believe in resiliency. And in this case, it helps if you believe that our political and economic institutions can withstand the pressures they are currently facing. That said, with all of the stress people have experienced this year from the pandemic, politics and the markets, I certainly understand if anyone wants to take financial uncertainty out of the equation for the time being by selling some stocks. But if you’re thinking about getting out of stocks until after the election blows over, please have a plan to get back in, regardless of who wins. Investing is made easier by focusing on the long-term. What will things be like in 2025 and beyond? The digital transformation of the economy seems to be a ruthless killer of companies that can't adapt, and I think we're only in the first stages of the trend. Great companies continue to grow and thrive, even in the face of short-term uncertainty, because they are able to take advantage of it. Investors can do the same, but only with a long-term perspective. If we learned a lesson in 2020, it’s that markets move fast, perhaps faster than they ever have in the past.

Excellent companies don’t trade at excellent prices for very long these days. Sometime between now and December you might get a few days or weeks to buy at very cheap prices. But if you're looking for a good opportunity to buy, please know the window may not be open very long. When the market collapsed back in March, investors barely got a chance to catch their breath before stocks shot up again. The market may respond more favorably to one candidate than the other when all is said and done, but I believe the market mainly just wants a decisive result. Who wins is less important than having a clear winner. Above all else, please remember that if you make investing decisions based on short-term uncertainty, you must be ready for a variety of outcomes in the short-term. If you buy after a brief dip, the markets may keep dropping for a while. If you sell now in the hopes of buying a dip later, the markets may not dip. But if you invest in good companies that you believe will thrive over the next 5-10 years or beyond, you will position yourself to mitigate risk and benefit from the long-term gains of compounding. Like many of you, I'm ready to move on from 2020 and get to what comes next. Hopefully, we'll have some clarity by this time next month as to what 2021 might have in store. In the meantime, be well, stay safe, and make plans to vote if you haven't already!

Don't Treat Investing Like a Hobby

There are several ways a portfolio can truly fail. Luckily, you can avoid many of the pitfalls by simply checking your behavior. First, don't try to time the market. If your plan is to jump out of the stock market before it falls (or even worse, during a crash) and then buy back in when prices reach the bottom, you are setting yourself up to lose a lot of money. Don't do this. No one can predict the market. Stay in for the long run.

Another great way to hobble your portfolio is to change your investing strategy every few months. I see this most often in people who develop a real interest in the markets but don't work in the field. They are curious enough about finance to watch CNBC or Bloomberg and they enjoy reading financial news. It's almost inevitable that they decide to take what they learn and put it to use, turning portfolio management into something of a hobby.

So what's wrong with that?

Usually nothing. Personally, I'm fascinated with finance. I read about the markets all day long and I teach classes about investing throughout the year. I love it when I have students who are as curious about investing as I am, and I'm a huge supporter of people taking responsibility for their own finances. I even started a Meetup group to advance that exact cause, and I'm delighted to say we now have over 2,300 members. So why am I telling you not to treat managing your own portfolio like a hobby?

Because a hobby is something you're supposed to enjoy with relatively low stakes. Many of us are truly passionate about our hobbies. We learn new techniques for our golf swing, new recipes to spice up dinner time, new color schemes for our watercolor paintings. Some folks watch ESPN every day so they have the latest information to manage their fantasy football teams. There are plenty of new ideas to try out and no real downside to experimenting. Investing is different. The decisions you make with your portfolio can have big consequences, so you want to tread lightly. Someone who treats investing like a hobby is susceptible to changing their approach every time they hear a new perspective. One of the talking heads on TV recommends a certain batch of stocks in March, so they buy all those stocks. Then someone else writes an article about a different batch of stocks in May, so they switch into those instead.

Changing the plan too often and too drastically is a terrific way to lose money. The vast majority of professional investors try to minimize big tactical or strategic shifts in portfolios. They know that performance is judged over many years, not a few months. If you have a real passion for learning about investing but have found that it has led you to change your investing strategy too often, here's what I recommend:

• Identify your investing timeline.

• Develop one long-term strategy for the bulk of your portfolio (using basic principles like diversification) and stick with it.

• Set aside a small fraction of your portfolio for riskier ventures and experimental investing.

This will allow you to pursue your interest in investing and apply what you learn to a small part of your portfolio without jeopardizing your long term financial well-being. And if learning about investing is less of an enjoyable hobby for you and more like a chore, maybe it's better that way. You can figure out a strategy that works for you, put it in place, and just check in on it once or twice a year. After all, sometimes the best investors are the ones who make a plan, get it up and running, and then forget all about it.

Reopening, Social Change & the Markets

I can't remember a time when so many extraordinary events were unfolding simultaneously. Not surprisingly, people have been asking a lot of questions about why the markets have done what they've done over the last few months. Here are my responses to three of the questions I've heard most frequently since the recovery began.

When the Coronavirus crash happened, I thought the markets would have fallen farther and/or remained at their lows for longer. How did they recover so quickly in April and May when the news about Covid was still so bad? A market crash usually happens because investors don't think companies will be able to earn profits. The crash in March hit as uncertainty about the virus was peaking. Of all the uncertainties, the biggest unanswerable question was, "How bad is it going to be?" How many Americans would die? How many would lose their jobs? What would life be like under quarantine? No one knew the answers. Everyone was just making wild guesses. During this period of crisis, the Federal Reserve moved quickly. Between March 3 and April 9, the Fed made a series of moves with the potential to provide up to $6 trillion of liquidity to the U.S. financial and business system. This signaled to investors that the Fed would do everything within its power to minimize the damage from the crash. It also provided millions of individuals and businesses with the resources to continue spending. At the same time, the plan for flattening the curve become known to the public, and as people adopted social distancing measures, investors gained clarity on what the crisis might look like and how bad it would be. Covid-related deaths peaked in mid-April and then dropped steadily through early June. I think the market's rebound reflects investors' confidence that people would be able to get back to work and the economy could recover relatively quickly, and that the Fed would help out in the interim. 

When the protests erupted after the death of George Floyd, how could the markets continue to climb for another week? How could stock prices rise as footage of burning cities and police clashing with protesters dominated media coverage? Whenever I have to digest painful news stories and then try to focus on my job, I try to remind myself of this: The markets do not have a moral compass. They do not have a conscience. Stock prices reflect investors' confidence in companies' ability to earn profits. If I am saddened by news developments, I should not expect the markets to reflect my sadness. If I do, I will probably be disappointed. This does not mean that the investors who are participating in the market should not have a moral compass. Investors can vote with their dollars, choosing what businesses to buy from and which to invest in. I think the markets kept climbing based on continued confidence from the Covid crisis seeming to come under control in May. I don't think news of the protests affected investors' outlook on the economic recovery. 

Why did the markets fall last week after rising so steadily for so long? I think the dip last week was a reality check that the Covid crisis is not over. Last week we saw new cases and deaths rise again. With states reopening and many people losing their resolve to continue social distancing, investors feared the second wave was coming soon. Additionally, Fed chairman Jerome Powell made a statement last Wednesday that the economic recovery could take longer than some optimists were predicting. He said it could be "some years" before all of the 20 million Americans who lost their jobs were working again. This dampened investor enthusiasm and was probably part of the reason many of the major stock indices fell between 4-6% last Thursday.