Two Simple Principles to Investing Success | Insights #135
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Episode Summary
We all have our dreams, and while they might not always be realistic, it can be fun to get caught up in the hype of the newest product, market trend, or what you’d do with $2 billion if you won this week’s Powerball - even if it doesn’t always pan out.
However, what if you were told that some of your wildest dreams could be achieved with two simple secrets? Discipline and diligence.
Hype cycles can challenge any investor to stay disciplined and diligent. It is very easy to be overly optimistic and see a short path to your dreams becoming reality. A path does exist, but it requires the two secrets mentioned as well as a knowledge of financial market principles and fundamentals that govern the laws of that road.
They may not always be the strongest (or most exciting) forces in the market, but history has shown that they are the only tried and true tools that can be used to achieve your dreams and do so in a highly probable fashion.
On this episode of Insights, we highlight current events, including how many quickly accumulated fortunes over the past few years were lost overnight due to an overdose of optimism and a deficiency of discipline and diligence.
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Episode Highlights:
(0:00) Intro
(1:07) Current Events
(2:56) Surprise Inflation Reading
(4:25) Earnings Readings and Adjustments
(6:25) Crypto market activity - FTX
(7:27) Recession and Market Pricing
(8:45) Takeaways
(13:04) If it sounds too good to be true…
(13:25) Don’t forget that Fundamentals Matter
(13:55) Wrap up
+ Read the Transcript
Justin Dyer (00:09): Welcome back everybody. We're here once again for another episodes of AWM Insights. I'm joined by Mena Hanna. Brandon is out of the office once again, but really looking forward to continuing to have this conversation with you, Mena. Before we jump into a pretty meaty agenda, busy week, just wanted to remind everybody to shoot us a text at 602-704-5574, and we'll send you a brief summary of today's episodes to share with your friends what's happening, and then also to remind you guys that we want to answer your questions. So use that as a way to communicate to us, ask questions that may pop up. Maybe you're reading the news and one take, that's a great way to communicate with us and get that question on our agenda. We do want to answer relevant questions that are popping up. So like I mentioned, it's been a super, super busy week with all those words there.
(01:08): It could be potentially an understatement. And kind of the focus today is given all of these different events that are going on, a lot of these themes have been in place over the last three years. So taking a step back, using the events of the week to take a step back and talk about some potential lessons learned over this period of time that are really, really tried and true lessons for long-term investing in our opinion... For successful long-term investing in our opinion. But before we get into those conclusions, those nuggets for you guys all listening out there, let's just highlight this busy agenda, this busy week. We had inflation coming out. We had Meta laying off a substantial number of employees, 11,000, about 13% of its workforce that in addition to a lot of other tech companies that are laying off employees, kind of get into that in the bigger conversation.
(02:06): There was an election, it's the heart of earning season and Amazon has the unfortunate title of being the first company to lose a trillion dollars in market value after its market cap briefly to around 880 billion dollars after the crazy run-up. Once we heard what inflation was after that crazy run-up. I'm sure it's well back above that low, but it certainly has fallen quite a lot from its peak in July of 2021. And then, of course, we're going to touch on what's going on in the crypto markets. Crypto's kind of lost its... I don't want to say its luster, maybe lost its focus within the media. I'm sure some people are still tracking it really, really closely, but it was a very busy week within the crypto world and we're going to definitely touch on that. So let's circle back to inflation Mena, give us a quick overview of what we saw in that inflation report for October.
Mena Hanna (03:04): So CPI and core inflation numbers came in this morning much better than expected. The overall CPI number was at 7.7%, which is down from 8.2% last month. And if you strip out food and energy core inflation, what is CPI just without food and energy was down to 6.3%, three-tenths of a percent down month over month. So it is one data point. Obviously, we can't say that the battle against inflation is over already.
Justin Dyer (03:41): Good point.
Mena Hanna (03:42): But the market reacted very positively. Hopefully, this gives the Fed a little bit more leeway to be less aggressive with their rate hiking policy. We saw the NASDAQ have the biggest point gain ever, and the S&P actually had the third largest point gain ever. So huge market reaction.
Justin Dyer (04:05): Yeah, really, really huge. But I think it's important to underscore it is one data point. I mean, it's certainly what the Fed has been looking for. I'm sure they will come out and say something along the lines of, it is one data point, we want to see some more consistency in the trend. But overall a good statistic. It is one statistic, but a good statistic nonetheless. Let's touch on earning season. Obviously, data matters, fundamentals matter to a company and its valuation, earnings being one of the more important pieces of that. Give us a quick update on earning season.
Mena Hanna (04:38): So earnings for the S&P 500 did grow quarter over quarter. Their growth slowed down to the lowest growth figure since I believe it was Q3 of 2020. So still positive... Not as positive as what we've seen previously. Not the same level or magnitude of momentum. Some of the positive earnings were primarily coming from healthcare and energy companies, as you'd expect with the negative performers being financials, real estate, and consumer services, and consumer discretionary. So earnings forecasts for 2023 have come down slightly with all the negative news that we've been hearing. It's to be expected that it would weigh on forward earnings and markets are obviously forward-looking. So we have seen a little bit of activity in the markets there, but the trajectory is still positive and we are still expecting to have a record Q4 of 2023.
Justin Dyer (05:50): Yeah, interesting. And I think it's important, we've touched on that in past episodes, but the question around are we in a recession? There's not a clear definition. We touch on how that actually is refereed, so to speak in previous episodes as well. But earnings, while they are softer from a growth standpoint, are still relatively healthy if you want to call it. So I think that's important to underscore the fundamentals do matter. That's going to be something we kind of hit on throughout this podcast, this conversation. One of the more interesting topics, I kind of mentioned it within the crypto space, but for those of you who didn't see FTX, huge crypto exchange, I think number two behind Binance is basically no longer... There's still some potential that it rises from the ashes. I think that's a very low probability outcome. But give us a quick overview Mena, of what actually happened. How was there such a substantial and quick fall from grace for FTX, which was really, really held up in... Had a great reputation within the crypto space and in markets overall?
Mena Hanna (07:02): Yeah, it's definitely not every day where you get the second-largest player in a sector going bankrupt pretty much overnight. But it all started when CoinDesk issued a report on FTT, which is FTX's internal token. And that led to Binance, which is the largest player in this sector to start to liquidate their holdings. That pretty much just created a really negative cycle where everyone was trying to liquidate the token, withdraw their funds from FTX, and overnight the CEO of FTX was calling around for a loan of 8 billion dollars, so hard to do overnight. Binance for a time period did try to step in and purchase FTX just to restore peace and calm in the crypto space. They looked at their books, they did their due diligence, and they pretty much said, "This is beyond our fixing." So that continued the spiral down for crypto for that day. Thankfully, CPI came in and-
Justin Dyer (08:17): Saved the day.
Mena Hanna (08:18): Gave us a little bump up, but it has been a very, very volatile 48 hours for crypto and for the space, and really came out of left field, FTX sponsors Mercedes, AMGs, Formula One team. They have their name on the Miami Heat Stadium. They're a large player and almost foundational. So it's pretty crazy that-
Justin Dyer (08:43): It is, yeah. And they, I mean, had attracted celebrity investments and partnerships. It really, really is amazing. I think how I would take this one event, and even the item I mentioned with respect to Amazon and it's crashed from its high, along with Meta Snap, all of these tech companies, the market basically priced in absolutely phenomenal outcomes in returns for all of these things. Crypto, you could say there was a belief that it would solve every single problem that exists in the world at one point in time. I think some reality started to come into that, and you see basically a good old fashioned bank run in web three with respect to what happened with FTX. You also had crazy hype around specs. There's not a true definition of what a bubble actually is. Some academics have tried to define that. But looking back, I think it's fair to say some of these sectors, some of these assets, asset classes were arguably in a bubble is a hype cycle to an extent, if you want to call it that.
(09:54): And those exist, they will happen again. They're incredibly challenging to think through and to exist in. We humans have a natural inclination to try and keep up with the Joneses and we don't want to miss out, whether it be with Bitcoin or you mentioned when we were preparing the tool bubble back in the 16 hundreds. So these are not new, they will happen again. They certainly are difficult and really, really interesting periods to live through. And then of course, hindsight being 2020, we get to sit here on a podcast and talk about them and sound really, really intelligent. We don't want to necessarily go into crypto in great depth today. We've spent quite a few podcasts on that in the past year or so ago. So if there's any interest, by all means, go check that out. And I do want to hit on the fact that just because FTX and crypto is going through a lot of that adversity, "crypto winner" doesn't mean... And even though we at the time never really were super bullish and advocating for crypto exposure because of the sense that there was a lot of hype going on around it, not a lot of fundamentals, it doesn't mean good things will not come out of crypto or web three overall.
(11:15): There's some interesting applications there that if can be proven to have value will. And what we generally say is a picks and shovels approach to crypto to that asset class is probably the best way to go about it. Not through some pure speculative gambling type approach, which unfortunately is typically hits retail investors quite hard. So I think that's kind of the take that I'd throw out there for these general topics, whether it be tech companies coming down, hiring Mark Zuckerberg basically coming out and saying, "Well, I got it wrong. We thought the pandemic growth was going to continue at the insane levels that existed throughout that period of time." And getting these things right on an individual basis. And maybe you can highlight this Mena, as it is incredibly difficult, right? Picking stocks we know from the data is just not a repeatable way to manage wealth in a consistent way. And so that's how we focus on building portfolios and allocating to markets, right?
Mena Hanna (12:18): Yeah, exactly. And you'll hear the word fundamentals all the time during periods of stress, but I almost like to throw out the term financial physics. Financial physics isn't 100% perfect like gravity, but it is very evident in times of stress that we do go back to our core fundamentals. These core physics that you read about, you study, have existed for hundreds of years. And even though we might get into cycles of craziness or hype due to human emotions and greed, we tend to revert to the mean and yeah, come back to reality.
Justin Dyer (13:02): Yeah, that's a great place to end. And really what I'll put a bow on that as a key takeaway... You could summarize it. If it sounds too good to be true, it probably is. Or there's a great quote, "When the tide rushes out, you'll see who's swimming naked." You're somewhat seeing that or you've seen that to a large extent over the last year in a sense. So I think that's the nugget, that's the takeaway. I'd also like to add that fundamentals matter. You touched on this. When times are challenging, fundamentals matter. When markets are doing nothing but going up and to the right, fundamentals matter. Going back to the data, what does the data say? Constantly asking yourself those questions and making sure you're comfortable with that is the way to a successful investment experience. So we'll wrap there. Hopefully, this little look back on history was helpful for everybody. Just a little bit of perspective is always good. If you have any questions on any of these specific topics, we're happy to dig in deeper. And just to reiterate, the best way to get in touch with us is via our number 602-704-5574, shoot us a text. We can give you this quick little takeaway summary or shoot us a text with questions that you have and we'll cover them next time. So until then, own your wealth, make an impact, and always be a pro.