FTX, Inflation, and Navigating Hype Cycles | Insights #137
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Episode Summary
Tailoring a portfolio to your needs is very similar to designing and constructing a home for you. A general plan needs to be established based on how many rooms are needed, what style and functionality are desired, and what amenities and extras can fit in the most optimal and seamless way.
It takes communication for the architect and designer to understand what is needed, and a plan needs to be drawn up to execute on those requirements.
Your portfolio is constructed in a similar fashion. Your most important priorities are used to sculpt the foundation, and the placement of rooms, amenities, and features flow from this foundation.
A thoughtful approach ensures that you have everything you need and that you don’t run into any shortcomings in the future. Planning and intentionality separate a portfolio that works for now from one that will work for the rest of your life to achieve your purpose.
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Episode Highlights:
0:00 Intro
1:09 Inflation- Does it matter and how are we navigating through it
2:30 What can we do to outpace inflation
3:56 How to insulate your portfolio against inflationary pressures
6:18 Why taking a purpose-driven approach makes life less stressful and improves your odds of achieving your goals
7:33 FOMO in the crypto world, News around SBF
9:35 How do we evaluate risky opportunities, and why due diligence matters
12:01 Governance and red flags with FTX
12:43 Involvement and Endowments with Athletes and Celebrities
13:47 What do excess resources mean to you
14:15 Hype Cycles
15:45 Key takeaway- Ask questions, do your research, take an appropriate level of risk
16:57 Wrap up
+ Read the Transcript
Brandon Averill (00:06): All right, Justin. Well, we're back at it. We got a lot in the news cycles, for sure. Rates are changing, I think hitting what expectations were, but we've got a new inflation numbers coming out. If anybody's been watching Major League Baseball, the Winter Meetings, there's certainly wage inflation. At least, good thing for a lot of our clients and for baseball, in general. At least, from our perspective, the owners are opening the wallet and shelling it out, so that's been fun to see and we certainly can't have this conversation without hitting on old SPF and just what in the heck happened there. So, I think it'd be fun to just unpack some of these topics, their conversations we've certainly been having with clients. And so just, yeah let's dig into some of this stuff. Let's start with inflation. We just had a print number so that those numbers came out. I'd love to hear your take on, does it matter? Does it really matter to my investment plan? How are we planning around it? How does it interact with what happened with the Fed and rates this week?
Justin Dyer (01:15): Yeah, I mean, the short answer is yes, and I would say yes and no. It matters because inflation is one of the main reasons you invest. You want to make sure your dollar that you earned today that you're not spending, not using to consume or give away or pay taxes is keeping up with inflation at a minimum. Ideally, if it's a dollar that you don't need for a long, long, long time, it should outpace inflation. And so in that sense, inflation is meaningful. We want to be aware of it, and we want to make sure we are at least keeping up with inflation. You can't predict that, or you can't necessarily time that on a short term period, right? This year is a great example of that. Inflation really came, caught a lot of people by surprise. Some people totally called it and got it right. Whether they can predict that going forward, that's a whole nother conversation that we certainly hit on quite a bit, but it matters. So that's what set that to the side. Let's acknowledge that.
(02:18): And then we go, "Okay, well what can we do given that inflation matters from a portfolio construction standpoint?" We certainly can't predict the future. We all know that, hopefully you guys have really drank that Kool-Aid and that one sunk in for all of our listeners. That is something that not only we believe really strongly and I think is commonly accepted, but just the data just supports it, right? Let's always go back to the data and we say, "Okay, well how can we outpace inflation in a high confidence manner?" And the best way to do that is to stay disciplined, to buy long-term assets. Those can be anything from public equities, public stocks, time and time again, those have proven to keep up and outpace inflation over long periods of time. Private equity, venture capital as well, real estate also a good asset class, public real estate and private real estate, but it's not something that keeps up or outpaces inflation over short periods of time.
(03:16): This is a perfect year to see that inflation's been high. Almost every single asset class has gone down to a large extent. But if you have that structure in place, that discipline in place, that diversification in place beforehand going into this year, there still is a very high likelihood that and the confidence that we have in a diversified approach holding those assets over the long term, outpacing inflation.
Brandon Averill (03:41): And I think it's a great point when we think about it, building portfolios when you're in the weeds of this for clients and really thinking through, "Okay, I go out set priorities with clients and they've got something that they want to achieve in 20 years." Let's say, and it is essential. They absolutely need for this to happen, right? We're going to take an approach where it's going to be on the side of the spectrum. Okay, we need the money today. We know what we're going to expect from an interest rate, but then we also have... We want to make sure that it keeps pace with that inflation. And so we'll purchase a treasury inflation or an inflation protected treasury bond, for instance, right?
Justin Dyer (04:21): Right. Yeah.
Brandon Averill (04:21): So, we find ways that we can implement where we don't have to predict the future. We don't... Hard to say we don't care where interest rates go, but in that very isolated perspective, right? We take the information that's available today, we have a known need in the future, and we're going to protect against it with something very specific like a bond like that. Whereas like conversely, I think when we set the priorities and it's, "Hey, we would love to buy a ranch in Montana in 30 years." And guess what? Some things have to happen. This is a discretionary part priority for us. When you go to implement portfolios, now we're looking, "Okay, over the next 20 years, what is the best place to outpace inflation?" And the best place to outpace inflation over that period of time is typically in the stock market, right?
Justin Dyer (05:11): Yeah, exactly. And depending on how those priorities or those long-term goals are classified, it gives us some flexibility. And in some cases, like the example you gave, we don't want flexibility. We want to have a real narrowly defined outcome, and that limits our opportunity set from an investment standpoint. But that's a beauty of why we do things the way we do for our clients. You guys listening here that it gives us a lot more confidence in the long-term likelihood that your assets will support your priorities. A lot of what happens in our industry is so transactional, so short-term, we're going to talk probably a little bit more about FOMO and most cases overreacting as a result of that.
(05:55): That just has been proven to weaken your long-term prospects to really meet what's important to you. It's a hard psychological battle to deal with, but if you can take that step back, have those conversations, listen to this podcast and really understand, "Hey, there's a lot of purpose behind what we do, and a lot of really, really thoughtful work." It gives you that staying power and eventually the ability, the higher likelihood to really meet your goals.
Brandon Averill (06:27): Yeah. And I think for clients listening, that's why we're so specific with priorities and building out these structures because at the end of the day, it's just such a more successful way of achieving outcomes, achieving your priorities than trying to... There are other sales pitches, there are easy things that you can turn to like, "Oh, we're going to..." We believe in short duration bonds, because interest rates are going to go here or there and I get that, I get where if you're out selling products you need to be there or we're going to do opportunistic rebalancing as bonds. They're the ballast of the portfolio as they correct, we're going to take some and do X, Y, and Z, and I understand why that sold that way. But what we're really focused on is a much more tailored, individualized approach, tax efficient, et cetera, for clients that are listening. That's how we go about thinking through these things.
(07:21): And you brought up FOMO, so let's go there. The old FTX and SBF and whatever other acronym we can come out, but I think there's just been a fascinating development. We see these things pop up from time to time, whether it was Bernie Madoff years ago, there's been several Ponzi schemes since I read something as we were preparing for this where Bill Hwang from Archegos, it took them, the feds 13 months to track him down and arrest him for a giant Ponzi scheme. It took them all of what? A week, to go grab SPF and charge him. So, clearly something was crazy was going on here. A lot of deception. I think when I sit back though is I look at it, what are some of the reason that reasons that people got so caught up in this hype, and why were people so blind to what was going on? I'd love your thoughts.
Justin Dyer (08:17): Oh man, and to be totally honest, hindsight's 2020 is-
Brandon Averill (08:24): Oh, for sure.
Justin Dyer (08:24): ... This scenario. But I think hype is the perfect word for it, and it's happened in the past. It will happen again. And I think the way we think about this as investors and stewards of our clients and clients' money is I'd much rather err on the side of missing out and being wrong, especially in something like we've seen over the last couple years. I mean, certainly this year with the crypto markets. There was just so much hype around crypto, whether it be Bitcoin, NFTs, and you can go back and listen to some podcasts we did really in the midst of that fact. It's not that we don't think there's interesting technological applications and some of those are way beyond my pay grade to an extent, but I can acknowledge, "Oh, there's some potential here." There's still some potential that it also has comes to nothing, right?
Brandon Averill (09:17): Sure.
Justin Dyer (09:17): You talk to VCs, you can see both sides of that coin, still to this day. So, when we look at it, we definitely want to make sure we're taking the more prudent and cautious approach to things that you can really see have a ton of hype around them. That is going to happen again, like I said, it has happened in the past. It will definitely happen again. I do have a big issue with how venture capital in general, and specifically that people that backed FTX in various fundraising rounds seemingly did not do due diligence. And again, it's hard. It is very easy to point fingers at this stage, so I want to choose my words wisely, but there was definitely seemingly a FOMO aspect to this, whether it be the VCs themselves, and there is this concept of what they call party rounds within venture capital where it's like, "Oh, my buddy's doing it, so I'm going to do it, and I'm just going to get my group of friends to invest in this."
Brandon Averill (10:20): Totally.
Justin Dyer (10:20): And it's just... You hear that, and it is so foolish that, that actually exists. Now, those people within those rounds are really, really smart people, and they're getting caught up in the same psychological challenges that exist within this concept of FOMO that we're talking about. So, I think it was a simple lack of due diligence. And there's a couple of reasons for that, whether it be, "Hey, I'm trying to keep up with my buddy and I don't want to deal with FOMO." whether it was explicit or implicit. There's also a very real cycle that was going on at the time where these deals in venture capital, not just within crypto, but in the VC space in general and in private markets overall, were happening so fast. Deals and decisions had to be made within insanely condensed timeframes.
(11:13): It's easy to say now, "Well, hey, maybe you should have just passed." That's an easy thing to say. So, I think there's a number of different factors and variables that we can now go back and point fingers admittedly, but what I want to do is take something positive from that and say, "Okay, well, how did we think about it during that period of time? What can we learn from that going forward?" And I think our general approach, it gives me comfort that we take a little bit more cautious approach and we would rather say, "Hey, okay, yeah we missed out." Than made a gigantic mistake.
Brandon Averill (11:46): Yeah, for sure. And I think there were some low-hanging fruit, right? Just from a governance structure overall. I didn't realize this till we were talking about it before, but no board. There was just a lot of things that if you started to dig and it was eerily similar to the Madoff situation, right? People just never visited the sites. There just was never-
Justin Dyer (12:06): An offshore account
Brandon Averill (12:08): Yeah, it was offshore. There's all kinds of stuff to this. And if you just would asked for an org chart, sure, maybe they could have lied and that would've gotten you, but you start to see all the related entities that Alameda Research is doing some trading here, which was technically, I think SPF's hedge fund, and-
Justin Dyer (12:28): Right.
Brandon Averill (12:28): And then his girlfriend's involved. There's just people are involved all over the place and it just gets messy really quick. And I would think that would just start to raise red flags.
(12:37): And then for clients listening, the other part of this, there's a big celebrity endorsement to it, and celebrity endorsement isn't always bad. I mean, we point to it quite a bit with you guys that are listening, but I think it's also goes back to a little bit of a word of caution. I mean, Tom Brady, David Ortiz, Steph Curry, are all in the news around this stuff. And whether they're liable or not, they're being drugged through the mud a little bit, because they endorsed this. And so there is a liability to endorsing things. And so they may pay you to go endorse something. You might want to just double-check and make sure that you're aligned with what you're actually endorsing. And if you're going to actually put a check in, which I think maybe Tom Brady did, make sure that you're putting some due diligence behind it.
(13:24): I guess a word of caution related to this whole thing is that FOMO feeling sometimes grabs you and you think you got it figured out and you got to be in the cool kids club. When you take a step back, I think a lot of times we forget that we've already accumulated a pretty significant amount of wealth, and what is the job here? The job is to steward it well, and if I have excess resources and I want to take some shots, for sure, let's go do that. Let's do it in a very prudent, smart way, do the due diligence, et cetera.
Justin Dyer (13:56): Completely, completely. And I mean, I'll just add a quick addition to that, and that is when these hype cycles happen, when you do feel like FOMO is really taking hold, chances are it's not going to work out in your favor. I mean that admittedly, maybe there is some point in time where there was a hype period of time that did lead to vast, a vast amount of wealth for everyone involved, typically, at least in recent history, whether it's a dot com bubble or what's been going on with crypto more recently, even just tech stocks overall, meme stocks, excuse me.
Brandon Averill (14:39): Pickleball.
Justin Dyer (14:39): Yeah. There you go. They typically don't work out as expected. Certainly as expected at the peak of the hype. It doesn't mean that the internet didn't come out of the dot com bubble or a lot of... I shouldn't say the internet, that was way before that, but a lot of incredible companies did come out of that. It doesn't mean interesting applications won't happen with blockchain and potentially what's going with what crypto in general, we don't know that. But the hype around those industries and investments at the time just gives you pause. And again, it will happen again at some point in the future. Who knows where, who knows what asset class, when, et cetera. But just have that discipline and make sure you're questioning things and whether it be from an endorsement standpoint, you understand that it lines up with values, et cetera. I think a great, great reminder is to have this in mind.
Brandon Averill (15:36): And I think a good key takeaway to take from this is you don't have to run from things that get hyped up, but you just got to ask the questions. You got to do a little bit extra due diligence and then go back to one of the cornerstones of investing, and that's diversification. If you took a small position in FTX and it goes belly up, you expect, you know what? 50 plus percent of your private investments go belly up. So, it is what it is.
Brandon Averill (16:05): It's when you over allocate. You expose yourself too much, we call it single company risk, and it severely impacts your life. So, hopefully you can avoid all this stuff by doing the due diligence, asking the right questions, et cetera. But in the event that you do take a loss, just make sure that you're diversified in a way that doesn't impact your priorities in your life in a way that you don't expect it to.
(16:29): So, and then the FOMO feeling, this is hard to combat. We're humans, and this is just part of it. But when you start to have that feeling creep up, maybe it's just the time to take a little reflection and go second guess it. So, hopefully this is helpful. What's going on out there right now and our take on it. As you know, the best way to reach us and for us to address some topics is just shoot us a text. That number, again, 6027045574, we'd love to hear from you. We're coming up on the end of the year. Next week we're going to do a little year end review, just some of the bigger topics that we've seen out there.
Brandon Averill (17:12): Certainly been an interesting one. So, if you got some thoughts for us, shoot us a text. And until next time, own your wealth, make an impact, and always be a pro.