Market Highs, GameStop’s Historic Drop, How To Win the Stock Market Game | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #48
Enjoy AWM Insights? Leave us a 5-star rating & review to help others like you discover the show!
Episode Summary
Last week we saw the S&P 500 close with its best week since November 2020. We also saw GameStop plunge 80.4%. How can these two things exist at the same time?
Is the market broken? Is it too risky?
To the contrary, the stock market is still and will most likely always be one of the greatest ways to grow generational wealth. However, not everyone will succeed. Those who approach investing as amateurs are most likely to meet the fate of the gambler headed to Vegas.
The good news, the house has taught us how to win.
Today, Erik, Brandon and Justin layout the fundamentals of how to build your wealth. They specifically discuss stacking the deck in your favor so that YOUR house always wins.
Episode Highlights
(03:20): The economy is not the market.
(04:16): Is the market broken?
(05:57): The fundamentals of building wealth.
(09:51):What is the stock market?
(13:46): No such thing as a free trade.
(16:27): Passive Income and Equity.
(18:21): Ownership is the key to wealth.
(19:26): Is the market a casino?
(20:20): Probability of stock market returns.*
(24:44): Risk and return are related.
(26:22): We are not Wall Street.
(28:37): Your custom investment plan.
*S&P 500 from 1926-2020:
+ Read the Transcript
Erik Averill (00:00): Hey, everyone. Welcome back to AWM Insights. It's your power three, two CPWAs and a CFA. We are Eric, Brandon, and Justin, and each week on this podcast we cover what you need to know to capture the returns you deserve and invest like a pro. And today we're going to go ahead and pick back up on our conversation from last week surrounding GameStop, Robinhood, the market structure, and of course, how all of this should impact your investment strategy going forward.
Erik Averill (00:32): But before we do that, there are a few headlines that we think are important to share with you guys. Just dropped in the last couple of days that the US House is expected to advance President Biden's $1.9 trillion COVID aid package. This is one of three examples of we see the Democrats moving things forward without the Republicans approval. And other big news last week, Jeff Bezos stepping down from Amazon, CEO of AWS Services, Andy Jassy, will be taking his place. And obviously Bezos is not going over into the dark into retirement, it's just so he can focus some more time on some of his creative projects.
Erik Averill (01:21): Other news in the sports world, we saw Trevor Bauer land with the Los Angeles Dodgers, excited to see what comes out of that. And then something that you would really imagine would have garnered a lot of attention after the election in the investment world that has really been swept under the rug with all of this Robinhood, GameStop stuff going on is, we're paying attention to what's going to happen with the federal legalization of cannabis. So we saw last week Democrat controlled Congress, and of course the White House who support decriminalizing cannabis, we saw Senate Majority Leader Chuck Schumer unveiled a plan to actually end the federal marijuana prohibition. So that's something we're paying attention to, and we're going to cover on future podcasts.
Erik Averill (02:11): And then getting into the topic of today. Last week we saw the S&P 500 close with its best week of November. And this can be a little bit confusing because during last week we saw two really random things. First, the recovery of the US labor market, it disappointed for a second straight month, and then GameStop. It started last week at about $274, and eventually dropped down to around $60 bucks, down 77%. And so we have a few pieces of information where things don't look too great yet the stock market ends the best week since November. And so one of the questions we're going to jump right into is, is the market broken? How can we have markets going higher when we've got things pointing towards disappointment and dropping 77%?
Brandon Averill (03:10): Real quick, Eric, you didn't see my Instagram posts from last week? That was my quote, "The market's not broken." It can't be broken, right?
Erik Averill (03:18): What? Ah.
Brandon Averill (03:18): Right? All right, Justin, go for it.
Justin Dyer (03:20): Speaking the truth right there I guess. Before I jump in on that, I want to also, I guess it's on the same topic, but I want to underscore the idea that the economy is not the market. So we'll get economic data and sometimes that drives markets higher, and other times it doesn't. Sometimes it supports the debate or the expectation that stimulus will be passed, sometimes it doesn't. And you really need to bifurcate those two things, they're related, right? The economy supports the public stock market in various ways and forms, but the two things don't always move in lockstep with each other. So to Eric, your point about the labor market being a little bit disappointing, first and foremost, those are noisy statistics, they move all over the place, but you can kind of draw a number of different conclusions from those economics statistics, and for a certain market movement. So that's one thing to definitely highlight.
Justin Dyer (04:16): Getting into the elephant in the room question, if you will, is the market broken? I mean in my opinion, my humble opinion, no, it's not. And we talked about this a lot last week. There's been plenty of times where markets or certain areas of the market behave in an abnormal fashion. And abnormal might be a generous term to describe what happened with GameStop, but just because something, you could call it an anomaly, is happening in a very small portion of the market, which is important to underscore, but GameStop is a fraction of a percent of the market. It's a small cap company to begin with. And you will see these abnormalities happen within these corners of the market. It does not mean the market is broken.
Justin Dyer (05:09): And I know we'll get into efficiency, and then even trading, micro structures, and the plumbing, if you will, within the capital markets, and we touched on that last week as well, too. But I would say the short answer is, no, the market is definitely not broken, especially if you're a long-term investor, which we speak about ad nauseum on this podcast, right? The market is most definitely still an efficient allocator of capital, and risk, and return over long periods of time. And it does reflect information in a very, very, very expeditious way. And trying to predict if that information is right or wrong is all but impossible, and that information could be wrong, as in the case of GameStop.
Brandon Averill (05:57): Yes. And I think to me, I made the argument that everything that we saw last week was actually evidence that the market is working in the way that it should be working. Right? I mean you have the short sellers on one side that are trying to keep companies honest, et cetera, while we saw that there was a group of people that thought that that was an inappropriate, probably, pricing of GameStop stock, and there was a market anomaly that they were going to take care of. Now it obviously flew out of control, and I think anything you think of, there's always going to be the exception to the rule. The question becomes, "How much do you want to bet on the exception to the rule?"
Brandon Averill (06:36): And I think when we go back to the fundamentals of building wealth, if you're trying to look for that needle in the haystack, you're trying to be that person that gets luckily and front runs something, I mean, let's be honest with ourselves about how often you can actually do that, especially if you're just somebody that is casually taking notice of the stock market and doing different things. I think Ben Carlson who writes A Wealth of Common Sense had a great post on whether you are a YOLO investor, and he broke it down. And really, unless you're paying attention to this stuff on an extreme basis, and even the people on the Reddit boards, they are doing that. I learned what a trendy was... Or, no.
Justin Dyer (07:24): Tendy.
Brandon Averill (07:26): A tendy, what's a tendy? And he made the point, "If you don't know what an a tendy is, put away you're trading stuff." And I'm glad to say, I'm not a trader because I didn't know what a tendy is, but if you can't answer some of these basic questions, it goes back to that old adage, I mean, if you can't identify the sucker at the table in a card game, you're probably the sucker. And I think that's ultimately what we were looking at last week is we had a whole bunch of people. I mean, I've talked with clients, apparently there's a Facebook group out there for minor league baseball players, they're throwing around stock tips.
Brandon Averill (08:02): I don't know if somebody really took a step back and thought about, "The guys that around me in the clubhouse, as much as they really pay attention to the market, do I really want to take the advice of these guys?" But it's hard, you get caught up. It's emotional. The fear of missing out is a real, real thing. So anyways, a little bit of a tangent there, but I think for me it was just confirmation the market works. We had efficiency, even though it was disappointing when Robinhood and some of the other broker chalices restricted trading, to me, that's normal, this parts of a healthy market. Lots of issues, obviously people pissed off, but that's how it should work. It should work to protect the investor.
Erik Averill (08:48): Yeah. Justin can get a lot more into this, the halting is actually not new, this happens every day on the exchanges, right? It's just, it hasn't been as front and center. And so Justin can get a lot more into the plumbing of how the markets work, but one of the things that came to the forefront based off the conversations I know you guys have been having, I've definitely been having with individuals is, there's also a negative thing that I hope this doesn't happen coming out of these situations is fear of the market, right? It can feel unknown, and the most devastating thing, and disastrous thing that could result of this is people not trusting the stock market. And unfortunately, believing it's synonymous with these evil empowers of Wall Street, because the truth is the stock market is still and will most likely always be one of the greatest ways to grow generational wealth.
Erik Averill (09:51): And for most people, they're very scared of it. Rightfully so, we've had people that have worked extremely hard to make money, they're investing for the future. Their ability to earn high income is gone, so they're in retirement, and they're scared. They're saying, "Hey, is this at risk? Is this something that I'm going to lose all of my money?" It literally feels like a casino. I'm hearing the market's broken, I'm hearing people are manipulating it. I just don't want to arrive at the situation where it's all gone. And so one of the things that I thought would be super helpful for us is just to revisit what exactly is the stock market? A lot of times when we're referring to the market some people can right away think that that is an actual type of investment. And so we just want to set the record straight.
Erik Averill (10:47): We just want to reorient you the listener to what we're talking about that the stock market at the end of the day, think about it, all it is is it's the field of play, right? This is a grocery store. We're so used to going to markets, we go to a grocery store, also called a food market, all the time. We walk inside a building, and they sell fruits, and vegetables, and meats, and you can kind of go and choose and pick from different types of foods that you put in your basket, and you walk out. The stock market is no different except for buying fruits and vegetables, we're buying pieces of companies.
Erik Averill (11:22): And so I think that that's a really important thing to talk about is the exchange in the field. This is where Justin can get into the plumbing of what the stock market is, but ultimately what we're talking about, what we're believers in is buying pieces of good companies of capitalism in the future. That we believe that tomorrow is going to be better today, and so I just thought that that was really important for us to share is the stock market isn't a particular investment, it's just a field where we get to invest in companies.
Justin Dyer (11:55): Yeah. And I would even say it's gotten better over time. Is it perfect? By no means is it perfect. I mean, there, there are plenty of blemishes on the public markets, and Eric talked on or defined what a market is. There are stock markets, there are bond markets where fixed income instruments are traded, option markets. I mean, there are all sorts of different markets out there, but in general, these markets, especially public stock markets, which think of the New York Stock Exchange, NASDAQ, they have actually gotten more efficient over time. Again, I want to underscore the fact that they're not necessarily perfect, but you think about the access, the cost of access, all of those things have improved, right? The ability for anybody to open up an account on an app, let's talk Robinhood, is through the roof.
Justin Dyer (12:50): I mean, and that's really been over the last, let's say, five years, maybe a little bit beyond that, but that ability is amazing, right? It opens up investing, and hopefully most people are doing it for the longterm in disciplined fashioned. It opens that up to so many people, and then the plumbing comment that Eric kind of alluded to is the cost to trade, right? There's a lot that goes on behind the scene when you hit, "buy or sell a stock." And it's complex, but it's evolved over time to be really, really efficient. Can it be improved upon? Probably, I'm sure that will happen over time. Technology continues to get better regulations, get better maybe regulations that aren't helping people get thrown out the window hopefully, and new and improved regulations get put into place as a result. That's just kind of the natural cycle of things.
Justin Dyer (13:46): But I do really, really, truly believe that the access to markets is better than it has ever been. The cost to trade is better than it has ever been. Right? And I do want to underscore, it's not zero, right? I mean, if you do trade on Robinhood or even TD Ameritrade, Schwab, these big custodians and broker dealers as they're called, they're not charging you to buy and sell an ETF, or buy and sell a stock, there's still a cost to you, it's called the spread. It's the difference between the person buying it, and the person selling it, and then somebody collects the difference in between. And that's always been there. Those spreads have come down over time, and again, that's where I'm coming from when I say, "The cost to access markets is better than it has ever been."
Justin Dyer (14:28): Now, there's always kind of knock on effects or unintended consequences, maybe you can argue what happened with GameStock is potentially an unintended consequence of this new found access, or this efficiency and whatnot. I don't necessarily think it is, like we said in the past, I mean, what we saw with GameStock has happened plenty of times in the past, I referenced the [inaudible 00:14:50] bubble way when. I think I said 18 hundreds is actually 16 hundreds, get to correct myself there, fact check myself. And they're going to happen again. I don't know when, I don't know where, I don't know what stock, I don't know if it's an ETF, but there are going to be these little manias, the feedback loops that seem really problematic, I guess, on the surface, and to Brandon's point, I think he elucidated it really well that it still reflects a healthy market when you do see things like that.
Justin Dyer (15:26): It's not the best thing, because unfortunately you see people who lost a lot of money. I hope some people made some money and sold at the top, but unfortunately, some people who maybe didn't have the money to actually put into it initially, or they put too much in because of that fear of missing out or, "You only live once," that YOLO mentality. It's really unfortunate to hear those aspects of this story, but taking a step back, talking about the market as a whole, I do think we're in such an amazing time for market access for the individual. It's just really getting those individuals educated and understanding that investing for the longterm is boring, right? You can kind of just put your money into the capital markets, and pay attention to it, but don't trade in and out, don't incur taxes, don't chase fads. Be disciplined, be methodical, let that wealth compound over the longterm, and you'll benefit.
Erik Averill (16:27): Before you jump in, Brandon, I just want to put some meat on the bone in defining what the stock market is. There's a great resource, and there's two main words that I think are so important. So many of our conversations we have with individuals who get really excited about or interested in rental real estate, right? Or are athletes that are trying to expand what they do beyond the field, talking about, "I want equity, Pay me in equity." And I think these two things is we absolutely agree, you want equity, and you want passive income. And so Brandon mentioned Ben Carlson, so I just pulled this up. And he wrote this book called Everything You Need To Know About Saving for Retirement. And he's actually got a chapter literally called, "How The Stock Market Works." And I just want to share this a little excerpt, because this is so important.
Erik Averill (17:17): It says that, "The stock market is the only place where anyone can invest in human ingenuity. It is a bet on the future being better than today. Stocks can be thought of as a way to ride the coattails of intelligent people in businesses as they continue to innovate and grow. Short of owning your own business, buying shares in the stock market is the simplest way to own a slice of the business world, i.e., equity. The greatest part about owning shares in the stock market is you can earn money by doing nothing more than holding on to them. When companies pay out dividends to shareholders, you get cold, hard cash sent to your brokerage or retirement account, which you can choose to either reinvest or spend as you please. The stock market is one of the few places on earth where you can earn passive income without having to do any work whatsoever. All you have to do is buy and wait." I just think that is so powerful.
Brandon Averill (18:21): Yeah, I think so too. And I mean, I was going to go there too. When we think about wealth, and who has built the most wealth over time? It's typically people that own businesses, and they've started businesses, they've operated businesses. I mean, think about the people that you know in your lives or Jeff Bezos, right? I think he's the richest man in the world now, but the guy started a business. The new CEO, this gentleman was Bezos's chief of staff before he created Amazon Web Services, now is the CEO of Amazon, right? I think when we think about this, these operators of businesses, people that own businesses, are the greatest wealth generators. And to your point, if you're not going to go out and start your own business, which is incredibly difficult, FYI, if you want to call us, we'll tell you payroll, and making sure you make payroll, and all the taxes, and everything else that goes with it, you eliminate all of that. Right?
Brandon Averill (19:26): And you're able to own a slice of all these businesses. And I think that is a really important piece, as you are betting on a whole swath of companies being successful and building wealth. And I think when we look back at history, that's been the most successful way to do so. And there's been a lot of references to the casino on this. And it's kind of funny to think about gambling in a different way. I think people do approach, especially new investors, like "Oh, the stock market seems like it's gambling, we're betting." We use the word "bet" a lot, you're betting on the company. Yeah. We're betting on economies and companies, but I think it's a reframing of the mind. You're not the person walking up to the table, plopping your 20 bucks down and taking the blackjack hand, you're actually on the other side of the table, and you're dealing the cards.
Brandon Averill (20:20): And we all know that there are beautiful buildings in Vegas because the house wins, right? The house wins over time. So where do you want to be? And it doesn't mean you're going to win every time. And it doesn't mean you're not going to go through little periods of not having down periods, it's unlucky, right? There's still the guy we all know that rolled into Vegas and hit six black jacks in a row. That's going to happen, but the longer you get out, the tighter the funnel gets, the tighter the outcome distribution becomes, and we've seen this, we've referenced it before. But if you held the 500 largest US companies, and you look every day in your account, 56% of the time it's going to be positive, 44% negative.
Brandon Averill (21:04): If you look out five years, 88% of the time, it's going to be positive, 12% of the time it's been negative. You start to get out to 20 years, 100% of the time it's been positive, and 0% of the time it's been negative. Now, all that's looking back, it's no guarantee of the future, disclaimer, disclaimer. But you have to think about your process, you have to think about the process of investing, right? That's the only way to make good decisions really in life, period, is focusing on the process. And I think just taking that mindset and going, "You know what? Let's think about what I'm doing here. I'm buying pieces of companies that have been the greatest wealth creators in human history, and then I'm putting the odds in my favor."
Brandon Averill (21:47): I mean, those two things build a fantastic process, over, "Hey, if I get in on GameStop at a hundred, and it goes to 300, I'm going to make a bunch of money." Back to Justin's point from last week, there is just no way to come up with probabilities there. So do you want to play the smart game? Do you want to be the investor, build your wealth over time? Or do you want to be the guy or gal that can brag about what you did? And then of course you don't want to mention that the times you're going to lose in the future.
Erik Averill (22:20): Yeah. And what I would say, Brandon, important for our audience, so many of you guys that are listening hear, you're the best in the world at what you do, whether you're a professional athlete or our founders, or doctors, or whoever's listening to this is look in your own career and go, "Did somebody just show up overnight and have instant success?" No. What has made you the best in the world is refining your craft, it's diligence, it's playing the long game. It takes time, it's over time. And so when you take your money, and you invest it into companies, just understand that true wealth generation takes time. And if your patient, you will be rewarded in the longterm.
Erik Averill (23:05): It's unfortunate where people have been so terrified of the markets. I mean, we've seen these stats of if you were the worst investor on the planet back in the '08 financial crisis, and you put all your money in the day before it crashed, but you held onto it, you'd be up over 300%, right? It's just these crazy amounts, but most people don't have the discipline and the consistency to understand what they're doing and how they're investing their money. And over the long haul, the stock market is absolutely unrivaled when it comes to growing money.
Erik Averill (23:39): The worst 30 year return for the S&P 500 is 850% cumulatively. Right? That means your initial investment would have been 8X. That is wild. And it's hard to say that because we get caught up on the daily noise, we turn on the TV, we turn on our apps, right? And it's creating this fear and this anxiety, but if you just take a step back and look at what happens over the long-term, you will put the probabilities in your favor.
Brandon Averill (24:10): Well, and real quick, we are talking about all the positives of growth and wealth. I think we're a lot of people get caught up is there is a trade off for this reward, right? There's a trade off. It's not a straight line. We're guilty of it, so many people do it. It's like, "Okay, 5% to 7% annualized, et cetera, et cetera." You set these expectations like, "Okay, great. I'm just going to kind of chug up like this." Well, what we know is that the trade off is that in the short term, the stock market can rip [inaudible 00:24:42]. We saw this last March, right?
Justin Dyer (24:44): Risk and return are related.
Brandon Averill (24:46): Exactly, they're related. And, yes, those probabilities play out, but you got to go through some of the pain, and it's painful, there's no doubt about it. And hopefully that's one of the values of having an advisor is to keep you invested, that's the key, right? Make sure your financial structure is set up in a way that it doesn't hurt you. So you don't have to access money that's exposed at the wrong times. And so I just think it's important to understate, "Hey, it's you want to participate in the markets, but you want to participate in the right context of your financial structure." It's a complex deal, and that's why hopefully most people seek help for it. Because I think, can you do this on your own? Sure. You probably could. Are you going to maximize it? Are you going to hurt yourself? More than likely. I think we're pretty confident in being able to say that nowadays.
Justin Dyer (25:38): Yeah. And one other "cost" to participating in this is Wall Street, right? This big term "Wall Street," which is kind of a nebulous term, but it's often vilified, and I think the reason why that that's the case is because there's this inherent conflict between investors and Wall Street, because Wall Street, they're providing the plumbing, and they're trying to also run a for-profit business, and so those incentives don't always match, right? Investors want efficient access to the markets, and they don't want to pay a lot for it. They don't want the Wall Street banks front running their trades and things like that.
Justin Dyer (26:22): And again, Wall Street and markets aren't necessarily perfect, and sometimes there's good reason to vilify Wall Street. What I think is important for our listeners to know is we've set our business up to be in absolute alignment with you, from a business structure how we're compensated, we are not Wall Street generating products to sell to you. Eric's touched on it time and time again that we we're pretty much agnostic in terms of where your wealth is allocated. We have our viewpoints on where it should be to improve your probability of success, but we're not selling you our own products, our own proprietary products. So I think it's really important to underscore that.
Justin Dyer (27:04): So there's kind of this inherent push and pull between the Wall Street firms that are operating the structure and profiting off of that, and sometimes trying to profit too much, versus what we think is fair as investors. And then other times investors get the better of it. So I think it's important to understand that, and then, again, understand how we're serving you, the client, in that capacity as well.
Erik Averill (27:31): I think you bring up a great point there, Justin. It's understanding where are our incentives aligned, right? It's the news and the media, their job is not to help you make individually wise decisions for your family's financial future. It's to gain eyeballs, to sell advertising, to put money in their pockets, to put in their shareholders pockets. Right? And we saw this with Citadel and Robinhood is there's a lot of relationships that spider and have all these conflicts of interest all over the point. And so that's where we really hope that our podcast, and other podcasts from other certified financial planners and chartered financial analysts that work at independent registered investment advisory firms are there to help you the audience and the listeners figure out how do we make decisions that are in our best interest? How do we capture the returns that we deserve of really making this a level playing field? And stacking the deck in your favor so that the house does always win, that your house always wins.
Erik Averill (28:37): And Brandon hit on this nuance that you guys have heard us talk about podcast, after podcast, after podcast is this all comes down to, what are your priorities? When do you want to choose this money? The thing that we talk a lot about at AWM is we're helping our clients build generational wealth. And so what we don't ever talk about is, "Hey, how did your returns do against the quarterly returns or annualized returns?" Sure, if you ask those questions, we'll have that conversation, but it's always saying, "Those are arbitrary benchmarks." Right? These risk adjusted returns or these benchmarks that the news or the Wall Street likes to put out there, it's irrelevant to you. The only thing that matters to you is you laying out saying, "All right, based off of the type of life that I would like to live, these are the priorities that I want to achieve, and these are when I want to achieve them."
Erik Averill (29:31): Because the when really dictates the type of risk of where we want to invest your money. And so, as we know, if you want to accomplish something in the next 24 to 36 months, you want to have high confidence that that money is there, we are not talking about taking that money and buying pieces of companies in the stock market over the next 24 months. That is money that we have high certainty of, that we want to have the highest confidence that we have liquidity, meaning we have access to it. There is not a lot of volatility, meaning that it could be up or down when we need to use it, high certainty. The type of money we're talking about growing generational wealth for is for your longterm priorities, those things that you want to accomplish five years out.
Erik Averill (30:16): And then as you've heard us talk about when the private investment market and the private markets come into view is when you're wanting to build a legacy stuff. When we're talking 20 years plus, we've solved having enough money. And so I just think back to Brandon's standpoint, it's about your financial structure. It's about building your custom house, and you should be working with a competent certified financial planner and a team that can help architect and strategize your personal wealth.
Erik Averill (30:44): And so I think that that is just so important to lay down. As you listen in on these conversations, as you try to process what is GameStop? What is Robinhood? What's the next thing down the road? How does it impact you? Always pull it through your priorities in your investment plan, stick in the game, stay longterm, diversify, lower expenses, lower taxes. And if you do that, you've stacked the deck in your favor, and your house is going to win. So until next time, stay humble, stay hungry, and always be a pro.