Market Timing? When to Get In or Out | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #58

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Episode Summary

Crypto, real estate and the public stock market continue to roar upward. 

  • Can it last forever?

  • Are we close to a bubble?

  • Should you think about getting out?

  • Or should you invest more?

Making the wrong decision will severely impact your returns and history shows it is extremely difficult to make up lost ground.

Listen in as we discuss what the professional investors know and how to avoid being the fool.

 
 

Episode Highlights

  • (05:38) Revisiting March 2020 Correction

  • (08:50) The True Value of An Advisor

  • (12:52) How To Know If You Are Gambling or Investing

  • (13:49) The Greater Fool Theory

  • (17:17) Out Performance in Private Markets

 
 

+ 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 Erik, Brandon and Justin. And at AWM we're a community of athletes, founders and investors, all on a journey to try and be the best in the world at what we do. And we believe you deserve the same when it comes to your wealth. So each week we aim to cut through the noise of what we think Wall Street is selling you to actually bring you the knowledge, the skills and the access that you need to invest like a pro. Today we're tackling the topic of, when should you get in and out of the market? We see this so much, when markets start to arrive at all-time highs, that there are two camps shouting from the rooftop. The first is this mania cannot continue. It has to be a bubble, so you better figure out when you should get out of the market. And then equally, there's the second camp, that says, "You know what? It's going to the moon so I better double down." And what we're going to discuss, what we're going to expose is that we actually think both of these are amateur moves and we're going to detail the evidence behind that and equip you with what a pro will do. But before we do that, let's recap what is going on in the markets. We continue to see record highs across the markets. We also started to see record highs, once again, in the crypto space. We saw Bitcoin get as high as 64,000, really riding the back of the most popular kind of wide-covered, direct listing by Coinbase last week. So for those not familiar, Coinbase is an online marketplace for digital currencies. It was started in 2012, but the stock opened at $381, actually peeked up to around 430 before settling the day at around 328 bucks. So we're going to talk about, even when you try to time the market on the first day of the IPO, you can be a winner, but you can also be a big loser regardless of where it starts and stops during that day. In other crypto news, the country of Turkey's Central Bank actually is putting a ban on the use of cryptocurrency in the country, starting at the end of the month. So we're starting to see some regulatory stuff come across from countries. On the IPO front, we saw Nikola actually dropping their shares down to around 10 bucks, erasing all of the gains from their Initial Public Offering. Once again, the evidence showing up around what happens in the IPO market. And then on a global front, we actually are seeing the Chinese economy growing around 18.3% in the first quarter. And then some other great news, that first-time claims for unemployment continues to drop. It's a pandemic era low. So even within the market news, we've got some all-time high stuff. We've got some interest of maybe some headwinds against the continuing march forward, that really comes right into this topic of, should we try to outguess the market? Do we know when to get in and out of the market?

Justin Dyer (03:28): I'll jump in and just say it's a fascinating time right now. You have these incredible economic statistics. The economy, the global economy, the U.S. Economy specifically, is seemingly firing on all cylinders as we come out of this pandemic shutdown. Combine that with stock markets at all-time highs and really head-scratching speculative stuff going on, even just within the stock market, the equity market. We can go back to GameStop and what you see with the SPAC IPO's and Nikola. There's a whole host of things here. Combine that with what's going on in the crypto space where Dogecoin has doubled in the last week. There literally is no use case for that specific coin. So there's a lot of stuff out there on the table, I guess, to put it in summary. And how do we make heads or tails of it? I would just, I guess, start with my thoughts on it and say, hey, look, we are long-term investors first and foremost. We talk a ton about minimizing taxes. So how do we combine those two things with the current marketplace? Well, first of all, if you're going to say, "Hey, the market is way over overbought right now. It's at excessive valuations. I'm going to sell out." Guess what? You're also going to pay a ton of taxes to do that. And you're going to prevent yourself from compounding gains long-term. Conversely to that is if you think the market's going to continue to go and double down, I mean, it could. It could take a turn for the worst tomorrow. I mean, we... Let's rewind, rather, back to March of last year, where all of a sudden the pandemic had hit us and we had a 30 plus percent correction in the market. You just don't know what's going to happen, when it's going to happen. Even if the facts today make you feel a certain way, those circumstances could continue for such a long time going forward.

Brandon Averill (05:38): I think it's a really interesting point. I got really excited, Erik, when you had that title. I thought you guys were going to share your crystal ball with me, because mine's been broken for a while. But I thought if we had that crystal ball, maybe we could really turn some people here. But in all seriousness, I think, I saw stats earlier this week put out by Dimensional. They pointed out that, go back a year ago, March 2020, obviously we went through the COVID correction, but the S&P was down nearly 20%. The entire world was scrambling to a lockdown. Totally rational for it to go through your head, hey, you know what? The world's falling apart. I think maybe now is time to take the money off the table. Thankfully, not a lot of clients on our side do this, but definitely have heard the stories of people doing this. A lot of experts were writing articles, telling us, "Over the next year we're going to see this implosion. Get your money out." I actually, I don't even remember reading anybody saying, "Hey, the S&P is going to be up 56% over the next 12 months." But, that's exactly what happened. So to sit there and go with all those headwinds. That theoretically should have been the easiest time to time the market. But I think we've talked about it before. You've got to get a couple decisions right. Number one, you got to nail that decision, which good luck. I don't know anybody that... I don't even know how you could have benefited in that scenario. But then you also have to know when to get back in. So let's say you sold out of the market at that time. Are you sitting there? Did you get back in? Or are you sitting there right now? It's gone up 56%. Should I get back in? Is it overinflated? All these decisions have to be going through your head. So we know that if you stayed in the market, time in the market, that's actually the benefit. So if you did that, it might be time for a victory lap right now. But, certainly, trying to outguess that market, I haven't met anybody that can do it.

Justin Dyer (07:49): Well, and you bring up a really important point, Brandon. We're sitting here talking about this stuff at market highs. It feels maybe a little bit uncomfortable to some. If you don't have a plan, I would say it probably feels uncomfortable to you. And that's an important point to underscore. Maybe we'll circle back to that. But in March of last year, I have a text message with a good buddy of mine basically saying, "Oh no, the market's just going to continue to tank here. I sold out a week ago and I'm not getting back in, because it's going to go down another 20%. The entire market's going to change," and blah, blah, blah. The same emotions and things we're talking about right now, where maybe it seems potentially a little bit clearer, flip that on its head, you're going to experience the exact same thing in reverse at the bottom of the market or when the market is crashing. And guess what? It feels even worse at those points in time. And it's even more difficult to make decisions if you don't have a plan going into something like that.

Brandon Averill (08:50): I think that's an important point too, to remember the value of your advisor is not figuring out when to get in and when to get out. The value of your advisor is the architecture of your plan and then the implementation of that plan. Making sure that it is tax efficient. Making sure that during times of volatility, we get through that COVID correction. We've talked about it. Your advisor's doing tax loss harvesting. I mean, that's where we often see the misses. So when you're evaluating the success, your success, as an individual or as a family, how your wealth grew, it has far less to do with trying to time when I'm going to get in and when I'm going to go out and really it's going back to the architecture of that overall plan. If that plan includes crisises as a range of possible outcomes, that's a really good plan. It's never too late to create one. If you haven't created one, yet we implore you go do this. But if this last crisis wasn't in your plan, then I think you need to start rethinking that plan. You need to think about thoughtful planning, not for this new normal, as a lot of people like to, but what's the next normal? This isn't the last crisis we're going to go through. There are going to be crisises that we never even could dream up that are going to happen. So when you're thinking about the thoughtful architecture of your plan, how your advisor helps you put that together is the true value. Justin Dyer (10:22): Totally. And thoughtful is not, hey, we're going to scrutinize what sectors have underperformed and we're going to invest in that. That's a plan where you're just chasing your tail from crisis to crisis. What worked in the past crisis is not going to work in the next crisis, in all likelihood.

Erik Averill (10:43): In listening to you guys talk about the importance of the plan and what expertise is in architecture and structure here is, I think the other thing is to recognize that there's so much emotion at play. It's like anything else. You start getting going way too fast, you're going to make mistakes. If you let emotion drive things... I literally got a text message this morning from one of our young clients that says, "I just don't want to miss out, so I feel like I need to buy now." Or the single company risk, this is as a professional, as a pro, if you think about in your own craft, so whether it's a professional athlete or it's the doctor, you might see something happen in a very short window. It doesn't mean that that's the best path forward. Somebody got lucky. Or even if we just have the conversation around Coinbase right now. What we know is that you take a step back, that people who really were wealthy, who became wealthy on Wednesday, were those that had an allocation when it was in the private market. Even in the private markets, it's not all created equal, because there's something called dilution. I think these are the type of conversations that you start to go, "We're not telling you to not invest at times in single companies. We're just telling you, you better be compensated for the risk that you're taking." It is very foolish to buy single companies on the public stock exchange, because the juice isn't worth the squeeze on that. Or in the crypto markets, when we're talking about this, it's really asking what am I investing in or am I trading/gambling? I think having some deeper conversation, I'd love to hear your guys' thoughts on of, where does it actually, what is the difference between taking a trading/gambling approach and investing? Because you can be doing both of these things in the public markets and they're two completely different approaches.

Brandon Averill (12:52): I mean, I would just say for me, it's a really simple distinction. While all investments have risk, many people that are out there, and you're talking about investing, and a lot of people think they're investing. All this craze around crypto that, "Oh, I'm going to invest in this." One of my favorites is like, "I'm going to invest in my home." No, that's not investing, folks. A lot of these people, that if you're thinking about investing, are actually gambling. The real simple distinction, at least in my view, is that if you're trying to time short-term market movements, whether that's in the stock market, the bond market, the NFT market, the crypto market, you're gambling. You're not investing, so let's strike that word from our list. If you're going and buying any of these cryptos, you're buying individual companies, that is not investing. It is gambling.

Justin Dyer (13:49): Totally. There's the hedge fund guy. His name's Mike Novogratz, I believe, if my memory serves me correct. He's a quote-unquote investor. And I think he is, legitimately. His track records prove that he is an investor. He is a big crypto fan. He literally came out, I think it was today when we were recording this, and said, "The crypto market is very reminiscent of a bubble," because of exactly what Brandon just alluded to, that there is plenty of data that shows people are just, it's a greater fool theory. They're buying something, because it's going up, because they think it's going to continue going up. There's no fundamental analysis into the coin, the stock, the blockchain technology, whatever you want to talk about, where you're making some sort of conclusion that this is an interesting technology and I think it can be grown, applied to some problem in the future, monetized, et cetera, et cetera, et cetera. If those things are missing from your evaluation and you're just buying into something because you don't want to miss out, because everything is going to the moon, yeah, you're gambling. Again, we do think there's some fascinating applications within blockchain, within maybe even NFTs. We highlighted a news story last week, this company Paxos, which is settling stock trade in a more efficient manner than it happens right now. That is value add. That is fascinating. That is using this inherent technology. The crypto space overall right now is the Wild West. It's not regulated. Anybody can get access to it. People don't understand it. I mean, it is truly, truly, truly a dangerous place. Could it continue to go up? Oh, yeah! There's no question. I'm not going to say it won't. I mean, again, it's this idea of greater fool theory, where it's a self-fulfilling cycle to a certain extent. But then you have big players, especially within some of these cryptos, that hold the vast majority. If they want to get out, if they're like, "Look, I need to cash in," guess what? There's not a lot of volume and they're probably going to impact the price and it could be this vicious cycle downward. When that will happen, if that will happen, who knows? When those types of factors and variables start to come into an equation, that is not investing. Investing is, hey, there's a valuation. There's fundamentals tied to this. We're creating value. We're improving lives. It happens over the longer term. There's a pretty big difference between those two things.

Brandon Averill (16:45): The one thing I'd be remiss to mention before you close us out, Erik is just we saw the greatest Ponzi scheme master of them all passed away this past week, Bernie Madoff. I don't know about you guys, but this all seems eerily similar to me. I wouldn't be surprised if a lot of these coins and this crypto craze turns into the next Bernie Madoff Ponzi scheme. So anyways it might be a stretch, but I certainly want to get it on record.

Erik Averill (17:17): I actually don't think it's a stretch. And for the audience, to be very clear, what Brandon is not saying is that all cryptocurrency is a Ponzi scheme. He is saying that when you have a situation of what let's call, a severe lack of education and understanding with a lack of transparency and regulation, it allows a bunch of charlatans and bad characters to enter into this. We saw this two years ago in the professional athlete market out here during spring training. There was these crypto traders that were fronting, went and got this huge house in Paradise Valley, actually partnered with some credible people and stole a bunch of money from professional athletes in the crypto space. We're not too far removed. So I think this is why you have to have a level of scrutiny. And that's true in the private markets in general. One of the reasons you have the opportunity for out-performance is because there is a lack of transparency, which means you better be invested with the right people. Full disclosure, it's easy to celebrate Coinbase as if everybody knew that was going to happen and it's this huge home run. But the truth is that is one of a thousand. It's very difficult. So what you should not also hear on this podcast is, "Oh, I should now go do venture," because here's the thing, does it fit in your plan? Then the other thing, not all venture is created equal. We had an opportunity. We were just up in the valley earlier this week, sat down with an individual who exited his own company for 600 million back in the day. And he said, "Erik and Brandon, I've been around, now as considered an ultra high net worth investor for 20 plus years and what I've realized is there's no get-rich-quick scheme." And the majority of all the stuff in the private markets is complete crap. The two and twenty, you are going to lose more money. He said, and we won't use his name because he goes, "You know what? I was a client of Morgan Stanley. I was a client of Goldman Sachs. I lost more money in their fees and their bad products that they sold me than I did of just having a globally diversified, tax-aware portfolio." Then on the venture side to be abundantly clear is all the data shows you better be invested with the top decile investors, because the best win over and over again. And so most of the time, if you are seeing a venture deal and it has not come through one of the top tier funds, it means everybody's passed over it and it's a loser and you should pass, too. So these are the things that we want to share with you as a community is sure, you might get lucky and get rich by gambling in Vegas or gambling with crypto, but we're saying there's a better way. There's a path to success that has been laid for generations and generations of what are the key principles to investing. And if you head over to awminsights.com, you can download the 10 Key Principles to Investing Like a Pro. I promise you, if you put these to work over the long-term, this is how you build generational wealth. So, as always, we love our time with you. We'd love to hear from you. Brandon offered, I think, the couple of times, send us in a question. We'd love to buy the next cup of coffee for you. We'll send out a gift card to you. But until next time, own your wealth, make an impact and always be a pro.

 
AWM InsightsAWM CapitalJustin Dyer, Erik Averill, Brandon Averill