Gambling vs Science | Brandon Averill, Justin Dyer | AWM Insights #91

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Episode Summary

Fundamentals are the science of investing. The data and evidence prove that long-term investors that stay tax-conscious win over the long term. Smart diversification, managing emotions, avoiding media pumping fear and greed, and letting markets work for you is the proven way to invest for wealth.

Gambling and speculation will always be more “fun” for the risk-takers. It is also a good way to have poor returns, high taxes, and at worst, destroy your wealth. For every home run to be flaunted in the media there are hundreds of strike-outs.

Risk and reward are always related. There is no free lunch. There are no shortcuts to build wealth.

 
 
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Episode Highlights

  • (0:28) News: US Inflation at highest level since 1982. Unemployment dropped to lowest level since 1969

  • (1:56) Starbucks employees at a location in Buffalo voted to unionize.  

  • (3:19) SEC Chair, Gary Gensler took aim at SPACs and the risks they pose to investors. 

  • (4:20) The indexes are near all-time highs which is hiding the carnage of many speculative stocks. Many are down more than 50% from their highs.

  • (5:31) Are you a long-term investor or are you gambling to hit a home run.

  • (6:03) There are over 6,000 different cryptocurrencies. Picking the few winners is too risky to bet your financial future on.

  • (7:17) The fundamentals of an investment are the science and logic behind it. This drives a future value that should be your gain.

  • (7:55) Crypto makes huge claims that are a stretch to ever be realized.

  • (9:15) Crypto is only one use of the blockchain and it's possible to not even be the best use of the technology.

  • (10:20) You can apply the same logic picking crypto to stock picking.

  • (11:00) Over Allocating to too few companies or too few cryptos can unnecessarily risk your wealth.

  • (12:00) If you have your core priorities taken care of, then you can take speculative risk. You can take chances on low percentage opportunities with massive upsides. Because if you lose it all, your financial security is not in jeopardy.

  • (12:47) Markets have been said by some to be overvalued for the last decade. If you had acted on that information waiting your returns would be terrible.

  • (13:20) Valuation data doesn’t correlate with forward returns. If they did, it would be easy to outperform the market.

  • (14:20) Media never goes back to see if they were right with their predictions from the year before. Keep a look out for all these fortune tellers heading into the New Year.

  •   (15:30) Market valuations are high but that knowledge doesn’t help you with forward returns

  • (16:38) Speculating is fun when it comes to fantasy football, sports gambling, and casinos. Building generational wealth with science and data removes the uncertainty of hoping to get lucky.

  • (17:45) The media loves to rile up investors predicting gloom and doom. They also feed greed. This is their business model. Your advisor should cut through the noise they create and give you the clarity you deserve.

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Justin Dyer: LinkedIn
Brandon Averill:
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+ Read the Transcript

Brandon Averill (00:09):

Hey, everybody. Welcome back to AWM Insights. This is Brandon and Justin and as you know, we started this podcast for our clients so that way we could discuss the relevant topics in the public and private investment markets, while also talking about a broader investment lesson. And today we're going to dig into one of our favorites, the gambler versus the scientist, are we speculators or are we actually investors?

Justin Dyer (00:36):

Everyone's an investor.

Brandon Averill (00:37):

A rousing topic. Well, you'll never see me walk through a casino, I'm a sucker for the roulette table. Don't hold that against me. But before we jump into that, Justin, give us a little taste of what's going on in the markets.

Justin Dyer (00:53):

A couple big items coming up as we're recording this today, US inflation hitting the fastest annual pace since 1982. We've talked about the inflation topic quite a bit so there's some podcasts on that. I'd definitely recommend going back to those if you're curious. And if you have additional questions, let us know it's an interesting topic, it's obviously top of mind, we can certainly spend some more time in the future tackling that, but we don't want to beat a dead horse, so to speak. Your feedback's always welcome though.

Justin Dyer (01:23):

On the flip side though, so inflation incredibly high, on the flip side real positive data point, US unemployment claims which come out weekly are at their lowest level since 1969. There was a really low print of that statistic the week of Thanksgiving. Some people are saying, "Oh, that could be an anomaly because it's a shortened week and just how they collect the statistics," but it seems to be a true statistic. You're you're seeing it repeat and these unemployment claims remain incredibly low. Good for employment.

Justin Dyer (01:56):

Starbucks employees vote to unionize at a single shop in Buffalo, New York, I believe. That'll be an interesting potential trend to watch, see if that spreads throughout other Starbucks chains.

Justin Dyer (02:09):

And then something just teasing out this general topic, over the last couple weeks as we've had the new Omicron variant make headlines, the Fed changing their stance largely due to the increase in inflation, there's been an adjustment within the market. There's a great article in the Financial Times titled Sell Off in Market Silliness, and really if you look at the broad averages, not too much off record highs, we're pretty close to where we were three, four weeks ago, near highs for the years.

Justin Dyer (02:48):

But if you look under the hood a little bit, you're starting to see these more speculative, again, another teaser here, speculative assets and stocks really come off their highs. Anywhere from these main stocks, AMC GameStop, et cetera, or just the broader based unprofitable companies, SPACs, so on and so forth. Those more speculative type investments that did well earlier in the year have really, really come off and we'll touch on, risk and return are related so it's not all that unexpected.

Justin Dyer (03:19):

Then last item, the new SEC chair, Gary Gensler really took aim at the blank check companies or what are SPACs, Special Purpose Acquisition vehicles saying, "They provide ordinary investors with incomplete information and insufficient protection against conflicts of interest and fraud." It seems like the market understood that as well, just given how these particular vehicles have performed as of late, understanding that usually a company is going public in that route because it's a quicker route, not necessarily because they want to obfuscate their financials, but it's just quicker, it's bang, okay, understand the data after the fact almost more so than really sinking your teeth into the disclosures and making sure your financial statements are sound. Again, all related to this topic and we'll get into a little bit more of our take and how we think about it right now.

Brandon Averill (04:20):

Yeah, no, I think that was a great lead in Justin. I think when I look at this and you look broad base and you look at the indexes, that's the deceiving piece, is the indexes actually seem to be holding up as you mentioned. And we hear inflation's going crazy but employment's good so you start to look at these different things and try to make sense of what's actually going on. Sometimes you have to lift up the actual hood to see what's going on. And what it's revealing, like you said, is some big sell off in some of this real speculative type stuff. And it's intriguing when you see everybody loves the reason a lottery exists is because all of us want to win it at some point but what we all know intuitively is it's actually a tax on the poor. It's the people that need that extreme return or are attracted to that extreme return that take risk that like you said, risk and return are related.

Brandon Averill (05:19):

And if you're going to have this potential huge outcome, although it would be very small, you're going to have to risk the proportionate amount to expose yourself to that. I just think it's really fascinating to start to think about, what are you trying to do here? Are you trying to be a long-term investor, or are you trying to hit that home run and really just take advantage of some sort of market movement? We've seen not only the meme stocks and these no rhyme or reason stocks sell off, we've seen crypto, we've seen these other markets continue their volatility and sell off as well at times.

Brandon Averill (06:03):

And to be clear, we bang on crypto quite a bit on this podcast and I think one thing to set straight, because I've had this conversation quite a bit with clients lately is what we're not saying is that you're not going to potentially get lucky and pick the right one. And I think even when we talk about the crypto markets specifically, do we believe that one of these technologies is probably going to dominate the next decade or our future? Absolutely I think we can say that. But I had heard there's over 6,000 crypto currencies out there right now. What we always talk about is the speculation of which one is actually what's going to get you into trouble. We are not saying that it's not going to work, we actually believe very much it's going to work. What we believe very much like picking individual stocks is that we have no way of no way of knowing and that's because we're evidence based.

Justin Dyer (06:58):

Yeah. And just taking that crypto topic broadly speaking, I think it's a great one and probably one that has really been at the top of this more interesting market environment throughout the year, is take a step back and think about the fundamentals. It's really hard and we talk about fundamentals in our industry, it's a very common word. And essentially what that means is using how you set up or intro this podcast, the science behind it. Is there a fundamental model or a logical model that we can apply to an investment and extrapolate some future value down the road? That's where I would say investing falls within. Speculation is when you're taking the same type of approach, but there's a whole heck of assumptions, a whole hell of a lot of assumptions in there like, oh, Bitcoin's going to be the new gold, it's a digital gold, or Bitcoin's going to be the currency of the future. Those are huge claims that aren't really backed in strong fundamentals. Doesn't mean they're wrong, but because there's not a real true fundamental logic backing it up, it falls more in that speculative bucket.

Justin Dyer (08:12):

And then taking a even further step back, again, we're sticking on crypto because I think it is a great just topic to discuss this whole broader speculation versus investing, gambling versus science type thing, is crypto is incredibly interesting, but what's truly interesting within this broad crypto topic is blockchain. Blockchain itself in many respects doesn't require cryptocurrencies to have an appreciating value. Blockchain becomes an infrastructure in which all sorts of applications exist upon and benefit almost anyone. The whole concept is it's potentially conceptually removing intermediaries from many, many different industries, which remove frictions, which remove costs and which end up benefiting people. That is amazing.

Justin Dyer (09:14):

We're not there yet. And Brandon, you said that there's a number of different blockchain "technologies" or protocols and companies at the end of the day that are vying for this top spot. And it is, it's the wild west, there's 6,000 or some odd, what the statistic was you said, cryptocurrencies. I shouldn't say you can't possibly pick which one's actually going to come out on top. And I just read an article today that now stablecoins are starting to really take the day and it that makes logical sense to me because it's a great on ramp to this whole blockchain technology, but it's not nearly as volatile as the other cryptocurrencies that are out there and more popular right now. Anyway, hopefully that gave a little bit of context around speculation versus evidence within crypto specifically, but you can apply the same logic to equities and many investments.

Brandon Averill (10:16):

Yeah, certainly. And you brought up a great one, the relating is crypto the new gold? Well, to crypto investors hopefully it's not the new gold because the last 10 years, if you would've put what a hundred bucks into gold 10 years ago, you've got 95 now. That's probably not a very good run. I think that goes back obviously to individual investment risk. I think that's the other thing a lot of people are doing, they're speculating on a few of these stocks and it's like, shoot man, if you over-allocate your wealth to just a few companies, the pain on the downside if you get it wrong is pretty dramatic and it does go back to the fundamentals.

Brandon Averill (11:03):

I had a great example of this the other day. I took my 14 tubs of baseball cards to the card shop, to offload because Ann finally wanted them out of the house and even my beloved 1990 Frank Thomas Leaf that I thought for sure was worth a thousand bucks wasn't worth anything. But I look around and the card shops packed, people are buying these cards like crazy. At the end of the day it's a piece of cardboard and it was the same exact environment I was in as a kid yet people are pretending the frenzy isn't going to take over again.

Brandon Averill (11:46):

I just think, there's lots of different places we speculate. We're not even saying don't speculate. What we've talked a lot about on this podcast is just do it wisely, do it with a plan, make sure you've got your protective reserve taken care of, make sure that the rest of your priorities taken care of and then if you have excess wealth and we would argue we'd still want to help you build a multi-generational family. But if you want to take a piece of it and go speculate, you're not going to get an argument from us. It's just really having a good understanding of what it is and having the right expectations for it.

Brandon Averill (12:23):

And our bring it all back around is just, this is a really difficult thing to do to speculate on which company's going to outperform, which company's going to be around for the long haul and what that return's going to be. Shoot, it's tough to even pick what the entire market's going to do. We've seen that over the last decade. You've had year in and year out, somebody say, oh, markets are overvalued, they have to decline. And if you traded on all this different advice, God knows what your return would be.

Brandon Averill (13:00):

But when we go back to the evidence, what we know is that if we stay disciplined about being diversified and then allocating to those areas that have been shown up in the data to continually outperform, you're going to have three out of four years where markets are positive. One of those years is going to be negative. What's interesting is good luck trying to figure out which one.

Justin Dyer (13:24):

Don't know which one.

Brandon Averill (13:25):

None of the valuation data actually correlates to a predictive model. If that happened, we would all be rich, which goes against all fundamentals or all logic, really.

Justin Dyer (13:37):

Yeah. And well, a couple things I want to hit on. Well, first and foremost, given that it's the end of the year, turning the calendar to a new year, you're going to start seeing the Wall Street Journal, I think they have a round table I believe, or Barron's has a round table each year about market forecast for the year ahead or economic forecast for the year ahead. What unfortunately doesn't happen is very, very infrequently or almost never, at least, is at this time of year do we go back to the who said what January of 2021?

Brandon Averill (14:14):

Oh, come on, the smart guys at Goldman have to have got that.

Justin Dyer (14:17):

Oh no, actually if you go back and look at that, they were way off.

Brandon Averill (14:21):

But they're Goldman, they're golden.

Justin Dyer (14:23):

Anything they touch just turns to gold, right? No. In all jest, or jest aside, but it's true and again, it goes back to understanding the media and understanding all of this that we're saying. It's not to say speculation is bad or you shouldn't do it. Actually speculation is a good, healthy part function of the market, just not worth participating in for the management of long term multi-generational wealth. If so then it may be in very small proportions, and we've touched on that. But if you're going to do that, truly understand what you're doing and what you're potentially putting at risk, so on and so forth.

Justin Dyer (15:11):

And then on the valuation side, I want to just touch on that briefly as we wrap here is there's also two components. We can sit here and say markets are higher valued, are at a higher valuation than they were 10 years ago. No one would argue that. It's then taking that data point, if you will, and extrapolating what they're going to do going forward. And there's no solid way, there's no proven way of doing that. What we do know is that if you participate in the markets long-term, even from, arguably what is a higher valuation starting point today, you still have an expected rate of return. It still makes sense to participate in markets over the long-term from today. From five years ago, the same conversation were being had five years ago. We can't take what's going on today and extrapolate that forward, there's no proven data point, valuation performance or otherwise that is a good indicator of future outcomes.

Brandon Averill (16:28):

Yeah. I think it's a great place to wrap this up. And I think at the end of the day, speculation is really fun. We all play fantasy football, we all hit the casino from time-to-time, but it's putting it in the appropriate box and really having a good understanding for when you are speculating and when you're gambling. And then when you want to actually take the money that your family relies upon to provide for your priorities to accomplish your protective reserve, to help provide the lifestyle that you desire, the impact that you desire. That money shouldn't be anywhere near speculation, it should be in a very evidence based investment strategy that you're going to try to get sold. Like Justin mentioned, this is the time of year we're going to start seeing all the talking heads on CNBC predicting stuff and talking about what's going to happen.

Brandon Averill (17:24):

And I think it's just a good time to step back and remind yourself that the reason that those people are on TV talking and different things is to sell ads. That is their primary focus is to stir up all this emotion and get you all rattled and have you go take action. But what you really need to do is rely on your advisors, there's a big reason why you hire advisors and pay them is to help you get through emotional periods like that. But go back to the fundamentals, go back to having an evidence based portfolio, be diversified. All the logic, all the advice that everybody hears and we know works, and just make sure that you're in a really good spot. And then if you want to take your weekend trip and go gamble on a meme stock after you've accomplished all that, then certainly that's something you can get your kicks off of.

Brandon Averill (18:22):

But again, appreciate you guys. We ask to come give us feedback, we're looking for topics for next year we'd love to hit on, provide a lot of value, continue to provide a lot of value to everybody that's listening. Head over to awminsights.com, we got some resources there that you can download and we look forward to talking with you next week. Until next time, own your wealth, make an impact and always be a pro.