Investing Like You Only Live Once
3 ways the pandemic has rewarded crazy and punished cautious
If you’ve been thinking;
After the pandemic, I really don’t want to go back to the office full time. Life is too short. I’ve got to make a major change – do something meaningful with my life ’ …
… you’re not alone.
According to Kevin Roose at the New York Times, a combination of corporate burn-out, stay-at-home-savings, easy stock market money, and stories about fortunes being made in NFTs, cryptocurrency, and meme stocks are making Millenials rethink their life choices.
As Kevin summarized so succinctly;
‘Individual YOLO decisions can be chalked up to many factors: cabin fever, low interest rates, the emergence of new get-rich-quick schemes like NFTs and meme stocks. But many seem related to a deeper, generational disillusionment, and a feeling that the economy is changing in ways that reward the crazy and punish the cautious.’
There’s no crime in rethinking life choices — priorities change as we mature and experience new things.
The problem lies in using get-rich-quick strategies to achieve those new lifestyle goals. It’s true, stock, crypto, and real estate markets rewarded crazy and punished cautious investment behavior again and again, throughout 2020. However, it’s worth remembering, market conditions can change quickly and get-rich-quick strategies usually end poorly for the vast majority of participants.
In this article, we will explore;
- How shocking life experiences can lead to a ‘you only live once’ mindset
- 3 ways the pandemic rewarded crazy and punish cautious in 2020
- Final thoughts
You Only Live Twice
I get it. I had my own brush with YOLO when I was 35. I have a life-long friend who called me up one day and complained about a sore hip. A few weeks later he was diagnosed with non-Hodgkin’s lymphoma. I lived in a different city and I decided I was too busy with work to fly over to see him. I didn’t hear from him for a year while he suffered rapidly growing tumors cracking his leg bones and excruciating tests and treatments to reverse the cancer.
Thank Buddha, he survived. It completely changed the way he thought about life and hearing the details of his experience shook me to my core. He was lucky enough to have a chance at a second life and moved to the Philippines. I decided to leave a successful financial technology business I had built from scratch to start a completely new life in Japan. YOLO.
The pandemic is making everyone re-think life choices. Almost everyone I talk to has expressed interest in continuing to work from home at least a couple of days a week because they enjoy spending extra time with family. Lots of people are trying to figure out how to increase their savings or increase their money-making ability — not to buy a bigger house or a new car, but in order to work less, or travel more, or to create a situation where they can take lower-paying work that they really love.
I had my YOLO moment right around 2008. With the world economy gripped in the depths of the Great Recession, I was forced to plan my lifestyle changes carefully and implement the plan slowly. In 2021, everything looks a lot different. With housing, stock markets, and cryptocurrencies all simultaneously on fire, a lot of people are hoping they might be able to shortcut their own lifestyle change plans.
A few lucky people might actually achieve their goals. But if market conditions suddenly change and you’re on the wrong side of a crazy bet, your lifestyle change plans could be derailed for many, many years. Get-rich-quick strategies usually end poorly for the vast majority of participants.
3 ways the pandemic rewarded crazy and punish cautious in 2020
1. Real estate prices
By now everyone knows house prices are on the rise but it might not be clear why. According to The Economist, many real estate experts think the pandemic and resulting economic shutdowns are causing people to move out of smaller apartments in the city to larger homes farther away from work.
Other experts have theorized that with mortgage rates at historic lows, renters are becoming first-time home buyers and homeowners are taking advantage of low mortgage rates to free up cash, upgrade their existing home, or purchase a new home.
All of these theories are at least partly true. For example, we know revenues for Home Depot rose by 20% last year. However, a quick search on Google Trends indicates searches for ‘mortgage rates’ spiked in March of 2020 but very quickly fell back and returned to ‘normal’ search volume by September of 2020. This data suggests there must have been significant interest in property buying early in the pandemic but it can’t be the whole reason for the continued and relentless uptick in home prices throughout North America and Europe.
With interest rates so low, pension funds have turned to buying real estate with all-cash deals in an attempt to increase returns for the fund. Combined with virtually no distressed home sales due to the continued moratorium on foreclosures, home buyers are being pushed into crazy home buying strategies. To compete with all-cash home buyers, some home buyers have resorted to skipping inspections and appraisals and bidding far over the asking price in order to ‘win’ a bidding war.
More cautious home buyers might be thinking;
‘It’s crazy to skip an inspection or bid over the asking price.’
However, the strategy has worked out pretty well so far – particularly for those who got into the real estate market early last year. In fact, housing prices haven’t increased this fast since 2005 – right before the last housing crisis.
However, it’s worth noting, millions of households are currently far behind in rent payments. Business Insider estimates approximately 20 million Americans or around 1 in 5 renters are behind in rent payments. Unfortunately for these families, Reuters just reported today;
A federal judge on Wednesday threw out the U.S. Centers for Disease Control and Prevention’s nationwide moratorium on evictions but agreed to put a temporary hold on her ruling as the government seeks to reverse the decision on appeal. — Reuters
It’s hard to be sitting on the sidelines of a rapidly rising real estate market when everyone seems to be making so much money. However, the real estate market can’t rise forever. If interest rates suddenly rise or when the foreclosure moratorium ends, even a handful of distressed sales in a neighborhood could cause house prices to suddenly start spiraling lower.
If you’re hoping continuing increases in home prices is the path to a new lifestyle, please consider — those bidding far above asking prices today or purchasing homes that require unexpected repairs because an inspection was skipped, could very quickly end up owning a home that’s way underwater. If so, it could take a decade or more for these homeowners to see home prices rise back to the prices they paid in 2021.
Remember – get-rich-quick strategies usually end poorly for the vast majority of participants.
2. Cryptocurrency prices and NFTs
YouTube influencers like GaryVee (who admits he hadn’t even heard of NFTs (non-fungible tokens a year ago), are suddenly big supporters. But even Gary admits there is a high likely hood of the market for NFTs crashing in the near future.
Cryptocurrencies like Bitcoin, Etherium, and Dogecoin have been on spectacular runs. Huge influencers like Elon Musk have added fuel to the fire when it was announced Tesla had purchased around $15 billion of Bitcoin earlier this year.
Investors who invested early have made a lot of money. If you had the guts to buy when Bitcoin fell to $4000 early in 2020, you’re laughing now. Investing crazy amounts of money in 2020 was rewarded handsomely. However, if investors are thinking of pouring in a lot more money at current prices with the hope it will turn them into overnight millionaires, I would suggest caution. There are a lot of reasons why crypto did so well in 2020 but there might actually be more arguments against crypto in 2021.
Inflation
Many Bitcoin supporters refer to crypto as the new hedge against inflation. Could be, after all, gold — the traditional hedge against inflation — has fallen considerably from its peak of around $2100 in August of 2020. However, the Federal Reserve says we shouldn’t worry about persistent inflation. This probably explains why gold prices have dropped so much. If persistent inflation doesn’t take hold, it stands to reason there could be downward pressure on cryptocurrency prices.
Cryptocurrency can’t be devalued
Linked to the inflation argument mentioned above, governments cannot devalue a cryptocurrency they don’t directly control. I agree — and that’s the problem. Governments around the world are looking seriously at introducing their own digital currencies to exert control over their own financial systems.
This makes a lot of sense for many reasons, including data tracking, efficiently collecting taxes, and so on. A number of large economies moving toward developing their own digital currencies should give decentralized cryptocurrency investors pause. Many countries have already considered or outright banned cryptocurrencies like Bitcoin. A move toward more Central Bank digital currencies could accelerate this process.
If you think that sounds hyperbolic, consider for a moment how the US “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” from 1933 to 1974. — Wikipedia.
By May 1, 1933, everyone in the US was required by law to deliver all gold and silver (other than jewelry and a small number of gold coins) at a set price that the government decided. Those refusing to deliver gold and silver bullion of course could hide it at home but faced incredibly large fines and up to 10 years in jail if they were found out. If you think governments can’t or won’t ban the trading of decentralized cryptocurrencies, think again. They can and they might.
Having said all that, could Bitcoin climb higher from here? Sure, anything’s possible. However, with the incredible run we saw in 2020 and the wild rise and fall in cryptocurrency prices we observed in 2017–2018, investors might be well served to be extremely cautious in new purchases going forward. If you’re hoping Bitcoin is your one-way ticket to early retirement, you would do well to remember that if cryptocurrency prices suddenly collapse, it could take many years to get your money back.
Remember – get-rich-quick strategies usually end poorly for the vast majority of participants.
3. Speculative and MEME stocks
Storied and MEME stocks were also incredible investment vehicles in 2020. Green energy, EVs, pandemic-related stocks all took off to astronomical heights during the height of the pandemic. However, after only the first quarter of 2021, nearly all are all down significantly from their all-time highs, late last year.
Mega-cap Chinese tech stocks have taken a little hit due to changing CCP policies concerning monopolies, yet US mega-cap stocks continue to remain resilient. Its possible investors are decreasing risk by moving out of MEME and storied stocks and into mega-cap technology names like Amazon, Microsoft, Facebook, and Netflix.
However, again investors should be exercising caution. These mega-cap names remain at very high valuations. Microsoft’s PE ratio for example remains well over 30 — perhaps 33% higher than its long-term average PE ratio. These valuations could climb significantly higher if the purchasing that made them so successful during the lockdowns doesn’t continue as economies begin returning to normal.
PE ratio analysis for stocks like Amazon is difficult because of big earnings surprises to both the upside and the downside. High growth companies like Amazon don’t pay dividends and don’t really pay much attention to analyst estimates because of how much effort they put into reinvesting into growth.
It is therefore possible these stocks may be significantly mispriced to the upside. Any slip in earnings, increase in interest rates, or even the Federal Reserve signaling to taper their QE program could send investors rushing for the exits. Even solidly earning mega-cap tech stocks could correct to significantly lower on any bad news.
Remember – get-rich-quick strategies usually end poorly for the vast majority of participants.
Final thoughts
“Ageism — The last acceptable predudice in America” — Bill Maher
The most speculative and highest-flying MEME and storied stocks in 2020 have already been beaten down significantly. Yet barring some black swan event, real estate, crypto, and the general stock market could remain pretty resilient in 2021— at least until the threat of sustained inflation forces the Federal Reserve to take action.
First, it’s important to understand the likelihood of hyperinflation in a developed economy is very low. Hyperinflation really requires a level of incompetence that we are simply not going to see. However, we don’t need hyperinflation for the broader stock market to correct. We simply need Federal Reserve tightening to slow down inflation — and Federal Reserve tightening is not a matter of if … it’s a matter of when.
It’s more important to think about when the Central Banks decide to tighten monetary policy. Tighten too soon and the recovery could stall. Tighten too late and the subsequent stock, real estate, and crypto correction could be significantly magnified.
Things we should be keeping our eye on;
- The Bank of Canada started tightening monetary policy last week.
- It looks like New Zealand and Australia could start tightening monetary policy soon.
- Treasury Secretary Janet Yellen says rates may have to rise somewhat to keep the economy from overheating.
- Warren Buffett says Berkshire Hathaway is seeing ‘very substantial inflation’ and raising prices.
2020 rewarded crazy and punished cautious but nothing lasts forever. I read the comments sections of YouTube videos and Reddit posts. I’m aware older, more cautious investors like Warren Buffett are currently out of favor with younger investors looking to make higher returns in the post-pandemic recovery.
However, if you take only one thing away from this article, please remember this — older financial experts like Warren Buffett and Janet Yellen didn’t become wealthy by chasing get-rich-quick strategies. They became wealthy by being smart and staying cautious.
Stay calm, stay vigilant, diversify, rebalance.
