As I am writing this, bitcoin is currently trading just over $37,000 USD, up nearly 950% since the pandemic began in March. Tesla is worth $781 billion, making the company MORE valuable than the world’s nine largest automakers combined, despite selling 53.5 million fewer cars globally (let that sink in). The only thing that I think may have increased at a faster rate than both Tesla and Bitcoin might be the inquiries I’m receiving about whether people should be investing in them. This piece is not meant to dissuade you from investing in Tesla or Bitcoin, but rather I’m here to tell you if you truly want to grow your wealth over time, you better get comfortable watching others get rich.
When these questions arise with clients, they seem to always stem from conversations they’ve had with a colleague, neighbour, or family and friends. Today there’s Instagram, Facebook, Twitter, Snapchat and TikTok to let you know of the 14-year-old Robinhood trader that went from rags to riches. Psychologically humans seem to struggle when we’re watching others make what we believe are large amounts of money for no effort. FOMO sets in and the inner voice in your head starts asking things like “if they made 1000%, what if I could too?” or “What if I could become a millionaire off bitcoin? I’d be so much better off!” Throw in some online article suggesting that one Bitcoin is going to be worth $500,000, and suddenly large amounts of people with little knowledge want in. Quick tip - If you have no clue what someone means when they say things like discounted cash flow, monetary/fiscal policy, return on invested capital, free cash flow, this is a clear sign you should either be hiring someone you trust or looking for a completely passive approach to investing.
What often makes the hot stocks of the day so alluring is the fact that there seems to always be some grain of truth in the original belief of why everyone is investing to begin with. For example, in the 90s, the belief was that “the internet was going to change the world.” Today you could swap this line with “Tesla is going to change the automotive industry” or “Bitcoin is going to change the way we transact and issue money.”
The internet did in fact change the world, very drastically. But not without a lot of money lost along the way from investors blindly following the herd (or the faith in their neighbour’s investment tip). I think most of us can agree that Tesla has already changed the automotive industry with all automakers pouring billions of dollars to gain market share in the fast-growing electric vehicle market. Bitcoin is already changing our monetary system with several central banks looking to release their own digital currencies. Neither of the above facts means that either Tesla or Bitcoin are good investments today.
What’s happening is that people are buying these investments because they’ve recently gone up, A LOT. When this happens, they go up more, which many take as a sign that their original thesis was right. In these cases, they may even buy more sending prices even higher, which fuels the overly optimistc outlook even further. But buying an investment just because others are buying or because it’s gone up in value is never a reason to own any stock or asset. This type of price appreciation is exactly how asset bubbles form. It’s during the times when EVERYONE is buying, that you should be the most cautious.
You’ve likely heard the famous Buffett quote, “Be fearful when others are greedy, and greedy when others are fearful.” In the investment world, greed comes in different forms. It doesn’t have to look like Bernie Madoff and his Ponzi scheme, or the mortgage brokers in the movie The Big Short. Greed is also the belief you can just show up with an investment tip and think you’re going to make 10 times your money with no actual thought involved.
I get it, you’re 8% average annual returns don’t make you feel like you’re getting any richer, especially since investment returns come in lumps, and compounding takes time. The 1000% rise in Tesla this past year sounds much more appealing. But when you chase someone else’s past performance, you risk exposing yourself to major investment mistakes. I recently wrote a piece about investment mistakes and the drag it can cause on your long-term returns and how the better way to get wealthy is to slowly but surely compound your wealth over time. (Why You Should Stop Trying to Hit Investment Home Runs)
What’s happening today is nothing new. It’s been studied throughout history. From the Tulip Mania during the 1600s, the crash in 1929 that preceded the great depression, the dotcom bubble of the late 90s, and most recently the 2008 financial crisis caused by ballooning housing prices and excessive leverage. Different assets, but the same overly optimistic behaviours are seen in each case. Following the herd means more risk, lower returns, and a much higher probability of catastrophic mistakes. For every Bitcoin millionaire, there are going to be thousands that have lost their shirts. History just won’t tell you their names.
I may be wrong on both Tesla and Bitcoin, but that does not bother me. There will be plenty of investment opportunities with similar upside potential but with a lot less downside risk. The best strategy for everyday investors is to focus on developing a disciplined investment process, either with an advisor you trust or taking a passive approach with investments like ETFs. The amount you contribute and the time those contributions are invested is what’s going to make you wealthy. During that time there will be several trends that seemingly take individuals from rags to riches. I am here to tell you if you truly want to grow your wealth over time, you better get comfortable watching others get rich. Otherwise, you’re likely to end up as another investment bubble statistic.
- Brandt Butt, Investment Advisor, CIM®
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.