The Breakdown - 'Stocks Only Go Up' and Other Ignorable Investment Advice

Episode Date: October 2, 2020

When popular finance writer Morgan Housel asked followers on Twitter to share the commonly held investing beliefs they most disagreed with, the internet responded with vigor.  A thousand or so replies later, NLW ranks the top 10 investing ideas we should be questioning, including: Ignoring compounding interest in our 20s Buying homes rather than renting  The idea US Treasury bonds are risk-free Listen to hear the full list.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, October 1st. Welcome to the absolute best part of the year. I am so excited to be kicking off this month with a fun little episode about 10. popular investing beliefs that we should all be questioning. Now, there's no brief today, even though right as I was about to record, I saw some late-breaking news that the CFTC was going after BitMex, and there's a lot of stuff that we could talk about, but I wanted to kick off this month with a fun,

high-level show that was inspired by a tweet from Morgan Housel of the Collab Fund. Morgan became known for his incredible essays about money and business, and actually recently released a book called The Psychology of Money. He tweeted out yesterday, what's a popular investing belief you disagree with and has had almost a thousand responses? If there is one thing near and dear to Bitcoiners' hearts, it's the idea of questioning conventional wisdom. So with that, let's go through the top 10 answers that I saw with maybe a couple that I didn't about popular investing beliefs that we shouldn't necessarily take as they're given to us. I'm going to start with a number of personal finance ideas that came up in this thread, and the first, number 10 is the idea that home purchases

are a good investment. This one came from Gerald Volani, and remember, the prompt was, what's a popular investing belief you disagree with? And Gerald wrote that buying a home is better than renting. Rarely do they consider costs of landscaping, snow removal, remodels, roof repairs, etc., etc., etc., buying a home is a lifestyle choice. I wanted to get into this because I think it's one of the more interesting, long-term business or economic psychology questions that's shifting with millennials and might shift even farther with Gen Z. There are certainly the sort of cost-based arguments that Gerald was making, but there's also

other arguments against home purchases as the centerpiece of people's personal financial strategies. First is about where else that money could be going. And for some, the key thing here is that it's an investment that doesn't produce a cash flow. Really, the investment side of a personal home that you're going to live in is just the idea that home prices will continue to rise. In a world of sort of endless asset inflation like we've seen, maybe that's fine, but you still have to sell it to actually realize that gain.

And you're ultimately going to have to buy another house to live in or live somewhere else. So in that way, it's not kicking off cash like some other types of investment might. All that said, there are two shifts that need to happen to break this conventional wisdom down. The first is a long-term aspiration shift. The idea of home ownership as the centerpiece of an American dream obviously has huge, huge roots and origins. And although those have changed over time, they still do persist for a lot of people. A second shift, though, which I think is actually even more. enabling then an aspiration or a narrative shift is that we simply need better rental options for

houses that aren't in cities. We live, for example, two hours north of New York City, and there simply isn't a realistic rental market in the long term for the types of home options that we're interested in. Ultimately, however, that is simply a supply and a demand issue, and there's some evidence, especially in the post-COVID-19 world, that we're going to see a lot more rental options in the suburbs and in rural areas. Unfortunately, on the way to that being a mature market, you could see those rental companies actually also in the short term driving up home prices for buyers because they're scooping up all the available inventory, which is at historic lows.

Next up on our list of popular investing beliefs that we should be questioning is that passive index investing is a good way to build wealth. This one comes from our very own Nick Carter who tweeted that passively buying the index is a prudent and reliable way to build wealth over time. When someone asked Nick to elaborate, he said, passive has, quote, worked because of political incentives to advantage passive investing. More rotation into index buying the better it looks. But the fundamentals are the same. At some point, this will reverse and Americans will realize that the stock market doesn't always go up. Now, the thing that I'd add to Nick's argument is that we're starting to see the other side of

too much money going into passive and index investing. We may be discovering right now in real time the tipping points where serious problems get created because market movements become too synchronous and too automated. For more on the role of passive investing in accelerating and accentuating crises, go check out my interview with Corey Hofstein on this exact topic. Number eight on our list of investing conventional wisdoms to question is the idea of ignoring compound interest. Stephen Jolly wrote, you are young, go ahead and take a lot of risk. You have plenty of time to make it up if you fail. Compound interest relies on those years too. So Stephen is coming at the off-repeated idea that when you're young, it's the best time to take risk.

And his point is about compound interest taking advantage of those years as well. And I want to actually expand out his point to really focus on why we shouldn't ignore compound interest. I definitely believe that taking risks, especially entrepreneurial risk, career risk, field risk when you're young, makes a lot more sense than when you're older. However, I think there are a lot smarter ways to do it than a full stop. I'm doing one crazy thing over here and ignoring every other good piece of advice over there. The reality is if we're just talking about our 20s, for example, there are lots of really smart ways to take advantage of an extra 10 years of interest compounding, even as you're taking other types of risks simultaneously. So I think Stephen brings up a really,

really great point, but it doesn't have to be in all or nothing. All right, last on the personal finance side of these investing maxims that we might want to question is the idea of where discomfort fits in your investment strategy. Ben Carlson responds to Morgan's prompt by saying your portfolio should allow you to sleep at night. That's the conventional wisdom that he wants to question. He says, most good investing should be at least a little uncomfortable at times. I think this is a really great psychological threshold to try to keep on the line of this idea of having enough confidence that you're not nervous or anxious all the time, while also taking enough risk that you are just a little uncomfortable. That feels like a really great

place to be, at least from a psychological perspective. Now, of course, that's not financial advice at all, given that the psychological threshold that different people have might be so different. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the Crypto.com app today. In this crisis, many investors aim to keep and grow their digital assets. Others seek to maximize

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This comes from Barry Rittholz, who writes, markets hate uncertainty. This is the investing belief that he thinks is worth questioning. On the one hand, it's hard to disagree with the statement markets hate uncertainty in aggregate. For example, just see their response the other night to the idea that the election might not be decided on election day. That is not a state of affairs that markets like being in. On the other hand, and I think this is probably where Barry is trying to make his point, individually, moments of uncertainty, true uncertainty, are perhaps the only opportunity for true alpha in today's markets. A few months ago, as the markets were crashing and we were trying to make

sense of the COVID-19 market fallout, I was joined on the show by Emerson Sparts. A point that he made is that these moments of fundamental crisis and transition were the only moments in which there were no, to use his words, smartest guys in the room. When there's no smartest guys in the room, an individual investor, an individual firm, an individual strategy can perhaps be that smartest guy in the room. That happens very rarely and usually take some exogenous shock that no one saw coming, exactly like coronavirus, to actually create that opportunity. So I love this assertion because it's one that shows the complexity of this conventional wisdom. Yes, there are reasons to see and think that markets hate uncertainty, but those moments of uncertainty are also the only moments where people

really, really can make money differentiated from everyone else. Number five on our list, and this was immensely popular. It got a ton of likes and retweets, even in the context of this thread, came from Dennis Hong. He tweeted that he disagreed with the idea that investing in technology companies is not value investing. The heuristic that he's referring to is the idea that technology companies are somehow not the same type of value investing that people like Warren Buffett made famous.

Warren Buffett is famous himself, in part, for not liking those new technology companies. And in particular, it has to do with valuations of technology companies. The expected multiples that you get from a quote-unquote tech company can often be much higher than other types of companies.

and value investors have traditionally bristled from that. The issue, of course, is that this designation has a lot more to do with market wisdom than it does with actual factual reality. Basically, everything is a technology company, and that's especially true now in the internet era, but that's always been true. The history of energy shows great examples of this through and through. How can you not say that a shale company is, at least in some ways, a technology company? It's predicated on a new technological process. What's more in a world where everything is being automated and transformed,

where every industry is subject to change on the basis of technology, we need a better understanding of these terms. All right, now for the final four entries on our list of investing beliefs, we should be questioning. Let's go full macro. And let's start with that great big assertion that cash is trash. In the context of Morgan Household's thread, it was Douglas Bonaparte, the financial advisor who brought this up, but the phrase itself was made famous by Ray Dalio in January.

This concept is at the epicenter of one of the fiercest debates in macro. Is cash doomed to irrelevance and debasement because of the growth of the money supply? Are there deflationary forces that are totally countervailing? Is it all contextual with the rest of fiat? currencies, and will the US dollar suck liquidity from everything else, aka the milkshake theory? The crazy thing is that throughout this wild and unpredictable year, we've seen evidence for all sides of this argument, and it remains fundamentally unresolved, with people fiercely debating all sides. There's a reason that the breakdown keeps coming back to this question. It's because it's so

rare to see something with such different perspectives from people who might otherwise agree on lots of issues. So if any investing belief deserves to be continuously questioned and re-evaluated, it certainly is everything having to do with cash, and more broadly, the U.S. dollar. Speaking of the U.S. dollar, our number three entry on investing beliefs that should be challenged and questioned is the idea that U.S. treasuries are risk-free, and this comes from Justin Zovas on Morgan's thread. This one, I think, has to do with our confidence in the U.S.'s role in the world system, in the U.S. dollar's role in the world system more specifically. We've predicated that system, in part, on being able to sell an effectively unlimited number of these U.S.

treasuries, and the question is, if confidence shakes in the U.S. or the U.S. dollar, could this get more wonky? Right now, it's hard to argue that in terms of behavior, U.S. treasuries are anything other than one of the least risky assets in the world. However, the folks who question this conventional wisdom aren't looking at right now. They're looking at key trend lines such as U.S. indebtedness and a number of other factors and asking what it would take for the world to lose confidence. And if it did, what would then happen? Our penultimate entry on this list is one that I actually added. And I think that we should question, and this will not surprise you at all, the conventional wisdom, or as we might call it in the Bitcoin space, the fud, that Bitcoin is backed by nothing.

Now, I could have chosen a lot of different fuds to discuss here. And really what I'm saying is this is a shorthand for all of the different reasons that, quote unquote, traditional investors haven't gotten involved in Bitcoin. But the reason that I wanted to focus on the, quote, backed by nothing argument is that I think that it reveals a fundamentally different way of seeing the world than Bitcoiners have. Many folks can't get to the idea that something that is mathematically mandated and then enforced by a network of market participants could be as durable as something backed by guns. To me, however, this denies the centrality of networks over other types of human institutions in the future that we're moving into. The leaders of today's markets have grown

up in a context where the world was ruled by institutions, both public and private. However, the reality now, which is on display every day in the tension between the tech sector and other types of corporations, but moreover between tech and the public sector, has to do with the fact that networks are more powerful than institutions in many ways. Once you start to grok the idea that a network of loosely affiliated people could be as or more powerful than highly centralized institutions. It becomes clear that something like Bitcoin with a set of predetermined rules that are in fact enforced by that network is the exact opposite of being backed by nothing. Last up on this list and my number one for investing beliefs that we should always be questioning is, of course, the idea that stocks only

go up. This has been the meme at the epicenter of the rally and return since the March lows. It has been the rallying cry for Dave Portnoy and the Wall Street bets set and has so much loaded into it. The idea of the Fed put and that the Federal Reserve will do whatever it takes to keep assets up. The desire among people who are otherwise excluded from the system to be able to participate in this great big asset bubble that they recognize around them. The issue, of course, is, and I do go back to some of the conversation earlier about passive investing, is that stocks only go up until they don't. And when they don't in the system we've architected, the consequences can be massive. Anyways, guys, I thought it would be fun to kick off this new October session of the breakdown with a look through this

awesome thread. I'll link it in the show notes so you can go back and see everyone's answers if you want. If there are other conventional wisdoms that you think should be on this list, let me know on Twitter. But for now, guys, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.