I see these headlines sometimes on sites like Bloomberg: Where to Invest $10,000 Right Now or It’s Like Investing in Amazon in 1997. The writers reel the suckers in with headlines like these and just feed them what they heard someone else say, there’s likely no conviction, no bold statements and a lot of doubt sprinkled in their “recommendations”.

You can try to make money gambling in the market, purchasing the next hot stock after reading a Reddit forum or shooting for the moon on some deep value contrarian bet. Yet time and time again, people get burned doing these things. I promised myself I wouldn’t opine in another post about Bitcoin and the speculative bubble that it is in, but once and a while I do agree with “Dr. Doom” economist Nouriel Roubini. He articulated his points on why Bitcoin is a speculative bubble and primed to burst. You can see one of his interviews where he hits all the most relevant points here.

Besides not being a currency, he doesn’t even consider it an asset. I tried to make the case that it could at least make sense for a small portion of your portfolio given the less than one to one correlation with other assets, but Dr. Roubini’s arguments are compelling. Here are a few of his most important points:

• It’s not decentralized – the global custody is run by a few firms and Coinbase has most of it. Even the miners are concentrated in places where they subsidize cheap energy like Russia, China and Belarus.
• Fraud – There is wash trading, spoofing and front running pushing up the price. An example is you and I both agree to buy and sell to each other for ever higher prices. These prices are published making it look as if the price is rising but this is just artificial activity. Since Bitcoin is not regulated there is tons of this. Some cryptocurrencies are controlled by insiders holding a large percentage of the entire market. These players can easily manipulate the price as they see fit and offload their coins to unsuspecting retail investors.
• It’s not scalable – Bitcoin can only handle 5 transactions per second while Visa can process 24,000. There isn’t going to be a day when Bitcoin can start to replace the fiat currency infrastructure in its current form.
• Not an Inflation Hedge – Going from $5,000 to $50,000 isn’t an inflation hedge, it’s a speculative bubble. In addition when the market fell 30%, Bitcoin fell 50%. Other crypto fell 60%. This means there is huge tail risk in addition to having no link to inflation.
• Environmental and Electricity Cost – I hear little to nothing being said of the cost to both move and hold Bitcoin, only the cost to mine it. Transactions must be digitally confirmed and added to the ledger but this uses power which is now equivalent to the power usage of Argentina. This is a cost not being taken into account by many as well as the fact that it’s contributing to pollution. Those countries mining Bitcoin: Russia, China and Belarus are all burning coal or oil to produce that energy.

Once you take these into account, it starts to become clearer that Bitcoin isn’t more than speculation. I keep hammering home this point because I am looking at investments for the next 20-30 years as my horizon, not the next 30 days. When you look at it that way, it changes your whole perspective.

The View From the Long Term

Unlike the gamblers, some of the money I personally manage is not for myself it’s for other people. Whether it is my son’s college fund or an inheritance left to my sister, it’s more than myself I have to think about. Some of these funds have to have a long term horizon. Asking what you want to invest in for the next 20-30 years is a completely different question from what is hot today, they have almost nothing to do with each other.

This is where hot investments like Tesla and Bitcoin fade away in the vastness of time. Bitcoin is likely the precursor to big changes in banking which few are paying attention to right now. If central banks develop their own digital currencies based off of the fiat currency they print, it could change the game for international capital flows. Imagine money that could be sent around the world instantly. There would have to be a whole new compliance infrastructure set up around this. You may even have the chance to open an account at the central bank via these digital coins which would threaten the viability of the entire commercial banking industry. It offers the possibility of a bank with no risk because the central bank can simply print more money, or create more digital currency out of thin air if they need it.

Innovation is not a straight line, it doesn’t go from Bitcoin straight to a cashless society and seamless international capital flows in a year or two. Just like PDA’s were the precursors to the iPhone, the tech titans of today can easily lose ground to the next innovator while still planting the seeds for that same innovation. Many of the newest investors don’t realize this because they haven’t had the chance to see this play out.

To get an idea of how things change, here are the 5 largest companies by market cap in the year 2000:

• GM
• Walmart
• Exxon Mobile
• Ford
• General Electric

By the year 2020, none of the companies were in the top 5 which were now:

• Saudi Aramco
• Microsoft
• Apple
• Amazon
• Alphabet (Google)

This came up when I spoke with a financial advisor on another matter today. He has been advising clients since the early 90’s so lived through the height of the dotcom boom and is seeing it repeat itself now. Companies with few assets and little revenues at that time were the equivalent of SPAC’s. Other companies were selling at 20-30 times revenue just like Tesla is today. Even the giants experienced the bubble. General Electric, perceived as a tech company at the time, was selling at a P/E of 50, not far off the 40 we see for Apple or Microsoft now and even below the valuation for Amazon.

It was also the same with fund managers at that time. He mentioned that Cathie Wood was the flavor of the moment and is the latest reincarnation of the fund manager yet all she was doing to beat the market was taking more risk. Doubling down on names like Tesla and getting it right (or lucky) isn’t really “beating the market” your risk adjusted return hasn’t changed, you just are taking more risk. This can be easily broken down by things like the Sharpe ratio, but no one is paying attention to risk when markets are climbing at the rate they are now.

He seemed resigned to cave to some of his clients who were adamant about investing in hot assets like crypto and SPAC’s. Sometimes resignation is just the curse of knowledge, knowing how things will shake out but having little control over it while it’s happening.

Expect the Unexpected

This is why index funds are so important for at least being the core of your portfolio. There will be new innovative companies that come out of nowhere, and some may disrupt the current giants. There may be industries that get completely upended as I mentioned could happen in banking, and markets shift. Banks and home builders were a contrarian value play in a devastated industry 13 years ago, cruise ship and airline stocks find themselves in the same position now. Yet the market moved on and the next hot industry or company usually does a good job of side swiping those that think they can beat the market over the long term.

Currency imbalances take time to play out too and may have their own super cycle similar to commodities. I worked in emerging markets during the last prolonged period of high commodity prices and dollar weakness. The hot stocks were in mining, oil and gas, these companies ended up seeing a lost decade after the crisis that may only now be waking up. In the US we have once again become the center of the investing world in terms of returns but this never lasts, the weakening dollar already has foreign stocks and commodities seeing strong returns this year which will likely continue.

The only way to plan for the next 20 years is to eat a piece of humble pie and admit you don’t know what will happen so it’s best to be hedged against every downside scenario. The US isn’t going anywhere, even if returns are weak for the next 10 years due to valuations in the US, it gives you more than enough time to build up a strong position for the pop that will later come. The years 2000-2010 are known as the lost decade for investing in stocks but in comparison to the rally of the past 10 years, does this not look like it was a great time to invest when you zoom out and look at the return of an 80/20 stocks to bonds portfolio from a 30 year perspective?

The mental trick for 20 or 30 year investing is to visualize the above chart. Whether it goes up and down over a few months or even a few years doesn’t matter. Investments will go in and out of style but measured risk taking with an eye to the potential downside will be rewarded. So avoid the noise, avoid the garbage like Bitcoin, Tesla and the hype that comes with them. After they are long gone, the wealthy long term investors will still be here and ready for the next boom which will appear just when everyone has given up. Buy those boring international funds and even the value ones. It’s right when things are the bleakest that they start to look up.

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