Hit It Down The Middle Of The Fairway

Dec 11, 2020 | Financial Planning, Investing, Retirement

IPOs, the next hot stock, and doom and gloom. These are all things that can lead to not achieving your financial goals. Karl explains how to prevent common errors with your portfolio.

Yeah. Good morning, everybody. Welcome to the show. Thanks for joining me here on the podcast. Just a reminder. This show is brought to you by Covenant: Lifestyle, Legacy, Philanthropy, and Covenant is a registered investment advisory firm. If you’d like to give us a call, (210) 526-0057. Our website, Creatingricherlives.com. Creatingricherlives.com. If you go on there, if you want all the blogs, the podcast, TV interviews, radio interviews, some of the reports we put out, all of that information is under Free Resources right at the top. You can see all of it. You can even filter by categories. So, for example, if you want to know more about tax or investment, we had it broken down that way. Everything we do is in written form as well, including this podcast. So if you want the transcription, you want to read it, you can do that as opposed to listen to it. So it’s all right there on creatingricherlives.com.

All right. Well, let’s jump right in. We got a pretty ho-hum week. Really, the market seemed to be waiting for news of either fiscal stimulus, or more of that positive vaccine news, or the number of cases to start falling, or things to go well concerning Brexit. Remember Brexit a few years ago? Well, it’s rearing its ugly head again, and it had a little… gave the market a little pressure on Friday. But really, it seems like investors are pausing here, and I’m going to go over what did well and what didn’t right now.

So the Dow Jones was down about 0.5%, the S&P down about 1% this week. The Russell 2000 Small Companies continue to outperform, up 1% this week, but the volatility index, back over 23. Remember, it was flirting with going into the teens, but it was up about 13% this week, and some of your standouts are things like biotech, up about 4.5%, oil and gas. The energy sector up somewhere around 3% to 4% as well. Bonds were up this week as stocks retreated a little bit, and the things that got hit the worst were Bitcoin. Some of the cannabis stocks, semiconductor stocks, airline stocks, insurance companies, financials. Those were all down anywhere from 1.5% to 4% or so. But for the most part, it was just a weak week. I mean, we really didn’t have a lot of themes at all. Again, it was just everybody waiting for what can boost us and take us to another level.

The markets are stretched here a little bit. For some of you that watch the markets a little closer than others, you know that things, especially from a technical perspective, got a little stretched, and we’re certainly due for a pause. A lot of people didn’t know what would happen at the end of the year. Could we see a lot of selling going into the end of the year because people want to lock in capital gains prior to 2021 because they think may be capital gains may go up next year? The rates, let’s lock it in this year, but a lot of people don’t have capital gains because of what happened in March, and April, and May, so we didn’t really know. But also, there’s another theory that people wait until 2021 just to defer capital gains. So, for example, if they have some tech stocks that are up, maybe they sell those in January just to push the taxes back into another tax year, but it seems like we’re not really getting either. We’re not getting an overwhelming one way or the other. We’re simply getting a pause.

I mean, if you look at the Dow Jones, as soon as it peaked at around 30,000, it’s just been hovering there the last couple of weeks or so. If you look at things like the NASDAQ, they’ve been working their way higher, but you’re just not seeing any big movements. Probably, the consistent thing has been small companies, as I’ve been saying, and even international stocks. I mean, again, a lot of these things are playing catch up, but we’re not seeing a massive rotation. We’re just seeing the things that had been lagging doing well. That breath, which is the spreading out of what’s participating in the rally, is good. That’s what we want in a bull market, but things are stretched here. Again, you can tell markets are looking for a catalyst.

Now, one of the bright spots, of course, on the week was some of these IPOs. For those that don’t know, we have people all over the map in terms of educational, financial education levels on this podcast. An IPO is simply a private company that’s deciding to raise some money. So they’re going to sell some of their stock to the public. Maybe not all of it. Maybe a portion of it. But the founders and the various early investors, it’s their time to cash in. Now, they may have raised money privately, but this is their big splash. This is where they raise a lot of money, and the idea is to take some of that exchange of giving up ownership, they get the capital, and then they can expand and grow further.

Now, it’s the job of the underwriters and the investment bankers to say, “This is what we think you can get per share for the number of shares. This is what we think you can get.” Then, when it goes on the market, hopefully it trades around that area. Well, what we saw this week with DoorDash and Airbnb is that both of them went public about 80% to 100% higher than what the actual IPO price was. So did they not do their job? It didn’t look like it because, again, what’s happening is the companies are relying on those investment bankers to get them the best price. If there’s a much more demand in the open market and the price is up, they could have raised the price of the IPO, which is what the company gets. Remember if that goes public at, let’s just say, $50 per share, at the end of the day, it’s trading at $100 per share, that extra $50, the company didn’t get. The founders didn’t get.

Now, a lot of them still own a lot of stock, but you see, my point is that the public price, the IPO price, that’s the price that they get. So when you see these things run up afterwards, it doesn’t look like the investment bankers and underwriters really did that good of a job of pricing this. There’s so much demand. Remember, a lot of these companies have blackout periods or lockup periods where they can’t sell. The insiders can’t sell their stock a for a while. I don’t think these particular two companies who went public this week had that. So even though there may have been some insider selling, it was sopped up by a tremendous amount of demand, which brings me to my point about public companies and some of these IPOs.

I recall, back in the late ’90s, I would get calls from all types of people asking, “Can you get me into X, Y, Z IPO?” I don’t get those calls nowadays, but there’s still a frenzy out there and people wanting to get rich quick or, “This is the next big thing.” A lot of this is eerily similar to the late ’90s and the dot-com bubble, and I’ve mentioned that before. I’ve been on record here saying that I do believe we are in a tech bubble and there are certain pockets. Not just tech, primarily focused in tech, but there are some pockets of the stock market that are in a bubble. I don’t believe the entire market is in a bubble. It’s not dirt cheap, but it’s not in a bubble, but there are pockets that are. When I see people that came to me 10… Let’s call it 5 to 10 years ago and said, “I need you to do this because I tend to buy low-price stocks. I tend to try to get it on IPOs, the hottest fad, and I tend to lose a lot of money. I want you to do it.”

I’m seeing some of those people, all of a sudden, want those same things that got them into trouble the first go round. So I’m seeing that sort of behavior. That’s just boots on the ground me telling you what I’m observing. I’m seeing, obviously, people that are not in the industry and have other jobs bragging about day trading and bragging about, “I’m up X percent on this particular stock,” with no regard to what the actual portfolio should be based on their financial needs. It’s really just about, “I think this is a good company. I use their products. Therefore, I’m going to buy the stock,” without any regard to valuation.

These companies go in public. Some of them are at 30, 40, 50, 60, 70, 80 times their sales. I mean, think about that. For those of you that are business owners, you may get 5 to 10 times your profits when you go to sell the company. That’s typical. These companies are selling for 30, 40, 50 times their revenue. I mean, it’s amazing. So you as a business owner, those of you that are business owners, imagine getting that valuation for your company, right? It’s crazy. So why are these companies going public? Because they can get the hype valuations. Who’s buying them? Hopefully, not necessarily you on every one of these.

I’m not saying all IPOs are bad. I’m not saying these companies are bad, but be careful about this because… Back in 1999, it was about technology. High valuations. Well, this is the new technology era. So that’s the justification for these stock prices and a lot of IPOs. These companies are taking advantage of a hot market and demand. That’s what they are taking advantage of, and there’s layers of people who have essentially marked up the stock, right, as they’ve raised money in different valuations. When they go public, that’s the last in the line there. So I just want you to be very careful because I do see some of those characteristics of 1999 now.

Now, the good news is, as I’ve mentioned numerous times, there’s plenty of pockets of value in this market, and we’re starting to see those things come to fruition in the last… really, the last month and a half. Maybe the switch or the tipping point was when Pfizer announced their vaccine, right? Of course, we had two more companies after that, three consecutive Mondays where that was announced by different companies. That definitely propelled the reopening trade. It propelled a little bit of a rotation, but certainly, that’s when the market really had a lot more breadth. So the health of the market is great.

The main thing I want to get through to you today is really just staying out of the ditches, staying… and this is from an emotional standpoint. Okay? What I mean by that, I just describe the exuberant side of one group of people, right? Those are the people that are saying, “I want to buy this stock because I use their product,” and they have no concern for valuation at all. Very reminiscent of 1999. That’s one group of people. There’s the other group of people that are overly cautious on the stock market, always looking for the next shoe to drop, and some of these people might be in their 30s or 40s where they have multiple years left where they could take advantage of dips in the market. They’re overly cautious, and they’re overly pessimistic, and they worry about the election. Well, that passed, right? Then, they worry about, “Well, okay. Well, the market is high right now, right? The Dow is at 30,000.” So? I mean, I remember the Dow at 20,000. I remember the Dow at 10,000.

I watched a show from the early ’80s the other night, a sitcom where they were talking about, “Someday, the Dow will be at a thousand.” Right? Now, again, it actually went to a thousand in the ’60s, and then it went flat for about 20 years, but it was around a thousand in the early ’80s. Here we are at 30,000. Someday, it will be at 40,000. Someday, it will be at 50,000. Someday, it will be at 100,000. We don’t know when. I don’t know if it will be you participating in that, or your grandkids, or me. We don’t know that, but what I do know is over time, profits go up, and that leads to the market going up. People that worry about every little thing, it’s costing them money this year. It has cost them money multiple years where they get cautious. The market goes up, and then they say, “Well, okay. I was wrong about that, but now I’m right because the market is high. It’s at this level. Therefore, let’s wait.” Then, the market pulls back, and they still don’t want to do it.

So those are the two groups of people, right? The overly optimistic, “The market can never go down. We shouldn’t be prudent. We should have all our money in stocks. Get me the next IPO.” Right? “I have concentrated stock position.” That’s one group of people, and the other group of people are the overly pessimistic. What I’m encouraging you to do today while you’re drinking your cup of coffee is to take a balanced approach. Okay? Start with, what are you trying to do? If you want to break your money up into literal buckets, you can open several accounts. As far as I’m concerned, that’s fine to keep discipline.

Again, Covenant uses that lifestyle, legacy, philanthropy process, which is our proprietary way of thinking about how people use their money. If it’s for your lifestyle, it tends to be shorter-term needs or wants, right? It could be a trip. It could be a car. It could be college education. These are things that are going to be in the next few years. So that tends to have to be more conservative because you’re going to need it, and the last thing you want is to be selling stocks at the time you need that money. So those are lifestyle items.

The next layer may be legacy. I don’t need it for my lifetime, but maybe I want it for my kids or even grandkids, right? That can be more aggressive, longer-term money. Then, there’s the charitable side, which is the philanthropy side, and that can actually be multi-generation and perpetual money where the charity is benefiting from this account for years, and years, and years. That can be much more aggressive because it’s got time to recuperate losses and so forth. So that’s one way to think about it. If you want to think about breaking it up that way, so be it.

The other way, of course, is to look and say, “Okay. I need, based on my income, inflation, my taxes, various chunks of money I’m going to need over time for various goals. All of those things, when I look at all of that, I need to earn X return to do what I want to do. If it’s a reasonable number, okay. How do I achieve that number over the longterm?” Well, the first thing you have to do is what are the expectations for the various market things you’re investing in, right? Those are capital market assumptions, and we update ours… We’ll look at them each quarter.

We may not change them because that’s a fool’s game to be thinking you can predict from quarter to quarter, but the idea is, should we expect the stock market, going forward, to give us the same return that it did in March till now? Probably not because the markets run up, right? Or should we expect the same, forward-looking, returns maybe then than we did back in March of 2009 when it was at extremely low level? Probably not. So we have to temper our expectations, but is there a difference between foreign stocks and domestic stocks? What about fixed income? What are you expecting in high-yield bonds and treasuries? What are you expecting commodities to do and gold to do? Right?

You have to make some assumptions because that tells you what you need to invest in. For example, if you have low expectations in the fixed income market, in bonds going forward, well, then you’re going to have to do something other than bonds, which could mean that you have to own more stocks or more equities of your portfolio. That may be more uncomfortable though, right? So we have to take in consideration what we’re comfortable with to a certain extent and balance that with what we need. But you see, my point is now we’re getting down to building a portfolio based on facts and needs, not based on my emotions of what I want to invest in because I think it’s cool or my neighbor told me about it.

Again, I get emails, and texts, and phone calls every single week, and it’s… There’s usually something with the latest thing. It could be cryptocurrency from a couple years ago. It could be cryptocurrency from two weeks ago, right, because why? It’s going up now. Why didn’t anybody call me about it a year ago when it was way down? Because people want it… They want yesterday’s returns, right? I mean, we all want that. We want to go back and say, “I just bought it then,” and so I don’t get those calls until something has run up, right? I don’t get those, “What do you think about this particular stock that’s now public?” Well, there’s millions of other stocks that are public as well. Why don’t you look for one that is a good business at a reasonable price, or if you don’t want to use individual equities, why don’t you look for a good mutual fund or a good exchange-traded fund?

So I’m trying to, again, give you the framework for how to put together a portfolio versus, again, these extremes of IPOs, the hottest stock, and doom and gloom run for the hills, right? I can tell you. I have worked along with my colleagues at Covenant people of all different backgrounds, net worth. Some are more educated in the financial world than others, and I’ve worked with people with tens of millions of dollars. I can tell you that they stay out of the ditches. Okay? They don’t participate in these extremes. They may occasionally again say, “You know what? I’ve been watching the stock, and I want it because it’s going public, and I want a small piece of it.” That’s okay. I’m okay with you doing that, but they’ve already taken the… The bell curve is their core portfolio.

Again, people think, “Well, the rich must be doing something different.” They don’t. I’m telling you. I work with these people every day. What they do is they look at where they need to go, they look at their balance sheet, and they make sure their balance sheet is diversified, and it may be… Most of it may be more boring than you think. In fact, it’s interesting. I still do a lot of TV and radio, but I used to do a lot more national TV, oh, probably 10 years ago or so, and when I would… I used to go at the Chicago Mercantile Exchange and do these TV interviews, and so I was around all these people that you see all the time. If I told you their names, you’d go, “I know that person. I know that person.”

These people that come across on TV with these quick trades and say, “Hey, this looks good,” and two days later, saying, “Boy, I took profits on that,” they do that, but guess what? They have told me specifically that that is a tiny, tiny, tiny part of their actual portfolio. You know what else they’re doing with most of their money? ETFs and mutual funds. That’s what they’re doing, but that’s not what gets the eyeballs on the TV. Does it? It’s, “What’s the next hot stock? Who’s coming out with a cure for X, Y, Z? That’s the stock I want. Who’s got the next piece of technology that’s going to change the way we buy something? That’s what I want.”

Again, there are very few people in this world that have become multi-millionaires with one stock, but it has happened, right? I think we know who they are. Some of the biggest tech giants and moguls in the world made most of their money with one stock, but that’s rare. That’s not you or I, right? Now, if you have of your own business, as I mentioned earlier, and it’s a private business, you may have most of your net worth in that business. You may make most of your money in that business, and you may make… Eventually, when you exit and have that exit strategy, that may be where you get most of your money is in that company. After that, people tend to diversify. So I’m not saying that people can’t make money with one company, but when you control it and you work at it, it’s yours, it’s a little different than taking all your money and sticking it in one publicly-traded stock that you really have very little control over.

So again, the point of this is be in the middle here. For you golfers out there, try to keep it in the fairway, right? If you have to take a bogey in a hole, that’s okay. But when you lose your ball, you’re going to end up with a double or triple on that hole, right? So you don’t have to be the longest. Just keep it down in the middle of fairway. For you golfers, you ever golfed with somebody that was significantly older than you, and you go out there, and the young studs are out there gripping it, and ripping it, and spraying it all over the place? You golf with this older gentleman, older lady, and they just have the smoothest swing. It doesn’t go very far, and everybody outdrives them, but guess what? They’re in the middle of the fairway, and they end up having a pretty darn good day.

That’s what I want you to do with your portfolio. Don’t try to get rich quick by saying, “Let me take a third of my investment money and stick it in this stock because I know it’s the best stock ever.” It may be the best stock ever, but we can go back to the dot-com bubble and see those companies that are still in existence today. They were great companies, and they are great companies. You’re right about that, but you paid too much for them. You fast forward 15 to 20 years, and they’re at the same price now, if not lower than they were back then. That’s what we’re trying to avoid. So again, start with what you’re trying to do and build a portfolio from there. Guess what? If you do it right, you will have some free money from time to time to go invest in an IPO or go invest in something you say, “You know what? It has a tremendous upside, but I could lose all my money, and I’m okay with that because I can afford to lose it.” That’s the position you want to be in. Okay?

So that is my little soapbox for the day because I’m just observing. I’m observing some of this behavior now that’s starting to worry me a little bit because it’s feeling a little more like 1999 than it did a few months ago. But again, I will say it again. I think we are in a tech bubble. That doesn’t mean we don’t own any tech. We own tech. We love the software companies and have for most of 2020. That’s not to say that we don’t own tech. It’s just be very careful and know what you own and know what you’re paying for the various things that you own in your portfolio.

If you need help with your portfolio, and you want us to take a look at it, and do an analysis for you, and really do a look-through, reach out to us. (210) 526-0057. You can also go to creatingricherlives.com. There’s a place in there that says, “15-Minute Conversation.” It’s just to get a question answered, really, to see if you would like to meet. If there’s something that we can do for you, great. It’s really easy to do that. In fact, you can click on that. You can see my schedule and schedule your own meeting when you want it.

So the other thing I was going to mention, if you would also… We’re on Spotify, Google Podcasts. We’re on Apple Podcasts. We’re on Stitcher Radio, iHeartRadio. All the podcasting platforms I can think of for the most part, the major ones, we’re on there. Go give it a like. Go put a comment down there. We really want your feedback. We obviously want a bigger audience, want to share this information. If you know there’s a friend that could use this information, share the episode with them. If you don’t know how to do that, just send them to the website, creatingricherlives.com, and they can hear all the podcasts in the past or what have you.

We do different topics. We do a lot of different topics each and every week because sometimes the TV stations want a very quick two-minute, “Give us your top three of this or financial tips for that,” depending on the time of the year, what’s going on in the economy. We do that. Of course, this is more of a long form. So we have a lot of different ways that we’re trying to help people through education on this site and this podcast. So make sure you check out creatingricherlives.com. Hey, you guys. Have a great weekend and enjoy it. We will talk to you next weekend. Have a great day.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there could be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at creatingricherlives.com.


Schedule a Free Call

Receive a complimentary 15-minute financial evaluation with one of our wealth advisors.

Other Resources

Major Tax Changes In 2021?

Major Tax Changes In 2021?

John Eadie, CPA, CFA, CFP®, PFS, CLU®, CIMA, CKA® joins Karl Eggerss this week to discuss all the tax proposals floating around and how it might impact your investments and your estate.

read more