😵 The Agony & Ecstasy of Investing

Chris Dunn, Nikki Dunn & Travis Devitt
October 11, 2023

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What’s on the Menu 🍴

War, inflation, and a disappearing middle class…

These are the unfortunate themes of 2023.

Yet somehow, markets are still holding up… for now.

Today we’re taking a look at how to digest what stocks are doing…

And explore bitcoin as a tool for freedom against war and repressive regimes.

Let’s roll:

Stocks Rebound, Leaving Bears Perplexed 🐻
The Agony & Ecstasy of Stock Picking 😵
Bitcoin's Rising Role During Crises & War 🛡️
Ditch the Side Hustle, Get Real Cash Flow 💸

Today’s newsletter is a 5 minute read.

Stocks Rebound, Leaving Bears Perplexed 🐻

We’ve felt the negative sentiment over the past few weeks as the S&P 500 has been selling off.

But, the fear and selling has quickly taken a surprising turn over the past 3 trading sessions.

We can’t say that this bounce wasn’t expected… it was.

We have written plenty about the confluence of forces around the $4,200 level in the S&P 500.

What is a bit unexpected is the STRENGTH of this bounce.

With geopolitical tensions at extremes, and a list of other risks, it doesn’t feel like a good time for the stock market to rally:

In the last 24 hours:
- Mortgage rates hit +8.09%
- Credit card interest rate hits record high
- Car loan interest rate hits highest since 2001
- Oil prices jump highest in 6 months
- China planning +$137 billion stimulus
- War continues on in Israel
But guess what?
Stocks are… twitter.com/i/web/status/1…
— Genevieve Roch-Decter, CFA (@GRDecter)
Oct 10, 2023

It’s worth noting that even bond yields have cooled off as people “flee to safety” in the asset class:

But, when investors flee to safety in bonds, they typically aren’t gorging on risk assets like stocks at the same time.

We essentially are trying to figure out who is right about the economy: the stock market or the bond market?

So, how do we make sense of all of this?

We have a unique environment that you almost can’t look at as a whole anymore. It’s quite fragmented.

The labor market is still strong.
Chinese stimulus could be beneficial for markets.
Bonds have been beat to lows and are actually looking like good buying opportunities as the Fed is expected to be near the end of their rate hike cycle.
Consumer debt as a percentage of disposable income is above pre-pandemic levels now.
GDP growth is expected to be 5.1% (which is shockingly good)

So, if we have growth expected in stocks for 2023 PLUS a bond market that looks buyable as rate hikes slow or end, we have a recipe for stocks and bonds to go up at the same time.

I think getting too comfortable on the bearish or bullish side may end up being too risky.

This is a market that calls for open-mindedness.

The Agony & Ecstasy of Stock Picking 😵

One of the big stories in the stock market this year is the relative strength of tech stocks, particularly the largest “mega” market cap companies in the Nasdaq-100 index.

That index is up 38% year-to-date while the Russell 2000 index of smaller cap companies is almost flat, with many individual stocks down significantly.

But how unusual is this really?

When we look at the base rates of individual stock performance over time, the data is fascinating, and has significant lessons for active investors.

JP Morgan put out an updated study in 2021 that showed a majority of stocks in the broad Russell 3000 index underperform the index as a whole.

In fact, just a small number of “mega-winners” drive the strong long term stock index returns:

In addition, this study shows us that over 40% of stocks not only underperform the index, but end up producing negative overall returns!

This study makes it clear why so many active investors underperform the stock indexes over longer time frames: to beat the index an investor has to avoid MANY terrible stocks.

The indexes themselves end up booting a lot of stocks out due to catastrophic losses (>70%) & bankruptcies, of which there are many:

The GOAT investor Warren Buffett himself has stressed the importance of avoiding catastrophic losses in stocks.

One way to do that is to avoid companies in distressed industries; another is to avoid companies with high levels of financial debt and declining revenues.

It’s also important to quickly recognize a loser and sell it, rather than bag-holding to total loss.

Beyond avoiding bad stocks, an investor also needs to identify & own at least a few of the “mega-winners” in order to outperform the indices as well.

We’re not saying that large mega cap tech stocks will be the driver of huge index returns forever, and at some point those stocks probably do become over-owned & overvalued.

But it IS clear that concentration of returns is not a new phenomenon.

So how do we find the future mega-winners?

We ask ourselves that every day and it’s why we spend so much time tracking rising trends, companies, and recent IPOs.

Some future mega-winners will come from stocks that are already doing well (momentum) and some will come from lesser known stocks.

We’ve experienced success with a barbell approach of owning recent winners (via ETF or individual stocks) while also picking a handful of potential future winners that we identify.

There is no perfect answer as markets constantly evolve, but try not to forget that stock returns are like wealth distribution: highly concentrated!

Bitcoin's Rising Role During Crises & War 🛡️

In an era marked by geopolitical turmoil and shaky fiscal policies, Bitcoin is emerging as a tool for financial freedom and stability.

Hedge fund titan Paul Tudor Jones recently highlighted the attractiveness of Bitcoin, especially when the U.S. is spiraling into an "untenable fiscal position."

Amid rising interest rates and escalating debt, Jones finds solace in Bitcoin and gold.

Why?

Because unlike traditional currencies, Bitcoin is decentralized.

It's immune to the whims of repressive regimes that manipulate currency to fund conflicts or seize assets.

This is not just theory; it's been put to the test.

During Russia's 2022 invasion of Ukraine, Bitcoin served as a financial lifeline when the local currency and banking systems were in disarray.
This decentralization also proved invaluable for refugees in Myanmar during the latest coup. With traditional banks inaccessible, Bitcoin offered a way to preserve and transfer wealth, all via a smartphone.

Jones's bullish stance on Bitcoin isn't new; he allocated 1%-2% of his assets to Bitcoin back in May 2020 and has since increased that to 5%.

Despite price volatility and regulatory challenges, the value proposition of Bitcoin remains strong. It serves as a hedge against the "vicious circle" of rising interest rates and debt levels that Jones warns about.

While Bitcoin can't resolve geopolitical crises, it offers a stable alternative in an unstable world.

It's more than a "safe-haven" asset; it's a symbol of financial freedom and resilience.

Ditch the Side Hustle, Get Real Cash Flow 💸

Society’s “hustle culture” encourages people to create side hustles to generate extra cash.

But let's cut the fluff—most side hustles are like that gym membership you never use.

Sounds good, but it's a one-way ticket to nowhere if you're not all in.

If you're side-hustling just to escape a job you loathe, you're setting yourself up for a double dose of misery.

Why?

Because a half-baked side hustle is like a leaky lifeboat—you'll sink faster than you can say "Why did I start selling essential oils?"

And then there's the passion pitfall.

You love knitting, so you decide to monetize it…

Fast forward a few months, and you can't even look at a ball of yarn without breaking into hives.

Turning your passion into a paycheck can suck the joy out of it faster than a vacuum on steroids.

So, what's the secret sauce?

Focus and practicality.

In high school I wanted to generate a lot of cash, on my own schedule, with little risk.

So I started a mobile car detailing business.

Within my first month, I was making more money than my teachers… as a 16 year old!

Was I passionate about scrubbing sedans? Heck no.

But I was passionate about making bank.

Here's the key: Start with something that's not sexy but kicks off serious cash flow right away.

Revenue cures most problems.

Once you've stacked your dough, you can diversify into something you're genuinely excited about.

But remember, the goal is to make money, not just fill your time with another form of drudgery.

So, before you dive into the next "amazing" side hustle opportunity, ask yourself:

Is this a lifeboat or a leaky bucket? Are you in it for the cash or just trying to escape your day job?

Answer those questions, and you're already ahead of the game.

Check out my video, “Side hustles are BS” to hear the whole enchilada:

Food For Thought 🧠

“You get extraordinary outcomes by doing ordinary things for extraordinary periods of time.
It’s the commitment to the act, not the act itself, that creates the outsized return.”
- Alex Hormozi

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DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.