Are We Heading for a Bitcoin Bloodbath?

Before the speculative bubbles in housing in the mid-2000’s and .com stocks in the late 1990’s, there was an emu craze around here. If you're not familiar with the national bird of Australia, they are five-foot-tall flightless birds, weighing as much as 100 pounds. Billed as the “next red meat”, emus were high fliers in the Lone Star State before many had even heard of things like the internet or sub-prime mortgages.

How high did they fly? According to this 1997 LA Times Article, eggs were going for thousands of dollars and breeding pairs for up to $50,000! Also detailed in the article, the literal bloodbath that resulted from investors that didn’t understand what they were buying. WARNING: The description of how two Colleyville, TX doctors tried to cut their losses may be disturbing.

Lately, headlines about bitcoin have echoed back to some of those frenzies. Bitcoin, the most popular blockchain technology, got a further boost this week when Fidelity Investments announced that they are adding the ability to track your holdings on their website, right beside your 401(k) and IRA.

The hype has reached a fever pitch recently as the price has doubled in the past month. One example this week was a news story discussing the anniversary of Bitcoin Pizza Day, where a programmer bought a couple of pizzas with 10,000 Bitcoins on May 22, 2010. Today, that amount of bitcoin would be worth about $25,000,000.

Eye popping stuff, to be sure. Perhaps, though, we should remember advice from a former Fidelity fund manager. Among his many famous quips, Peter Lynch offered, “Never buy anything that you can’t illustrate on the back of a napkin”.

Do you understand what bitcoin is? If not, you’re probably not alone. Below is a “napkin like” one page description of the underlying blockchain technology from Autonomous Research.

Simple, right?

A longer (about 6 minute read) explanation that made a little more sense to me was in this Medium.com article by Nik Custodio, “Explain Bitcoin Like I’m Five”. His use of an apple analogy demystifies some elements of the cryptocurrency, but it still leaves a lot of unanswered questions.

It is potentially revolutionary technology that could change the way we do business in the not too distant future. But is bitcoin going to be the ultimate winner? Or will it be the next Betamax or MySpace?

Risks include careless folks inadvertently losing them, bad guys figuring out how to steal them, or the market preferring an emerging alternative, such as Ether (up 2300% this year).

Some have even touted bitcoin as being “better at being gold than gold”. I’m not sure what that means, but I do know that if the lights all go out, an inert hard drive probably won’t pay the tolls to cross many of the bridges heading out of town. On the other hand, an ounce of gold will likely still buy a lot of emus.

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Updates from Dimensional

ATX Portfolio Advisors utilizes Dimensional Funds in most of our portfolios. Any time there is significant change at Dimensional, I pay close attention to try and insure that your interests are being met first and foremost. As you may have heard earlier this year, Dimensional Founder and Executive Chairman, David Booth, stepped away from his Co-CEO role.

Longtime Dimensional executive, David Butler, was promoted to take on the role vacated by Booth. Earlier this month, he sat down for a Q&A session that was initially meant for an internal audience, but has now been made available for broader consumption.

Even though Booth has stepped away from some of his day to day management duties, he is still involved in strategic initiatives and leadership of the firm. In his Letter From The Chairman, 2017, he shares lessons from his 35 years in the industry, as well as compelling evidence that the Dimensional approach works.

As always, if you have questions or would like to discuss if your plan is working, get in touch.

Want to Be Smarter? Disagree!

As most readers of the Accountable Update probably know, I’m a Fightin’ Texas Aggie. Like many of my fellow farmers, I’m proud to have attended one of the two flagship universities in the Great State of Texas. As a resident of Austin for the last decade or so, however, I have met many graduates and fans of that other school, the University of Texas (t.u.).

When I first moved to ATX in 2007, the Longhorns (tsips) were riding high. They had recently won national championships in football and baseball in 2005. On my daily slog from Westlake up to the Arboretum, it was hard to find respite from all things related to The Forty Acres as they more or less dominate the local news and talk radio. The sports channels that I favor spent the majority of their air time discussing when the next Longhorn team would light up that God forsaken tower with another #1.

One evening in early January 2010, as I was creeping home on Loop 360, one local sports radio personality almost caused me to drive off the Pennybacker Bridge when he posed the question, “Has there ever been a better time to be a Texas Longhorn in Austin, Texas?” He went on to remind listeners that Mack Brown was about to lead his team back to the Rose Bowl for what could be their second championship in five years, the baseball team had just finished second in the previous season’s College World Series and were ranked #1 leading into the 2010 campaign, and the basketball team had also just been ranked #1 for the first time ever.

While it was a great time to be a Longhorn in Austin, maybe it wasn’t quite so awesome to be an Aggie marooned here. I turned off the radio and swore to never listen to any tsip themed sports show again. We Aggies are known for our steadfastness and resolve. We’re also very fond of our traditions and history, even if we have to go back a while to find things to celebrate. (Did you know our 1917 football team was unbeaten and unscored upon?)

We enjoy commiserating to one another about being ranked too low, t.u. being ranked too high, some perceived snub in the reporting of a big win or positive story, or a commentary that is considered unflattering. It’s probably not a lot different than being a Chicago Cubs fan prior to 2016.

Perhaps nowhere is this phenomenon more prevalent than the message boards on Texags.com. A search of their site using Google’s Advanced Search for the term “disrespect” returned 10,700 results. I couldn’t find any other college site that registered more than 2,500. Aggies really have a hard time understanding why others don’t like us as much as we like ourselves. On second thought, we’re probably less like the Cubs and more like Sally Fields before the 1985 Oscars.

Eventually I tuned back into the local channels, though, because I missed hearing the orange tinted version of the world, no matter how misguided. Gradually, I’ve come to realize that being unranked in the preseason is less about the BOMC (Burnt Orange Media Conspiracy) keeping the Aggie man down and more a reflection of the market’s sentiment. Last year, for instance, the Ags football team began unranked but rose to the top 10 in most polls after winning their first 6 games. The 2-4 finish, on the other hand, only served to reinforce that at least the sum of media pollsters knew what they are talking about. 

While I frequently find myself disagreeing with the opinions of my many bovine aficionado friends & acquaintances, I have found that my own expectations and beliefs wind up more grounded as a result of engaging in conversations with them about both our similarities and our differences. I’ve also found this to be the case with politics, religion, and even finance.

The modern world has made it easy to create our own personal echo chambers. With a click of the mouse, we can ignore a “friend” on social media that offers different world views. If we don’t like the spin on a news story, we just change the channel to a more liberal or conservative alternative. But by limiting our exposure to sources or audiences that we only agree with, we may be missing an opportunity to make ourselves smarter, as discussed in this 2014 Scientific American® article.

If we allow this tendency to extend into our investment opinions, the results can be costly. So, if you tend to read glass half empty perspectives such as Zero Hedge or Nouriel Roubini, you should also take in some more optimistic points of view from folks like Jeremy Siegel or even Jim Cramer. The views and perspectives may vary widely, but that’s the point. Get more information and then make informed decisions.

That’s how markets work. They take all the available information, knowledge, and opinions and integrate that into prices. Together, we know more than we do alone.

At the end of the day, broadening your circle may help you wind up with more money. You’ll almost certainly have more friends, which is probably worth even more.

Want to discuss or debate?

Get in touch.

A Few Miles From Uncertain

Photo by Christopher Wheeler

When did you start investing? 

My first investment was with my first IRA contribution in 1992. The previous year had been a really good one for stocks and most indicators showed an economy on the rebound from the 1990 recession, but jobs were not being created as quickly as in previous recoveries. Stocks were trading near all-time highs, which made me wonder if I should wait for a better time to buy. Adding to the angst, it was an election year, and the jobs issue made what initially looked like would an easy re-election for the incumbent less certain.

The pace of the recovery was so tepid that a relatively unknown governor from Arkansas was gaining momentum with an entire presidential campaign strategy built around the phrase, “It’s the economy, Stupid”. In addition, a straight talking billionaire was attracting attention for memorable quips such as his description of job losses to Mexico causing a "giant sucking sound". All the while, the President couldn't believe that so many people read lips.

Despite all that doubt, the S&P 500® had a respectable return of 7.6% that year. In fact, with dividends reinvested, the fund I invested in is now worth over four times as much as my initial contribution.

Along the way, there were many uncertainties that tested my risk tolerance. Looking back now, it can seem obvious that taking risks and staying the course was the right decision. However, at the time they occurred, the ever present concerns about bubbles, busts, inflation, deflation, terrorism, war, the economy, etc, tested even the most steadfast investors.

Perhaps I owe some of my resolve to growing up just a few miles from Uncertain. Uncertain, Texas, that is. If you're not familiar, check out this recently released Ewan McNicol documentary titled, "Uncertain". It has absolutely nothing to do with investing, but it will give you some insight into living on troubled waters deep behind the Pine Curtain of East Texas.

Today, the worries in the investing world may be different than in 1992 (or not), but the concept of risk and reward is ever present. This week, I share with you the latest Issue Brief from my friends at Dimensional Funds that explores the paradox of uncertainty.

In addition, I’ve included a short video on dealing with uncertainty from DFA’s founder and Executive Chairman, David Booth.

I hope you enjoy the information. Get in touch if you’re feeling, well, uncertain.

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The Uncertainty Paradox

May 2017

"Doubt is not a pleasant condition, but certainty is an absurd one."
—Voltaire

“The market hates uncertainty” has been a common enough saying in recent years, but how logical is it? There are many different aspects to uncertainty, some that can be measured and some that cannot. Uncertainty is an unchangeable condition of existence. As individuals, we can feel more or less uncertain, but that is a distinctly human phenomenon. Rather than ebbing and flowing with investor sentiment, uncertainty is an inherent and ever-present part of investing in markets. Any investment that has an expected return above the prevailing “risk-free rate” (think T-Bills for US investors) involves trading off certainty for a potentially increased return.

Consider this concept through the lens of stock vs. bond investments. Stocks have higher expected returns than bonds largely because there is more uncertainty about the future state of the world for equity investors than bond investors. Bonds, for the most part, have fixed coupon payments and a maturity date at which principal is expected to be repaid. Stocks have neither. Bonds also sit higher in a company’s capital structure. In the event a firm goes bust, bondholders get paid before stockholders. So, do investors avoid stocks in favor of bonds as a result of this increased uncertainty? Quite the contrary, many investors end up allocating capital to stocks due to their higher expected return. In the end, many investors are often willing to make the tradeoff of bearing some increased uncertainty for potentially higher returns.

MANAGING EMOTIONS

While the statement “the market hates uncertainty” may not be totally logical, it doesn’t mean it lacks educational value. Thinking about what the statement is expressing allows us to gain insight into the mindset of individuals. The statement attempts to personify the market by ascribing the very real nervousness and fear felt by some investors when volatility increases. It is recognition of the fact that when markets go up and down, many investors struggle to separate their emotions from their investments. It ultimately tells us that for many an investor, regardless of whether markets are reaching new highs or declining, changes in market prices can be a source of anxiety. During these periods, it may not feel like a good time to invest. Only with the benefit of hindsight do we feel as if we know whether any time period was a good one to be invested. Unfortunately, while the past may be prologue, the future will forever remain uncertain.

STAYING IN YOUR SEAT

In a recent interview, David Booth was asked about what it means to be a long-term investor:

“People often ask the question, ‘How long do I have to wait for an investment strategy to pay off? How long do I have to wait so I’m confident that stocks will have a higher return than money market funds, or have a positive return?’ And my answer is it’s at least one year longer than you’re willing to give. There is no magic number. Risk is always there.”

Part of being able to stay unemotional during periods when it feels like uncertainty has increased is having an appropriate asset allocation that is in line with an investor’s willingness and ability to bear risk. It also helps to remember that, during what feels like good times and bad, one wouldn’t expect to earn a higher return without taking on some form of risk. While a decline in markets may not feel good, having a portfolio you are comfortable with, understanding that uncertainty is part of investing, and sticking to a plan that is agreed upon in advance and reviewed on a regular basis can help keep investors from reacting emotionally. This may ultimately lead to a better investment experience.

Source: Dimensional Fund Advisors LP.

There is no guarantee investment strategies will be successful. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.