As we enter the holiday season and gather with family and friends, one tradition many of us look forward to is hanging favorite ornaments on a Christmas tree. Ornaments can enrich the beauty of the season and often have wonderful memories attached to them.
After hanging a few of our ornaments, I couldn’t help thinking about the tree and the ornaments as a metaphor for investing. The fact is, last month’s article on FTX is sticking with me. I continue to follow the media’s take on it, and, as usual, it mostly bothers me. But there are so many dimensions to this evolving story that offer valuable lessons, particularly for young investors. I’ll touch on at least one of them in this article.
Which came first, the tree or the ornament?
Most Christmas tree ornaments we save and put up every year have special meanings. They come from kids, grandkids, special teachers, and friends. Some may have been handed down to us from parents and grandparents. They represent cherished memories of loved ones, specific experiences, and special times. Some may express hope under trying circumstances. In other words, there are substance and value in these personal Christmas tree ornaments. They are the focus of this tradition.
The tree on which the ornaments are placed, on the other hand, is often temporary—cut down fresh and then disposed of soon after the season, or artificial and pulled out once a year. It’s rare when one is preserved and replanted.
When we think of this in terms of our investments, our goal should be to start with a very strong living tree that will reliably grow larger and stronger if nurtured prudently over time. It should represent the total economic growth, innovation, and prosperity of free markets around the world. We can add some fertilizer to it to make it stronger and grow larger still (deliberate and managed tilts toward small company and value stocks, for example), but it’s beautiful and bountiful without any additional ornamentation.
Most investors don’t even start with a strong tree, though. All they have are ornaments. Few have any personal meaning, and few survive more than one season. This is certainly true of investing professionals whose mutual funds typically experience 100% or higher turnover every year.
The emotions attached to portfolio ornaments are usually fleeting and not the same as those created by tree ornaments. Fear of missing out, greed, running with the herd (of the moment), ego, bragging rights, and so on do not make for good lasting memories—or sound portfolios. Individuals usually buy hot stocks, or hot mutual funds like Cathy Wood’s ARKK fund, after they’ve reached a certain critical mass of media stories —which means after they have soared in price (that’s why they’re “hot”).
Portfolio ornaments are shiny and super attractive to almost everyone. Highly trained professionals package and market them to be addictive. This is why the majority of investment advisors in this country either sell or “manage” nothing but ornaments.
FTX is a portfolio ornament. So is crypto. So are high-cost hedge funds, venture capital, and private equity for almost all investors. (Sure, billionaires in “the club” can kill it over time by getting in early on deals, but even they occasionally must eat an ornament like FTX. Sequoia Capital’s unprofessional and immature zeal for a dweeb in saggy T-shirts and baggy shorts playing video games while he lied to them is a godsend to the well-connected. I’m guessing they’ll be more professional and mature next time.)
Some portfolio ornaments lose their luster and sit unloved in a box before you can dispose of them. Hedge funds and private real estate partnerships that restrict redemptions are like this. We’re seeing this now with Blackstone’s BREIT, which Jason Zweig called out in a recent Wall Street Journal article.
The most popular portfolio ornaments
The most popular portfolio ornaments are simply individual stocks. In an ever-changing and volatile market environment, there are always stories to tell, brilliance to display, and ego aplenty to drive it all. New ornaments every year. Bigger, shinier!
Sure, some investors catch on to the shallowness of this game eventually and might even at some point understand what the ornaments are costing them vis-àvis a well-managed asset class portfolio. To pacify these troublemakers, at least temporarily, some advisors toss S&P 500 and other “market”-type index funds into portfolios. To these advisors, the index funds are the ornaments. In their minds, these spindly and annoying little trees beneath the stack of pretty ornaments are targeted for disposal at some point— usually right before the end of a bull market when their portfolios are highly concentrated in high-priced, big-name growth stocks, and they appear to clients as stock-picking heroes.
But what if the portfolio ornament came from Grandma and Grandpa?
A portfolio ornament might be a gift from a parent or grandparent, and for that reason—and that reason alone—it might be worth keeping. But the risk of financial loss should also be considered. Do you think the giver would be happier if you kept those shares of General Electric despite the very real risk that their value could significantly decline at any time or if you took the proceeds and converted them into something even more meaningful? A more substantive legacy of the loved one other than the stock of a giant corporation they worked at for 40 years, perhaps? A trip with friends or family? A charity? A college fund?
If not “invested” immediately in great memories, why not better preserve the value with a diversified portfolio targeted for future plans? Portfolio ornaments are virtually guaranteed to detract from the value of a well-diversified, low-cost, asset class portfolio. We know this from study after study over the past four decades that explain why this is the case.
Beware the “influencers”
Many young people today are tempted by the fame and fortune of social media “influencers” to buy virtually anything. Spending thousands of dollars on cosmetics or athletic footwear is one thing—more akin to buying Christmas tree ornaments. But betting tens of thousands of dollars on crypto, FTX-type stocks, meme stocks, or any other speculation-of-the-day scheme because some YouTube star said so just strikes me as total madness. Social media has become the modern Gen Z version of Wall Street to create and promote expensive portfolio ornaments.
These financial influencers are called “finfluencers.” (I’m guessing words like hustlers, charlatans, con artists, and manipulators didn’t test well among the marketing consultants.)
In any case, finfluencers are gaining traction with Gen Z—despite the consistent collapse of their best recommendations. These hucksters are essentially unregulated promoters who are paid huge sums to fling BS with a smile and a deceptive air of authority and expertise.
A great example of this is Kevin Paffrath, aka “Meet Kevin.” Paffrath is a YouTube star who, according to The Wall Street Journal, made $22 million in 2021 alone promoting all kinds of shiny portfolio ornaments —like FTX. Paffrath is like an old-school stockbroker on steroids. But the wealth destruction he causes is vast and mostly affects people who can least afford the losses.
Watch this smirky punk dance around his disclaimers in a YouTube video (I particularly like how he emphasizes SEC in yellow) to promote his new idea—an innovation ETF with “AMAZING” tax benefits. Sound like Cathy Wood’s ARKK fund? Yep. Here’s the link: *JUST* Invested $1 Million into THIS Stock.
The video is exhausting. I tried to watch it and had to stop after about five minutes. Especially when Kevvy secured the symbol for his new ETF and actually said, “In this video I’d like to explain why I’m launching my PP.” My head was ready to explode, and I still need my head. Have I used the word “immature” already in this article? WTH is going on with our culture!?
Enough of the madness
I know some of the reasons we gather during the holidays are to enjoy family, renew friendships, and consider deeper meanings to our life (love, religion, spirituality, charity, and so on). We’ve pretty much all had it with discussing Covid and politics, right?
But if you find the opportunity, why not talk about the destruction social media influencers can—and do— have on the younger generations? It’s not just the financial hucksters, but all of those who elevate materialism, fear of missing out, envy, and greed ahead of common sense, humility, and living a truly meaningful life.
Everyone at Equius wishes you and yours a healthy, prosperous, and loving New Year. Merry Christmas and Happy Holidays from the Equius Team!
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