Should Investing be Boring?

Should Investing be Boring?
Should Investing be Boring?

Investments in the news

It’s been tough to turn on any financial news network lately without hearing headlines regarding the saga at FTX and the antics of their founder Sam Bankman-Fried. If you are unfamiliar with the story, I’ll elaborate. Sam Bankman-Fried founded the crypto exchange FTX in May of 2019, just in time for the coming boom in the popularity of crypto trading. At its peak, it was the 3rd largest crypto exchange and had over a million users. Users would deposit money, buy, sell, and hold bitcoin and other digital assets on the platform. The exchange later ran into credit issues and FTX filed for bankruptcy last week. Turns out Bankman-Fried was running a somewhat sketchy organization. FTX did not do the best job at keeping records of client accounts, and how much cash they had, and ultimately had to file for chapter 11 bankruptcy when their own FTT crypto token lost 80% of its value.

They still owe depositors 8 billion dollars. Bankman-Fried was the darling of the industry having Tom Brady, Kim Kardashian, and Larry David as advertisers. They also had their name on the Miami Heat arena. In the bankruptcy filings, it was revealed that expenses for business reimbursements were accepted or rejected by a random manager over a group chat with an emoji. FTX did not have a board, or cash management system, and they did not even keep records of their own employees. Attempts to locate certain employees were unsuccessful, leading to the presumption that some were not even real.

It might seem like it is so cool, so hip, or so fun to trade digital made-up tokens in the hopes of getting rich but remember that if you have no idea how a company makes money, they probably are not the best investment.

I do not say these things to rub salt in the wounds of investors who opened accounts and had their hard-earned money stolen. But I do think there are some valuable lessons to be learned. Most critical… Sometimes things explode!

There are more examples of this from the past

XIV was the name of a popular investment in 2018, it was a Credit Suisse product that had an incredible run. During an 8-year run, it went from $10 to $130. It was not a stock; it was an exchange-traded product that generated returns based on market volatility. Long story short, it would produce outsized returns as long as no volatility hit the markets. Well, any seasoned investor knows that volatility is part of investing. February 2018 marked the end of XIV’s run. Markets fell almost 10% in a matter of days and XIV was down 80% in a day. It was delisted days later, and lawsuits followed. Mainly because Credit Suisse didn’t make it clear enough that this wasn’t a long-term investment vehicle. The following is found in the XIV prospectus “In almost any potential scenario the Closing Indicative Value (as defined below) of your ETNs is likely to be close to zero after 20 years.”

Other examples include Lehman Brothers, Enron, Theranos, and my personal favorite Nikola. Nikola was founded by Trevor Milton. Milton claimed that Nikola had developed a semi-truck that ran on hydrogen. Instead of making a semi-truck that ran on hydrogen, Milton just recorded one of his nonfunctioning, futuristic-looking trucks rolling down a gradual slope and released the footage to the investment world. The stock was worth almost $66 in 2020, now it is worth just $2.53.

How do you know what investments are right for you?

I do not want to give the impression that the investment universe is full of nothing but con artists. That is not true at all, it is almost exclusively not. Investing is a marathon, not a sprint. Most successful retirees have spent decades being “Boring.” By "boring investing" I am referring to investing consistently, in well-diversified portfolios of stocks that have real business models, that generate real cash flow, and return that cash to shareholders in the form of dividends. It is almost as though the recipe is too simple so we come up with ways to make it more complex. It is common for people to want to try to time the market, put too much into an area that they feel is poised for outsized growth, or decide not to get started because they feel overwhelmed by the task of saving for their future.

I encourage everyone, wherever they are on their financial journey, to be "boring", be consistent, and have a long-term plan and path to get to their financial goal. If you would like help creating a financial plan to achieve your retirement goals, feel free to reach out to one of our Financial Advisors and we would be happy to help. 

Author: Jake Buckwalter


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