Everyone is Getting Rich Except You!
How to avoid FOMO when everyone is making money in the markets.
Hello Pulsers,
Before anything, I wanted to wish you a happy Thanksgiving. Thanksgiving is one of my favourite holidays. Growing up in Iran and immigrating to Canada when I was a teenager and not with my family, I always felt extra lonely during Thanksgiving. I had no close friends who celebrated this holiday at the time and never participated in its tradition.
As I have grown a family in the last few years, celebrating Thanksgiving has become a big part of my life. I hope you enjoy time with your family and loved ones and cherish your days together!
I am also growing a mean mustache as part of my promise for Movember and helping raise awareness for men's mental health. I will share a picture with all of you next week, but if you can, make sure to donate to my Movomber and help me raise funds for this beautiful cause.
Everyone is getting rich except for you.
It has been a fantastic few weeks in the markets, especially in the crypto, with Bitcoin up more than 127% for the year. To put things in perspective, SPY -0.01%↓ is up 26% for the whole year, and it is one of the most stellar years the market has had.
So, if you have yet to have crypto exposure, it is hard to stay disciplined and not get the fear of missing out or FOMO.
As a person with no exposure to crypto, what do you do? Do you buy now? Are all asset classes in a bubble territory? Do you buy Ether instead because it has not run as much as Bitcoin?
I answer these questions in this newsletter and discuss whether we are in a bubble territory.
Crypto: bubble or no bubble?
I am not going to sit here and pretend I am a crypto maximalist. I also do not know enough about the technology or the infrastructure to have an educated opinion on the matter. I look at crypto like I look at every other asset class. It has to answer three questions for me, and the answer to these questions determines how much of an allocation I am going to make to it.
The questions are as follows:
Is it a cashflow-producing asset?
Does it have positive carry or negative carry?
What is its volatility profile?
Let’s break this down with an example.
Cashflow
Let’s take a commodity, gold, as an example. Gold does not produce any cash flow. It is not about being good or bad; it is just a fact that gold does not generate consistent recurring cash flow. I should consider this when allocating to Gold.
On the other hand, a rental unit (real estate) is an example of an asset class that generates cash flow. The rent you collect from the apartment, minus any maintenance fee, is the cash flow generated by this asset.
Carry
Gold has negative carry, which means it costs to own it. The cost is usually the storage cost. Of course, no one stores the gold physically these days, but even if you are getting exposure to gold with ETFs, you are paying a managing fee.
Volatility
Lastly, gold has a beta of 0.15 compared to the S&P500. This means that if the S&P500 moves by 1%, gold would only move by 0.15%. Adding gold could be a good diversifier since it is less volatile and generally has a lower correlation coefficient to equities.
My attitude towards crypto has remained the same. It is an asset class like any other that has a place in a well-diversified portfolio. My allocation percentage is based on the answers to these three questions:
Does it generate cash flow?
Positive or negative carry?
What is its volatility profile?
For the most part, Bitcoin does not generate any cash flow. It is not a business, and as far as I am aware, few use cases for it shows that it can generate revenue or cash flow.
The carry is negative. It costs to own Bitcoin, and it does not pay any dividends. It is true that there are yield farming programs and other programs where you can stack your coins and earn yields, but it still remains a big mystery to me how these work. If you assume these yield farming programs are real and not ponzi, then Bitcoin comes with positive carry.
Lastly, volatility. Bitcoin and crypto, in general, are among the most volatile asset classes in the world. Bitcoin beta relative to the S&P500 is closer to 2, meaning for every 1% move in the S&P500, the bitcoin would move by 2%.
In general, it is an asset class that does not produce cash flow and has very high volatility. However, it has also been the best-performing asset class of the last 20 years, so you definitely have some exposure to it.
The number is now dependent on your own risk tolerance and financial goals. I am a risk-averse person who wants to create generational wealth over multiple decades and minimize the volatility in my portfolio.
For me, 5% exposure to crypto has been the magical number. For another person, that number could be 50%.
As you can imagine, I am severely underperforming someone with 100% exposure to crypto, which is okay.
The key is to stay disciplined and make peace with the fact that you need to follow an optimal mandate for you and you only.
It is hard not to get FOMO when your neighbours, co-workers, and friends are getting far richer than you are and getting ahead in life.
On Markets
While the market continues to do very well, it is important to note that compared to historical levels, it is still expensive. Last week, the Federal Reserve released its financial stability report, which examined some of the market's risk factors.
Some of the interesting charts were the lack of equity risk premium and high P/E multiples compared to the historical average.
Price-to-earnings ratios are near historical highs. Equity risk premiums are also closer to 2%, which means that equity investors are not getting paid enough to take on risks in the equity market.
In next week's newsletter, I will discuss the meaning behind equity risk premiums and how you can guide it in using leverage in your portfolio for excess returns. If you have not already, please subscribe to this newsletter here and share it with a friend.
Last Words
As many of you have seen, most of the charts and analyses I use are from interactive brokers. Interactive Brokers provides some of the best commission structures, yields on idle cash, and, more importantly, one of the best tools for active trading. As an active options trader, I can only imagine myself trading with the tools that they have provided.
If you are still deciding, check out their free simulator and everything else they provide to help you get started.
Below are the links to help you get started.
Lastly, if you enjoy my writing and delivery, and if you have not already, make sure to check out my best-selling book on Amazon! It has been a best seller for four years in a row! Please support my work by purchasing my book and leaving me an honest review. It is also the best gift you can give your loved ones this holiday.
Thank you for supporting my work.
Disclaimer
The opinions provided in this newsletter are mine and mine only and do not represent any firm or other affiliation.
You understand that NO content published and discussed during this newsletter constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person.
You further understand that I will NOT advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter.
This presentation and the content provided are for educational purposes only.
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