The problem with 2021 was there were virtually no obvious viable alternatives to assets that ranged from overpriced to bubble. During the late 90s tech and dot.com bubble, you could "hide" in value stocks, international stocks, and bonds and get a decent average return into 2007. That is why Grantham called this the everything bubble.
I agree with much of what you say, but your math is misleading. Yes, it's true that even if you have 20% returns, it will take a while to catch up with an investment that has 10% returns if you start off in a bigger hole. But the hole has already been dug. Investors in ARKK and Bitcoin have $x dollars to work with. Period. So where should they put it? In an investment that will gain 10% a year or 20%? The math should start with the same starting balance if you're addressing someone who has already lost a lot in ARKK or Bitcoin.
If you're trying to dissuade people from putting a lot of their money in high-risk, high-volatility stocks in general, then I agree. But once people have done that, and the bubble has burst, I think it's understandable why some people think the high-risk assets might outperform in the next 5-10 years. Of course, they might not. Some of the assets may turn out like Cisco or FTX: so grossly overvalued that they never recover.
Overall, I agree with you, especially your second conclusion. Even for those who are trying to recover and who believe their high-risk asset will gain 20% per year, they should understand there's a reasonable chance they will not see such gains. The S&P (or "boring" individual stocks) are a much safer bet and most of your money should probably be in those investments, not the risky ones.
I agree and indeed, once you sitting in a deep hole it is kind of too late to switch. I made a logical error there in that post..
But the key points at the end hold nevertheless. By all means have fun with volatile assets but never bet a large amount on them because high volatility has a long-term cost.
I agree with your comment on the math. I was thinking the same thing when I was reading it. Basically, the sunk cost fallacy problem where you have to look at everything as if there is no past history.
To me, the key thing on staying invested is if the underlying assets are real and can get the 20% bounce back return. I think ARKK has a higher probability of bouncing back than bitcoin etc. because a bunch of ARKK investments are actual companies with actual services that are likely to actually grow. Bitcoin is still speculation on the greater fool theory. A 75% decline is a moment for serious reflection on what just happened and what the future should be.
One reason that S&P 500 came back much quicker (twice) on a total return basis is part of the return is in dividends and stock buybacks. The companies are returning cash to the investors during the dip period which can be re-invested, either by the companies themselves through buybacks or by the investor through re-invested dividends. Cash dividend yields usually rise significantly during bear markets, cushioning the stock price loss by providing more shares. Once the company's finances start to pick back up again, they usually restart their stock buyback programs that lead to higher EPS assuming they aren't diluting it with additional share offerings of executive options.
That is a major challenge for the "growth" stocks typical in tech - making or losing money is purely based on how much the market is willing to pay for a share which is a function of earnings and P/E multiplier. Where the investments become a real flyer is if there are no earnings and the price is the expectation of potential future earnings. That was a major reason the dot.com bubble was so bad - there were no future earnings and many companies vanished. This time around, many of the companies are real companies that just got badly over-priced but should still have at least some value a couple of years from now. I wouldn't lump crypto-currencies into that category.
It was pretty clear to me in early 2021 that much of tech and crypto was a bubble where valuations had disconnected from reality. If market cap gets very big quickly for a sector and the expectation is that the fast growth rate will continue with a "sky is the limit" mentality, then it has likely entered bubble country. The "meme" stock and NFT crazes indicated that a substantial amount of money was in play without consideration of fundamentals.
2 to 10 year Treasury bonds got to bubble territory when the Fed forced them down close to zero percent yields. It was going to snap back - the only question was when and how much. Starting early 2021, I made sure that my bond portion had an average duration of less than 4 years to keep the potential damage muted. I even rotated some aggregate bond index money into large cap value stock index which ended up holding up better than the bonds.
I hold some ARKK so your article is more than academic to me. You make your case and I am going to half my position, take the loss but still have a little bet on the lightning strike.
The problem with 2021 was there were virtually no obvious viable alternatives to assets that ranged from overpriced to bubble. During the late 90s tech and dot.com bubble, you could "hide" in value stocks, international stocks, and bonds and get a decent average return into 2007. That is why Grantham called this the everything bubble.
Thank you for torturing the English language; this article is great. :)
I agree with much of what you say, but your math is misleading. Yes, it's true that even if you have 20% returns, it will take a while to catch up with an investment that has 10% returns if you start off in a bigger hole. But the hole has already been dug. Investors in ARKK and Bitcoin have $x dollars to work with. Period. So where should they put it? In an investment that will gain 10% a year or 20%? The math should start with the same starting balance if you're addressing someone who has already lost a lot in ARKK or Bitcoin.
If you're trying to dissuade people from putting a lot of their money in high-risk, high-volatility stocks in general, then I agree. But once people have done that, and the bubble has burst, I think it's understandable why some people think the high-risk assets might outperform in the next 5-10 years. Of course, they might not. Some of the assets may turn out like Cisco or FTX: so grossly overvalued that they never recover.
Overall, I agree with you, especially your second conclusion. Even for those who are trying to recover and who believe their high-risk asset will gain 20% per year, they should understand there's a reasonable chance they will not see such gains. The S&P (or "boring" individual stocks) are a much safer bet and most of your money should probably be in those investments, not the risky ones.
I agree and indeed, once you sitting in a deep hole it is kind of too late to switch. I made a logical error there in that post..
But the key points at the end hold nevertheless. By all means have fun with volatile assets but never bet a large amount on them because high volatility has a long-term cost.
I agree with your comment on the math. I was thinking the same thing when I was reading it. Basically, the sunk cost fallacy problem where you have to look at everything as if there is no past history.
To me, the key thing on staying invested is if the underlying assets are real and can get the 20% bounce back return. I think ARKK has a higher probability of bouncing back than bitcoin etc. because a bunch of ARKK investments are actual companies with actual services that are likely to actually grow. Bitcoin is still speculation on the greater fool theory. A 75% decline is a moment for serious reflection on what just happened and what the future should be.
One reason that S&P 500 came back much quicker (twice) on a total return basis is part of the return is in dividends and stock buybacks. The companies are returning cash to the investors during the dip period which can be re-invested, either by the companies themselves through buybacks or by the investor through re-invested dividends. Cash dividend yields usually rise significantly during bear markets, cushioning the stock price loss by providing more shares. Once the company's finances start to pick back up again, they usually restart their stock buyback programs that lead to higher EPS assuming they aren't diluting it with additional share offerings of executive options.
That is a major challenge for the "growth" stocks typical in tech - making or losing money is purely based on how much the market is willing to pay for a share which is a function of earnings and P/E multiplier. Where the investments become a real flyer is if there are no earnings and the price is the expectation of potential future earnings. That was a major reason the dot.com bubble was so bad - there were no future earnings and many companies vanished. This time around, many of the companies are real companies that just got badly over-priced but should still have at least some value a couple of years from now. I wouldn't lump crypto-currencies into that category.
It was pretty clear to me in early 2021 that much of tech and crypto was a bubble where valuations had disconnected from reality. If market cap gets very big quickly for a sector and the expectation is that the fast growth rate will continue with a "sky is the limit" mentality, then it has likely entered bubble country. The "meme" stock and NFT crazes indicated that a substantial amount of money was in play without consideration of fundamentals.
2 to 10 year Treasury bonds got to bubble territory when the Fed forced them down close to zero percent yields. It was going to snap back - the only question was when and how much. Starting early 2021, I made sure that my bond portion had an average duration of less than 4 years to keep the potential damage muted. I even rotated some aggregate bond index money into large cap value stock index which ended up holding up better than the bonds.
I hold some ARKK so your article is more than academic to me. You make your case and I am going to half my position, take the loss but still have a little bet on the lightning strike.
Great article, thanks!