Investing in Stonks

Everyone is asking me — yo Uzair what’s going on with the markets?! What are you investing in these days?! I know you lost all your money betting on Lehman Brothers in 2008 so you’ve learned your lesson and that’s why I want to hear your thoughts so I can do the opposite.

Well — the good news is unlike 2008 — I now know how the markets actually work. It is a gong show and no one has an idea what’s going on or what’s going to happen — confirmed. The whole stock market is just a bunch of people’s opinions and these people are slowly but surely going extinct as the traders are now being replaced by algorithms and made redundant by the rise of Exchange Traded Funds.

First I’d like to clarify what passive investing is — it’s investing in anything where you don’t have control over the outcome. It doesn’t matter if you’re investing ETFs, options or picking individual stocks after searching them for months. It’s all passive because you’re relying on someone else — and hope.

Another thing — if your goal is to get rich then passive investment is not for you. I don’t think that anyone is going to get rich by investing $2k a month for the next 25 years at 7% interest. On top of that you’re just hoping it works out by the time you need the money.

If you did have a small portfolio and did want to take your chances to get rich on the stock market then I would recommend options or at least betting big on small cap stocks that have the potential to be huge. I haven’t figured out how to do this though and would have been way better off not trying.

The reason why I invest passively is just a place to hold my cash and get some return when I don’t have anything better to do with it and so my number goal is to not lose money. Losing money in the stock market is the worst — what they don’t tell you is when the market drops 30% or 50% you need to double your money to get back to just break even.

It’s not easy to double your money.

The financial markets have been going through a major change (some may choose not to accept it but it’s there) — the idea of picking individual stocks and value investing is dead. The last 10 years were driven by everyone buying into ETFs (there is a bubble) and companies buying back their stocks. The market was on such a tear that it would be a massive waste of time and effort to try and beat it — especially when you have less than $500k to $1 million to work with.

I think the idea that people read into balance sheets and blah blah is a waste of time (the ones that waste their time doing this will obviously disagree) — the best way I’ve seen to invest in the stock market is.

1. Research market sentiment (twitter, forums, ask people, or pay for research) and find out whos bullish (expects the market to go up) and who’s bearish (expects the market to go down)
2. See who has the better arguments and you think is right and that’s the side you picked.
3. Remember it’s better to be a bull than a bear because in the long run the market will always go up. However you need to know if there are too many bulls then the market will probably run out of steam because there aren’t enough buyers.

So far, as of April 2020 here are the cases for the two:

Bull case: Don’t fight the fed — they said they’re going to do everything in their power to keep the markets up including unlimited cash printing. If history is any indication — you don’t fight QE. The market will go through it’s ups and downs but will go up. Also coronavirus has been a problem that’s affected the poor service workers disproportionately more than anything else. These people don’t invest in the stock market and their problems aren’t the problems of the people who invest in the stock market. Plus with bonds and cash providing 0% yield, the only place to park billions of dollars is the stock market because most fund managers can’t put that money in real estate or crypto. Another reason for the bulls winning is the fact that the pension money is still coming in and 401k money is still coming. The ETF bubble is a real thing, everyone is told to invest in the market regardless of what it’s doing and they will continue propping it up. Value investing is dead and the idea that you have to pick certain stocks and what not will just make life more difficult for minimum rewards. Also we have learned the new government doesn’t want companies to experience any pain and has fucked up incentive structures for management. Everyone is getting bailouts and America is going to be a monopolistic state — where the few companies with Washington connections will lever up, make risky investments and decisions only to get bailed out if they’re wrong. Might as well invest in that —because you should never bet against American greed and innovation. People also say it’s the death of the middle class and mom/pop businesses — they’ll get bought up by the big guys for pennies on the dollars. This will also make the big guys even bigger and thus inflating their stock price.

Bear case: This is the majority view, the economy is fucked. There are demand freezes, supply side freezes, credit freezes — everything is frozen. People are stuck at home across the planet — no one is working or buying anything. Airline traffic is down 90%, hotels are running empty — it’s all really bad. The largest jobless claims report ever, depression level deflation and unemployment is soon coming. The market right now makes no sense and was for a time when things were going really well so a 30% pullback is meaningless compared to the reality. This is the view that most people have but the chances of us getting a 90% pull back in the stock market seems really low so it might not be the best play. Another more likely play here is that the markets will slowly go down as insolvency goes up — we’ll have lots of rallies and then collapses.

Regardless of the above — it’s fairly clear that people have no idea what’s going on and neither do I.

I want to sleep at night so this is what I’m doing.

My play: DAC into the market below and buy a few put options that expire Jan 2021 and sell shorter puts against it when volatility goes up to lower my overall cost of the hedge.

This will be give me the upside gain but I’ll also lose money on my hedges if the markets go up. However, if the markets go down a lot I can make money on my puts and just pick up stocks when they’re much cheaper.

This is how I’m investing Passively (medium risk)

1. 10% of my portfolio is in crypto. Just bitcoin for now.
2. 80% is stonks. 50% will be in ETFs including Nasdaq & SP600.
3. The reason why I bought the S&P600 (IJR) instead of the S&P500 is because I want exposure to the smaller cap stocks which are much more volatile and in the long run likely to go up much faster than bigger ones — however they also get decimated during a recession.
4. The other 50% is in stocks I think will do well in the future according to my idea of where the world is heading like:

a) NVIDIA — gaming + crypto

b) DDOG — Cloud analytics for the big guys like Amazon. Mostly buying because word on the Twitter is that the founders are real studs and that their company has been able to grow really fast profitablity beceause their Net Expansion Revenue is like 150%. This means that even if they have no new customers, they’ll revenue will grow because revenue from existing customers grows.

c) Energy stocks that have been hit hard — because how much lower are they going to go? I’m buying Cenovus, CNRL and Williams Pipeline but don’t copy my picks because they’re just a crapshoot.

d) Hotel, airlines and cruise ship stocks if you’re feeling frisky — you are betting on them not suffering for the next 2–3 years.

If you’re looking to start investing I recommend use Questrade. It’s what I use and it gets the job done well — also the fees are so much lower than going through the bank.

Only go through the bank if you’re a sheep and like getting swindled. They didn’t make $46 billion in profits last year by looking out for you.

Having said this though — investing in the market sucks and it’s pointless if you don’t have much to work with.

What you need instead is to focus on active investments like real estate (the easiest but lamest one) or building or buying a business (much harder but returns can be juicy).

What do you think? Is my portfolio out to lunch? Let me know in the comments below!