While Luke comes home from front row seats at the Paris Olympics, the market tries to rain on his fur by having a historical meltdown and a global margin call.
We discuss the $VIX volatility index and just how rocky Monday morning was relative to the 2008 financial crisis and the COVID scare.
What caused it all? Krzysztof explains the Japanese carry trade, how it’s tied to leverage and why NVIDIA $NVDA potentially seems to have been a trade as much about AI as it was a trade taking advantage of free money loans given out by Japan.
No strangers to the upsetting emotions of extreme market drops — we outline practical steps to take advantage of panic, and to make sure you’re not one of the lemmings getting crushed by fear, and reacting instead of acting with discernment. Have you tried the investing buddy system?
Krzysztof also voices a complaint: Bitcoin $BTC did not pass his test for store of value, while gold most certainly did. Is this a short term issue or is Bitcoin not a true decoupled asset from the global financial system? Badger wants to know how this failed performance will affect Monkey’s BTC stack.
With good tech earnings from $GOOG Google and $AMZN Amazon and Apple $AAPL, why have there been such massive price swings both up and down? It’s another sign the systemic risk is real and that the market at this moment is far from an efficient one. We therefore examine a few fixed income strategies such as short-term Treasuries to help you protect your capital.
Have you checked out Luke’s Axon $AXON deep-dive? It will convince you to pay attention to this excellent company as an antidote to all the fear – but even this one is wildly over-valued, and that’s a recipe for danger in a fragile market!
How well do you sleep at night with your investment portfolio? Let us help you take the stress and fear out of investing. You can find the 10 Laws of the Investing Jungle at wallstreetwildlife.com.
Segments:
[00:00:00] – Introduction
[00:04:24] – Black Monday, August 2024 Edition – What Happened?
[00:15:32] – How Can You Protect Yourself?
[00:27:39] – How Was Bitcoin Impacted?
[00:33:35] – Is Today A Buying Day?
[00:36:20] – The Benefit of Having an Investing Buddy System
[00:38:47] – Conclusions
WSW E39
[00:00:00] Introductiona
Luke: On today’s Wall Street Wildlife, we are going to discuss Black Monday, August 2024 edition. I don’t know about you, Christoph, I glanced at my portfolio this morning and I was nearly 9 percent down. Seems like we’ve made a comeback in the last two hours.
Krzysztof: I could barely sleep last night because I was checking the indexes and the volatility. I saw what was going on in the Japanese stock market last night, and my subconscious would not let me rest in peace. And when I woke up, it was even worse, than I thought. So I’ve been doing nothing but thinking through what the, what the hell is happening and what does it mean for.
Yeah, I
Luke: Great stuff. We’re going to share that with our listeners today, how we felt about what looked like a temporary Black Monday. Maybe it’s coming back. Who knows? Maybe we’ll get September edition and that’ll stick around. we have insights and we have thoughts for you,
Krzysztof: to make the joke, you know, did I miss anything, but I think what I did miss, I know for sure is seeing the Olympics live. So before we get into all of the nastiness, mind, uh, catching our listeners up on, on what you saw in Paris.
Luke: Yeah. my friends and I have just literally this moment got back from the Paris Olympics. Uh, I stepped in the door about two minutes before hitting record on the podcast. Christophe was kind enough to delay our recording today. Superb weekend. So we did a five day weekender in the beautiful city of Paris.
I’ve never actually spent a night in before. I’ve only ever driven through the place. So now I’ve seen Nice and Paris. Yeah. Yeah. We were, we had a great Airbnb in the Montmartre area, so very sort of central, very beautiful. And we did six big events. Our headline event was the Athletics Day on Saturday, which was, uh, included the men’s 10, 000 meter finals, which was an awesome event.
Probably the best part of that was the, American team smashing the world record in the, four by 400, uh, relay. That was really good. And like seeing these athletes coming out, we had superb seats for every event. Like we were really close to where the action was. And these guys and girls, like, they just look such an epitome of health and fitness.
They’re like gazelles, you know, the, all the runners are six foot five tall, the ladies as well. And they all just look like perfect physical specimens. So just very, very impressive.
Krzysztof: Yeah. I mean, I’ve ran a few 10 Ks in my day. I think my best is a 39. Uh, under 40. So that’s like that, that’s, you know, moving in the local region, but, you know, put me on the track with, like, all of a sudden I look like a snail.
Luke: Yeah, these guys would be, uh, like, yeah, like a 26 minute 10k, I think was
Krzysztof: like, just. Yeah,
Luke: but hey, you know, you maybe, maybe beach volleyball is your game though. That was probably our, in terms of fun, that’s probably our highlight of the weekend. And I went with a couple of friends who we are dear friends and known them for decades.
and they were a bit skeptical. They thought I was dragging them to beach volleyball because it was, you know, girls in skimpy bikinis, but they had a ball and we got into like the chanting and the, and all that kind of crazy singing and everything else. It was really, really good fun. So it’s a great event.
Krzysztof: Oh, that’s cool. Right, right after ping pong, or apologize right after table tennis, my eyes were glued to the to the woman’s volleyball.
Luke: For real. Yeah. And the men’s was great as well. And then we saw the men’s badminton doubles final and my God, like the speed and the reaction times of those athletes and we have really good seats. I think we’re, we’re on TV for quite a bit of the footage.
Krzysztof: Like, what’s the difference between seeing a match like that live versus, you know, recorded? Does it seem, like, even more insane?
Luke: Yeah, totally. Cause I guess, you know, what was the, what was like the promise in your lounge of like 3d TVs years ago and it never quite took off and it became a gimmick, you know, to see something in proper 3d with your eyes.
Like if Zuckerberg or, um, the Apple folks can figure out proper VR headsets where you can be in the action, it’s very different to seeing it on like a flat 2d TV in terms of, just like the visceralness of how fast these guys are and sweat going everywhere.
And yeah, it’s for real.
[00:04:24] Black Monday, August 2024 Edition – What Happened?
Krzysztof: well, right on. Um, I think most people, uh, they’re like, yeah, sure, the Olympics are nice, but we have a market situation on our hands.
Luke: Yeah. We’ve all, you know, we’ve had like the Olympics of our emotions in the last 24 hours, I think. Yeah. Why don’t you give us, cause I’ve been off the grid a little bit. Why don’t you give us a bit of a breakdown of kind of what’s happened and what’s precipitated it. And we’re definitely like, stay tuned in.
We’re definitely going to wrap up this discussion with some actionable conclusions.
Krzysztof: Right. Actionable conclusions and how we are in almost real time processing all the, all this news ourselves. So one thing I have at the top of my, um, trading platform is the V I X and that’s the volatility index right now. to quantify it, it’s at 33. 42, which is a change that’s up 10 points or 43%. But that already spiked quite a bit on Friday.
So it was basically for the last few months hanging around the 12, 13 level. So it’s now at 33. So that’s a lot higher.
Luke: Break it down for us, Christoph. What is, what does that mean? What is the VIX?
Krzysztof: So it’s simply think of it as a volatility index that measures. the, extent of upheaval in the market. And so if you look, if you zoom out, you will see major huge spikes around 2008 uh, some lower spikes around two 16, and then COVID had a massive spike so that that’s all I really use it for is like Is the market steady or is it like completely, bumpy this morning when I was looking at it, it was up over 125%. So that means something big happened in the market. What is that big thing that happened? it’s hard, you know, in one sense, it’s hard to talk about, uh, a complex system that has so many moving parts, but in the most reductive way, um, I could get my hands on. It’s as follows. There’s something called. a carry trade.
Are you familiar with this, Luke?
Luke: I am, but break it down for us.
Krzysztof: Yeah. So all it really means is that for all kinds of reasons that have developed over the last several decades, the Bank of Japan is willing to loan out money at near zero percent interest rates
Luke: And it’s been doing that for a long time, right?
Krzysztof: for a very long time. So if you think about money now, especially in 2024, As a globalized global market economy, uh, money can flow very freely across borders and so forth.
So if there’s a bank, especially of the fifth largest industrial nation, that’s willing to lend money at 0%, there was approximately 20 trillion of, assets that took advantage of Japan’s loans. What is it that they’re doing? So imagine you, you, You borrow money at 0 percent because you can, and then what do you do with it?
You invest it somewhere else, which gives you a higher yield. Let’s say 5 percent in just another currency, right? I mean, that’s a basic way of looking at it. Borrow from Japan, buy U. S. dollars. Right, which give you, say, 5%, and now you’re making, it’s as though the world is giving you 5 percent for free.
That’s one way of looking at it. If it were that simple, this wouldn’t really be much of a problem. That’s just kind of like arbitrage, But we know human beings, and we know that greed is The thing that always causes cycles, market cycles, and upheavals. So the best analogy with this is in fact, 2008.
So let me take a slight diversion there. It’s fine. I suppose to package loans. and sell them and make money between the differences in interest rates but the problem is leverage, you take in the product, that’s a physical asset. And out of that product, you create multiple new products, all of which are intended to make somebody musical game of musical chairs, if you will, right, make somebody some money, but everybody else is left holding essentially nothing.
When the music stops. This is in the carry trade what I think has been happening. And I think this is what sort of broke this morning, You borrow at 0%, and the majority of that money did not invest it in something, call it safe. Instead, what they ended up doing, and I’ll use, I’ll use a poster child for this, NVIDIA. They saw something like, oh, there’s an AI hype cycle. NVIDIA as a company is performing stupidly well. You’re telling me I could get money for free. and essentially buy shares of Nvidia for free, right?
So one way of looking at this is that 20 trillion, went into assets via the Bank of Japan. In other words, global major players start buying something like the Magnificent Seven because they could, there was no cost for them to do that. All of a sudden, meanwhile, we know over the last weeks and months. Let’s just say the Japanese economy had to defend its own currency and they tried many different tactics, none of which were working. So very recently, I think in the last couple of days, they raised interest rates from zero to a quarter of a point.
Now, that might not seem like much, but the people using, doing this carry trade to go from money that’s free to having less of a delta. Means that that leverage that they that that gap all of a sudden got smaller and the players in this that were over leveraged all of a sudden realized that the trade was no longer profitable so they had to sell and that started a spiral negative loop feedback spiral of selling leading to margin calls leading to more selling so by some that this is this was called this morning a global spiral.
margin call. How’s that for a, an overview,
Luke: That’s good. I’ve learned something there. I haven’t been in touch with the news, but I guess it’s a global margin call also going into what is objectively a pretty overheated market, an expensive market. Like we’ve talked on this podcast and I’m acutely aware, even say the company I did a deep dive on.
If you go check out our YouTube on WallStreetWildlife or you check out my Twitter, you’ll see like a 30 minute deep dive where I went. It’s super deep on a company I love called Axon Enterprise. And like I concluded with a slide on risks around being an investor in Axon, like the highest risk is valuation risk.
It’s crazy expensive, compared to its peers and also compared to its own history. and that’s not uncommon, like we’re back in almost like COVID bubble time where like some growth stocks are just very, very expensive. There’s a lot of momentum built into their price, maybe not backed up by fundamentals.
so that makes a market like the one we have, well, the one we had last week, let’s say, uh, or two weeks ago, very fragile and, Like when things start to go bad, they’ll go back much faster because there’s a lot of like AI fever, you mentioned AI earlier, like a lot of AI fever built over the market and everyone’s kind of waiting for the music to stop so they can kind of jump off the merry go round and try and save their money.
And so when things start to slide like they looked like they were doing early today from probably a weekend of fear, you know, the first big seller like Warren Buffett selling out a large part of his stake in Apple just a few days ago is another catalyst for people saying, okay, it’s time to run for the exits and not be like the last guy left standing holding the bag.
Krzysztof: right? So what I want to add to this, two points, Luke, bogeyman bogeyman bogeyman here. And what worries me about the situation that this is not the end of it is the same boogeyman we had in 2008, leverage. if people were playing within normal parameters, then you have, you have, it could be contained, right?
Because then you go back, there’s valuation resets, and companies just revert back to the mean. But if leverage comes in, Then again, it’s that negative feedback spiral. If somebody is giving you money for free and you decide to buy, say, 10 billion worth of Nvidia for your fund, because you can, in fact, in a sense, you’re in one sense, you’re incentivized to do so because not to take advantage of free capital is actually in one way, stupid, right?
But using leverage, you buy too much of it. And then all of a sudden that trade stops making economic sense and you have to sell. Then the whole, then things blow up. And when one fund blows up, then another blows up and it just keeps spiraling down and down and down. One thing I noticed. Is that the recent earnings reports?
I don’t know how well you paid attention to Google’s. I didn’t actually look through the fundamentals, you know, with a magnifying glass, but companies like Google, Amazon, um, Apple. All are reporting, you know, relatively, I would call steady numbers, but the volatility around the share price has been really wild, which to me is another one of these signals that we are in a timeframe where things are not about fundamentals.
Things are really about how some of these big money players are going to navigate themselves out of what seems like. An intractable mess born out of some form of greed. one solution is possibly you throw more money at this, which is probably the more likely scenario where It’s just when in doubt, right?
When things are about to break, either in the United States or globally, you increase liquidity and you save the players and you just, right, you, you kick the inflationary can down the road yet again. And then it just keeps, you know, the pressure keeps building. Or, um, this is as some people I’ve listened to are talking, this is the beginning of a credit crisis.
That has to at this point unwind itself because there’s already too much pressure that’s been built up within the system. Let me pause there and see how, how that sits with you.
[00:15:32] How Can You Protect Yourself?
Luke: I suppose if we’re talking to our audience of individual investors, I think there are a bunch of things you can do to protect yourself or at least, manage your exposure to a potential like doomsday that may or may not come. And if it does come, like, who knows when it’s going to come?
You don’t want to be sat on the sidelines for years waiting for something that maybe never comes. Forever. Um, but there is tried and tested approaches to managing your own portfolio. And I think we should probably focus the conversation on those. because Hey, look, I was, the way I was thinking about this on the car on the way back from Paris today, cause I was prepping for the conversation and I started off thinking about like, how did I feel when I checked my portfolio this morning and I was having a conversation with my buddy in the car.
like, he’s planning to retire, uh, in the next year or so. And his investment portfolio isn’t super material to that, but it is like a major factor. and the conversation was along the lines of like, oh, you know, you’re gonna push your retirement back.
Like we’re laughing about, how far, how deeply impacted we both were by what, how bad it looked when we were down like, you know, eight, 9%. At the beginning of the day, and my kind of reflection as I was doing the last leg of the journey home, when I saw actually, Oh, the markets are either markets turned back where, you know, we can retire again, you know, reset was, um, like if you felt like a schmuck this morning and you were like, ah, damn it, like I missed my opportunity to take some money off the table or I missed my opportunity to de risk my portfolio.
Well, like it’s 5 PM right now on Monday, the 5th of August. Like, you, you have, you’ve got a do over now, you’re almost back, I’m almost back to kind of even on the day. So if you felt like a schmuck when we were in the hole for a few hours, then there’s a good wake up call. You’ve got a chance to take those things that you wish you had done, because you might feel like a schmuck tomorrow or next month or next year.
When, uh, this doomsday, perhaps maybe it does hit us again, and maybe it’s much worse than eight or 9 percent in a day. Like there is plenty of historical precedent for, and a regular diversified investment portfolio to. Like take a 30, 40 percent drawdown in a very, very bad market, right? We’ve, we see that you probably see that every what, 20 years, something like that.
So that’s, that could be coming up. if you can’t withstand that, and if you, if it materially impacts your lifestyle, then you should probably take some actions now to address that.
Krzysztof: Yeah, that’s a good point. as you know, you know, I was, this is one of the reasons actually, I think our king of the jungle portfolio challenge, It’s really pragmatically useful, even though it’s both, you know, it’s competition and we’re doing it as a teaching tool, but I was thinking like, okay, this, I mean, I’m really trying to win this.
how am I positioned relative to Luke? You know, as far as, you know, because actually, because we didn’t expect, I think at the start, we didn’t expect to have such divergent strategies in this first lap around, right? And so I was asking myself, would I have, ought I do something differently or did I make a mistake?
And I was actually quite pleased, surprisingly. with the thought that essentially I have, honestly, at this point, because I did a bunch of moves on Friday, which I haven’t told you about yet, but essentially I have two companies in there predominantly, which is risky to only have two companies. But the reason I have them is because there’s nothing about them being overvalued.
at all. And I’ll say this again. One is a biotech, which in general biotech lives or dies by its data, regardless of what the market does. Remember, we’re talking about life and death scenarios, right? So, um, Coherus in this case. is a cancer company. People will need the cancer drugs regardless of what the market is doing, right?
That’s just a given. So, am I happy holding a company I think is vastly, it’s been beaten down mercilessly over the past several years. It has, it has nothing to do with the market, basically is the point. Is that a satisfactory position to hold? I say yes, because nothing has changed. And the other one for me was EOS.
And it was the same analysis I used, like, energy storage will not become less needed in the coming decade. It’s a beaten down small company. It passed its most dangerous point. at the market open, both were down something like six, 7%, but that was not the 13 percent that Nvidia was down and not the, whatever the, you know, high fire.
So it seemed to be a little bit more stable. so that approach feels. the best one I could come up with. And it still feels right.
Luke: My strategy is completely opposite because a lot of your strategy is kind of hedging in preparation. Because you own other stuff, and you own some short positions, like you own stuff that’s getting ready for a doomsday like the one we almost had today. I’ve taken the other approach, which is I’m managing my King of the Jungle portfolio just like I’m managing my own real portfolio, which is just buy and own.
In my view, the best companies in the world for a long time. And for me, like the one year cutoff, if I win or if you win, it’s kind of irrelevant. Like I’m just trying to ignore that. It’s a bit of fun. I’m just trying to stick to what I think is a sustainable long term strategy. and so I was asking myself, like, do I feel like a schmuck for being essentially fairly long, like in my real portfolio, I’m probably 18, 19 percent cash right now in my king of the jungle portfolio, maybe somewhat similar, maybe a little bit less, Like I don’t feel like a schmuck if we, if I close today and I was down like the bat, the number, I looked like I was going to be down.
I stick to my strategy, Maybe I felt I should have had maybe just a little bit more cash. Might’ve been happier with maybe 22, 23 percent cash. So maybe I’ll make a little adjustment. Tonight if I’ve got time and I might sell one or two more things that I think are maybe just on the chopping block I mean between really maybe Airbnb.
I’m looking at that a bit skeptically So I’ll have some thoughts on that over the next few days, I think and a few others
Krzysztof: Show me, show me any investor that wouldn’t like to have a little more cash on days when the market, right. And I’ll show you, you know, you know, like, uh, I mean,
Luke: But here’s your chance, right? Going back to my point about a do over, if you felt like you should have more, like a lower risk portfolio, whatever that means for you, like more bonds, more cash, or, you know, more like lower risk equities rather than like high create high risk, like, like biotechs, like things that are super volatile.
If you felt like a dummy, because you got caught your pants down this morning, then here’s your chance right now to de risk. I’d do it now if it worried you because, that’s the main learning, right? If the market short term volatility and short term is like a couple of years, if that short term volatility, like things could go down 30, 40 percent or worse, or they, maybe they don’t, if that scares you and it impacts your emotions and cause it might cause you to do something.
Like fatal, like selling a load of good quality companies at the bottom, because that’s how you really hurt yourself realizing your losses, then you should sell them now to take some money off table de risk so that you don’t panic later because you say to yourself, Oh, this is fine. Markets down. I’ve, you know, I’ve lost a ton of paper money in my, in my positions, but I have this stuff on the side that was lower risk that hasn’t been impacted so badly.
And now. If we’re in like a protracted one or two year downturn, I’m back in a mode where I flip the thing and I’m starting to reinvest that money that I had on the sidelines. Like make those changes now before it’s too late.
Krzysztof: so true. And unfortunately I, both of us live through both the COVID, um, meltdown and 2008. And it is, it is not an overstatement that you do not know what it feels like when the market continues to drop five, 10% several days in a row. And you think there’s no way it’s going to drop more tomorrow, and it drops even more.
We’re talking, I’m talking about like, it’s a visceral, like, stomach churning, I, you know, I need to maybe go vomit outside kind of feeling sweat, like, if you like, that’s a real thing that happens. This today, I’m translating as was a was more like a, you know, earthquake tremor. and you know, our listeners I’m talking about, you know how you reacted.
This is why what Luke saying is important. If you already felt somewhat queasy, do not think you got lucky and everything’s fine. Everything is not fine. This really could end very, very badly. We don’t know what this is. None of us know. Do what you need to do so that if everything falls apart, you’re not vomiting outside into the bushes.
Luke: Yeah.
Krzysztof: That’s a real outcome that, fortunately, from some of this
Luke: And there’s a bunch of real practical tests you can do, right? If you have money invested now that you’ve, you’re relatively confident you’re going to need in the next five years, you shouldn’t have that invested in the stock market. You should have that in. Like T bills and low risk stuff. you know, try not to have it in cash earning like 0%, but you could earn today.
You can still earn like four and a bit percent, four and a half, 5 percent on your money. You know, maybe you’ve got a big purchase coming out. You might be, you might be about to buy a house or something in the next couple of years, maybe you’re about to get married.
You know, you might need a big ton of cash to pay for an expensive wedding. Who knows? like, how would, how would your partner to be feel if you’re like, Oh, I’m sorry, darling. I proposed, you know, we were planning to get this, have the big white wedding and like the Hawaii honeymoon next year, but the market just shit the bed.
So we’re going to have to like postpone the wedding by a year. Right.
Krzysztof: Oops. that’s a good way to test, uh, test the real marital bonds right before you, right? You’ll
Luke: And look, if you’re about, if you’re about to get married and you know, your partner is a stock market aficionado, have this conversation with them. Like how, Hey, how did you feel about this? About Monday the eighth, fifth, the fifth
Krzysztof: right. Yeah. Um, it’s funny. You also mentioned something safer like T bills, which side note, they may or may not be as safe or risk free anymore as you think, because we’re talking about global
Luke: us, us default? Is that, is that what you’re hinting at?
Krzysztof: no, not default, but something like the U S tenure. Dropped like 4 percent overnight, which for a risk safe, you know, like,
Luke: but you, you, I think, I would argue I’m not an expert in fixed income. I think the way I’m playing fixed income is very smart. Um, and I certainly didn’t invent it, but I kind of came to it by my own conclusion. Like I just. I own UK equivalent gilts, but they’re basically T Bells that expire in less than a year.
And I’m just kind of rotating my money through one year bonds. And I have like 50 percent of my cash in one that’s expiring, actually one’s expiring next month. And then the other half of my cash is one is one that’s going to expire in kind of Q1 2025. And when the one expires next month, I’m going to rotate it into like a year out.
So it’d be like September, 2025. Like those short dated bonds don’t. like fluctuate so badly. And as long as you know, I know I’m going to hold them to expiry. So I know unless the government defaults, which has happened, that’s like super unlikely, unless the government defaults, you know, exactly to the cent what you’re going to get on what date.
So there is no risk other than default.
[00:27:39] How Was Bitcoin Impacted?
Krzysztof: okay, so that’s good. Let me talk about a disappointment that came out of this. Um, and it’s temporary, but, uh, let’s see, how do I begin talking about this? Bitcoin’s reaction. To this mark to this upheaval to me was I would call it, uh, I would put it in the disappointing category with some asterisks. So what do I mean? There’s a lot of reasons why people are excited about Bitcoin.
One of which is that it’s allegedly plays outside of the system. So it’s a kind of. ought to be a hedge. So if things are breaking over here, at least they’re safe over here. And Bitcoin dropped. Something like, um, well, the recent high was 69, 000 and they dropped to 49, 000. So 20, 000 in a matter of call it a week, is certainly not a successful hedge, nor is it a successful call it on ramp.
Luke: of interest, what did, because you know, you did, you described Bitcoin as like digital gold. What did actual gold do at the same times, you know?
Krzysztof: gold did well. Gold basically held steady. So this is one of these stress cases where, it’s disappointing. It’s, to be honest, it’s disappointing that Bitcoin didn’t stay steady, especially now with the bigger ETFs Allegedly, you know, steadying the more, just more money, more right. The ship is a little bit bigger. but here’s why I said there’s asterisks here. If you think about it, a lot of this news happened late Friday into Saturday, into Sunday. The bank of Japan opens up before the rest of the global markets. And we already know it, or it’s opening up to down six. We know that there were funds that got margin called and blew up to use that parlance right overnight,
Luke: Yep.
Krzysztof: there’s no other market that’s open in that moment besides Bitcoin as a now legitimate currency.
So I think what might’ve been happening is that at this stage, Bitcoin is still. In the early innings, and it’s more of this risk on risk off asset. And because of the timing of this stuff, it kind of got hurt by the fact that it’s, it’s so universal and universally accessible. What will be more telling for me is what happens, to what extent does it recover and it’s already recovered quite a bit with the rest of the market.
But I wanted I as a Bitcoin holder, as a major part of my portfolio in the future. want to see it not be so volatile. So this is a definite, temporary setback for the thesis.
Luke: Is there something you will do then in your kind of realization today, like you’ve, you are holding Bitcoin as a kind of hedge against certain aspects of like financial system meltdown. If nothing changes and Bitcoin melts down with the financial system, are you going to adjust the way you’ve structured your portfolio in that way?
Krzysztof: That’s a good question. what’s unclear to me right now is, is the timeframe. I can’t it’s, it’s almost like short term, everything gets, messed up over long term. I, it’s because Bitcoin has been going up just so steadily. I just don’t see the thesis being broken or challenged substantially over the long term.
So I think the answer to your question is no, not yet. Nothing changes. It’s the, because the, the other piece I think of the hedge has to do with inflation. And so it’s, it’s the, it’s the, an asset that doesn’t get inflated. And what happens in the next stage, let’s see, say this continues playing out the way I suggested might buy more, liquidity being injected into the system.
So then that gap between Bitcoin as a non inflationary asset and the global system as one that continues to get inflated gets wider. And if then in the next year, say two years, Bitcoin still continues to get whipsawed over, say, a three month period, then I will challenge the thesis. But for now, it’s just like, I’m categorizing it as too much short term.
It’s just part of too much short term stuff. Not its fault, sort of.
Luke: And one thing I hadn’t noticed, cause I’ve, I’ve been on the road today. You mentioned Nvidia took like a 13 percent drawdown at some point today and that the rest of the Magnificent Seven got hit hard. Like how, how bad was that? Can you bring it to life for me? And uh, like, should I be thinking about de Magnificent Seven ing my own portfolio do you think?
Krzysztof: let’s see, the thought I had was It made sense to me. All the pieces made sense. It would make sense to me why in video would be seeing a 14 percent drop. And then I looked at the chart and I saw like, not a technical chart with, you know, all the patterns and lines, but just the, the shape of the price.
And I realized it’s still, if you zoom way out, it is still very, very high. So I asked myself, well, it earnings is coming up
Luke: earnings coming out on the 28th of August.
Krzysztof: So I, I bought back tiny, tiny little position, the same thing I did with CrowdStrike after the debacle just to get it. up off my watch list into the portfolio, but I was really happy not to have it be a bigger position and not because it was down 14%. I didn’t put it this way. I did not, I was not at all whatsoever tempted to add at the 14 percent decline.
I kind of thought it more like, Oh, this is, I don’t mean to be cruel, but this is more like poetic justice and a little bit of the bubble popping stuff.
[00:33:35] Is Today A Buying Day?
Luke: Let me, let me jump on something you said, because there’s, there is something interesting here I think. I saw on quite a few people on Twitter talking about today being like a buying day. There’s a, you know, Oh, I’m, I’m not worried about the drawdown. It’s a, it’s a chance to buy some great quality companies at a discount.
Like that feels like it may not be the most sensible approach, uh, when you suddenly get like one day, a very steep declines, but you, we don’t know, right. This could be the first day of many. You know, things seem to recover today, but maybe they’ll, maybe we’ll see another six, 7 percent tomorrow and the next day and the next day and the next day.
I think we should, everyone should be thinking about like dollar cost averaging. So do take advantage in a small way of adding maybe to your highest conviction companies at the best valuations when you see like an opportunity to add a little bit, but if you’re making material moves like that, like snap, that’s not really.
Understanding the market, having a plan and responding. That’s like reacting, oh shit, like things have gone bad. Okay, I’m going to capitalize this on and buy some stuff. If you haven’t really done that with enough planning and forethought, and maybe You’ll be left with egg on your face because you might have thought you’re getting a bargain, but if you waited another few days or another few months, maybe it’d be even cheaper still.
So again, I want to, let’s bring this conversation, like touch in with practical things you can do. It’s great as an investor in individual companies to have like a watch list. So Christoph owns like one share of a bunch of companies. I just have like a to do list, a list of companies I’ve got my eye on that I know I want to add to.
And it’s good to check in on those watch list ideas. and add a little bit here and there, you know, obviously considering your transaction costs, I wouldn’t in a very volatile market, I would rarely make very big changes to my portfolio. I want to be like slow and steady. And if I’ve got like an idea on my watch list, I might do that over the course of several months, maybe by like a little bit.
Let’s give it a quarter. Let’s see some results. Another little bit more, another little bit more to even out the volatility. If you find your strategy is causing you to want to make like really big moves, maybe like even like I just said, maybe that was kind of dumb. 20 minutes ago in this conversation, I’m like, Oh, maybe I’m at 18 percent cash.
Maybe I should be at like 22 percent cash. That’s quite a big move I’d need to do to do that. So in reality, there’s my emotion speaking. And in reality, I should do that fairly slowly over the course of several months, really as a long term investor, if I’m trying to run a sustainable portfolio grounded in a strategy, like I have a plan.
So have one of those, there’s a practical thing you can do as an investor.
[00:36:20] The Benefit of Having an Investing Buddy System
Krzysztof: My takeaway from this morning’s events, or rather the events of the last three days. is that the systemic risk is much closer to a potential reality than mere hypotheticals. you just cannot ignore that any longer. how do you deal with that? If your timeframe is in the daily or weekly range, and you’re thinking, I’m just going to keep dollar cost averaging over days, you are not understanding, I think, fully what systemic risk means. So ask yourself. What might share prices look like six months from now or a year from now? And if you, if you put together systemic risk plus all time high valuations, what looks like a huge bargain today will look absolutely ridiculously high. In six months, so you have to pace yourself and Luke, you, you brought this, uh, as a strategy, you brought this to my attention some, some time ago, and I’ve never taken proper advantage of this, but maybe I should, which is to have like a buddy.
it’s similar to going to do a workout at the same time, you wake up at the same time you you hold the other guy accountable, right? It’s not a bad strategy. If I were at my best game, I would probably make you My, you know, accountable partner. Maybe, maybe I’ll do this and say, Hey, I have my itchy finger, right?
And I want to buy this thing. green light, red light, or like, is this, you know, and just, just that as a friction point might be enough to. get you thinking clearly.
Luke: uh, I use my buddy Albert for this fairly consistently. I, I kind of run everything by him before I do a trade because if nothing else, even if he doesn’t even read the damn WhatsApp I sent him, it forced me to explain why I was doing that thing, which means I had to figure it out, have my rationale.
I can’t just say I’m doing it because I don’t know, you know, so just being able to say, to explain to someone else. Your buddy, your mum, whoever it might be, why you’re doing this trade might cause you to be a bit more you’re the neuroscience guy, like the, you know, the sort of thinking modern part of the brain rather than like the primitive ape part of the brain that’s telling me to do this trade.
Krzysztof: Well, I’m also the monkey. So you’re the, you’re the one with the more highly developed neocortex. so take,
[00:38:47] Conclusions
Krzysztof: so last takeaway is, uh, I think now I would say now is not the time to buy. Now would be the time to wait and see. we felt the first tremor Maybe that’s all it is. Maybe the big one is is around the corner.
We don’t know.
Luke: we genuinely do not know. Like I have the large majority of my net worth in the stock market. I couldn’t tell you where things are going to be tomorrow, next week, next month, or next year. I’m just relatively confident in 20 years time, I will have done better by having my money invested in that way that I will have been having it in property, cash, under the bed, art, barrels of whiskey, whatever other asset class you might think of.
I’m a firm believer that in the long run, which is much longer than most people think, buying the world’s greatest companies and holding them for a damn long time is the way to generate significant wealth.
Krzysztof: Yeah, so we were planning on talking about quite a host of different topics today, including universal basic income studies, uh, what those mean. Badger had something to say about civil unrest in the UK, but this obviously today’s momentum and earthquake tremors in the market to precedent. So we hope we satisfied the, maybe the emotional need to, to get some perspective on what to do when things seem so volatile and so upsetting.
And I’ll reiterate it one more time. Uh, I don’t think that we’re, we’re out of the woods, therefore I’m doing my best to practice restraint to not get anxious to assess whether my portfolio right now can withstand whatever future seismic shocks may be around the corner.
Luke: Yeah. And do use today as a insight into your own emotions. And if today felt scarier than it should have, like here’s your chance to straighten yourself out. Maybe try and identify the most overvalued companies in your own portfolio and use that as an opportunity to maybe trim away at them a little bit, maybe move some of the value from those into lower risk holdings or just into T bills or cash or some other asset class.
And if you don’t know how to identify what the highest valuation companies in your portfolio are, let us know on the Twitters, because that is a topic. That we could probably spend multiple episodes on, I’ll be happy to talk about like how I value companies
Krzysztof: you know, one thing, one more thing comes to mind. This is a memory flashback from the 2008 financial crisis. I remember at one point sitting looking at my holdings and thinking, if this goes down further, it’s becoming absurd because we were entering something like, the equity is now worth less than the cash on the balance sheet.
I was like, this can’t be And then what happened the next day when it dropped even further and then the next day, even further. And so you have to remember, or you have to, if you haven’t, if you’re newer to this. You have to remember the old adage that says the market can stay irrational longer than you could stay solvent.
So, even though rationally it didn’t make sense that Google was dropping over and over and over and over again and you could, you know, it was worth, the enterprise value was basically at zero. That is what happened. So, under no circumstance should you be leveraged. At this point, given what we’re seeing and be prepared,
Luke: Let’s, let’s modify that a bit to say, like, if you are, if you are using leverage, Make sure you, you have a damn good understanding of your real exposure and make sure you’re doing that with sort of knowledge, because if you’re like some people, some traders will be taking advantage of these very high volatility times and there is money to be made.
It’s probably more your side of the world of, you know, It’s kind of technicals and short term stuff versus my side of the world. I know there’s, you know, I know people make plenty of, plenty of dough doing it that way and it ain’t for me. It’s a bit scary. But if you are, maybe go redo your homework and just make sure you fully understand if it gets bad, how badly it could impact you, like your leveraged positions could wipe out all of your, the rest of your portfolio if you get margin called in the wrong way.
Krzysztof: right? In fact, that’s a great last point. Maybe one of the things we can talk about next time, or if any of our listeners have questions is. If you want to take out what I call an insurance policy, the way homeowners take out insurance policies, we’ve talked about this before it, that is not as there are methods of doing that.
And that is not stupid in the sense that you would never tell somebody buying insurance is stupid. you are giving somebody money and expecting nothing back, right? You expect your insurance to go to zero, right? The same thing can be done in the stock stock market. So, potentially I might spend next week looking for what I think are the best hedges, so that you could, I mean, that helps you sleep better, right?
Luke: Yep. Yep.
Krzysztof: Okay,
Luke: Okay. Very good. Good emergency episode. Hope that was useful. And it hit our, the madness of Monday, hit our usual recording schedule. So this will be out on Tuesday the 6th. Let’s see. Uh, let us know in the Twitter and the YouTube comments, what happened to you, how you felt about the market today.
And whether you’re taking any actions to de risk or maybe, Hey, you’re a crazy guy and you’re going even more risk on in this crazy market. Let
Krzysztof: right. And if so, what positions did you double down on or take off the table? We want to know.
Luke: Yeah. None of this is investment advice, but let us know. We’ll be there to share the glory. And if you haven’t got like an investing buddy, Hey, Christophe and I’ll be your investing buddy on Twitter.
Krzysztof: Sweet. We’ll be your friends, um, at
Luke: You can find us on the X’s and the Twitters. I’m at seven Luke Hallard.
Krzysztof: 7 Flying Platypus.
Luke: Uh, if you’re looking for just timeless, good lessons, you can find our 10 laws of the investing jungle. Probably never so relevant as they are on days like today. You can get those as a free download at wallstreetwildlife. com.
Krzysztof: Sweet.
Luke: uh, how do we normally close out our episodes? Be careful. It’s a jungle out there. Like it really is a jungle out there right now. So. Be careful.
Krzysztof: Right. Arrrrgh!
