Buy The Rumor, Sell The News?

Is America waking up from its COVID slumber? The number of people getting vaccinated is increasing daily. Yesterday, Governor Greg Abbott of Texas eliminated the mask mandate, and he’s allowing businesses to open up at 100% capacity. Mississippi is doing the same. President Biden anticipates most Americans will receive the vaccine by May. Are we ready for another Roaring Twenties?

The NASDAQ has fallen 6.5% over the past couple of weeks. High-flying stocks like Tesla and Peloton are trading in negative territory for the year; Zoom has dropped 17% since peaking last month at $451 per share. Netflix is down 10% from its all-time high. Are investors selling the working-from-home stocks now that the economy is opening up? It appears so because companies like Carnival, Southwest Airlines, and American Express are flying.

One possible outcome of the reopening economy is a broad sell-off in stocks as we start to live our lives again.  We have been staring at screens for the past year with little to do besides ride an indoor bike, binge-watch our favorite shows, and trade stocks. Investing was gamified. Individuals day-traded stocks based on posts on Twitter, Reddit, or WallStreetBets – and the more rocket emojis, the better! As we emerge from our outdoor hibernation, will we still focus our energy on buying heavily shorted stocks with poor balance sheets? I don’t think we will.

The market is forward-thinking; individual investors are concerned with the here and now. Markets are a collection of millions of investors, and the collective reasoning is that the reopening trade is already factored into the current valuation. The recent price action could be sending us a signal that the market may fall when we can roam freely.

If there is a correction, should you sell your stocks? If you own a globally diversified basket of funds, the answer is no. You likely own thousands of companies, so no need to worry about being in the right stock at the right time, nor do you need to time the market. However, if you have been feasting on a few speculative names, then selling some shares is recommended.

Your time horizon is another consideration. If your time frame is three to five years or more, use a market correction to add to your equity holdings – buy the dip. If you need your money in one year or less, sell your stocks and put the proceeds in a money market fund.

Another reason to buy or sell stocks during a correction is your ultimate financial goal. For example, if your goal is to retire with $2 million and your account value is $3 million, reduce your stock exposure because you reached your destination. However, if your portfolio is $1 million, you still need to save and invest to reach your target. In this case, buy stocks if they fall.

Last, the NASDAQ is up 85% from the March 2020 low, and several stocks climbed substantially. If you were fortunate to catch a few shooting stars, lock in some profits. It doesn’t hurt to take some money off the table.

A financial plan can help you quantify your goals and determine your asset allocation if you’re unsure how to proceed. It will guide your investment decisions. During the COVID correction last March, we were stress-testing our client’s plans regularly. The financial plans allowed our clients to remain invested through the correction, and as a result, enjoy the gains from the market rebound. We made our decisions based on facts, not rumors.

I have a strict policy. I will not and do not publicize unsubstantiated rumors about anyone — unless they’re very funny. ~ Jimmy Kimmel

March 3, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

This blog is not an offer to buy and sell Bitcoin. I do not own any cryptocurrencies because I don’t understand them as well as I should. If you want to trade this asset class, do your homework.

What A Year!

What a difference a year makes. Last March, COVID appeared, and global commerce came to a halt. The Dow Jones fell more than 30% as investors reacted to the virus and economic shutdown. Initially, working from home was expected to last a few weeks before things returned to normal. Larry Kudlow, former director of the National Economic Council, said, “We have contained this. I won’t say it’s airtight, but it’s pretty close to airtight.” He added, “The outbreak is a human tragedy. It will likely not be an economic tragedy.”[1] Mr. Kudlow made these comments last February. COVID has been a human and economic tragedy. It killed more than 500,000 US citizens, and the financial death toll for restaurants, movie theaters, airlines, cruise ships, and thousands of small businesses is staggering.

The Dow Jones Industrial Average bottomed on March 23, 2020, as investors pivoted to working from home via Zoom, DocuSign, Adobe, Microsoft, Slack, Shopify, and Amazon. The virtual economic engine roared to life. How will companies adapt to a post-COVID world? I expect working from home and virtual meetings will be permanent fixtures for everyone.

One of the best things to happen during the pandemic has been the COVID vaccine. Moderna, Pfizer, and Johnson & Johnson received FDA approval for their vaccines, and according to NPR, 15% of the US population has received at least one dose, and 7.5% have received both. To date, more than 75 million doses have been administered.[2] The vaccine is allowing states to reopen – finally.

During the initial phases of COVID, investors were aggressive sellers of stocks, but it didn’t last long as people went bargain hunting. The buyers eventually won out, and the “bear market” was the shortest on record. Over the past year, the NASDAQ is up more than 56%, small-cap stocks climbed 47%, and international companies rose 21%. Bonds, however, sold off. Long-term bonds dropped 9.5%.

A natural reaction is to sell first and check the facts later, especially during a crisis. Panic selling occurs when investors don’t have a plan, or if they have one, they don’t follow it. A financial plan or investment policy statement can keep you in the market to achieve your goals. If structured properly, your plan allows for market shocks and corrections. A suitable plan ensures your assets are in line with your short and long-term goals. Your asset allocation should represent your risk tolerance. If you’re an aggressive investor, you’ll likely own more stocks than someone who is conservative. Regardless of your risk tolerance, allocating a portion of your account to cash or bonds is wise. Safe components allow you to ride out a storm or sell them to buy more stocks. Our bonds performed well last March when the market dropped. As it rebounded, we rebalanced our accounts to more aggressive investments.

As the world awakes from the COVID slumber, here are a few thoughts for your investment portfolio.

  1. Create a financial plan. Your plan allows you to focus on your goals while ignoring the short-term fluctuations in the market.
  2. Allocate a portion of your account to cash and bonds. Safe investments can help your portfolio when stocks fall, and they can be sold to buy stocks.
  3. Rebalance your accounts. The markets were extremely volatile last year. If you did nothing, your investments fluctuated between too conservative and too aggressive. Rebalancing allows your asset allocation and risk profile to remain intact.
  4. Invest for growth. Market corrections and pullbacks are normal, but stocks always recover. If your time horizon is three to five years or more, allocate a sizeable portion of your account to stocks.

My prayer is that we all get vaccinated to attend sporting events, go to movies, and eat in crowded restaurants. I believe we are close to experiencing life in a post-COVID world, and I look forward to it.

Be safe and happy investing.

“Don’t worry about the world coming to an end today. It’s already tomorrow in Australia.” — Charles Schulz

March 1, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.cnbc.com/2020/02/25/larry-kudlow-says-us-has-contained-the-coronavirus-and-the-economy-is-holding-up-nicely.html, by Fred Imbert, February 25, 2020

[2] https://www.npr.org/sections/health-shots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state, March 1, 2021

Risk Management

Today I woke up to an inch of water on the floor due to a busted pipe from the Austin freeze.  We caught it early, shut off the water, and limited the damage. Despite shutting off our water, we’re lucky because we have electricity, a backup water supply, and food in the pantry. Others in our city are less fortunate.

Risk happens fast, and fortunes can change quickly. During a raging bull market, investors want to own the story stocks, the high-flyers. When a stock is mentioned on CNBC, Twitter, Reddit, or any social media outlet, investors buy it despite knowing little about the company. As stocks rise, some question the wisdom of diversification or the benefit of owning bonds. At some point, markets correct, and your diversified portfolio will limit your downside.

Stock market corrections are normal. Preparing for a pullback will allow you to take advantage of it and buy the dip. Bonds act as a buffer or a source of funds. They typically rise when stocks fall because investors are looking for a refuge. During the COVID correction, the S&P 500 fell more than 30%, while intermediate bonds dropped about 5%, and short-term bonds rose 2%.

Building an all-weather portfolio is your first line of defense against a risk event. It’s impossible to plan for every catastrophe, so don’t try. Rather, allocate your assets to stocks, bonds, and cash to minimize risk. Of course, there are trade-offs. If you own a large amount of bonds and cash, it will be safe, but it will mute your growth. If your allocation to stocks is high, you’ll experience larger drawdowns, but your long-term growth rates will be higher. Finding a balance between the two is part art and science.

Here are a few suggestions to safeguard your investments.

  • Have a financial plan. Before the storm hit, my wife and I had a plan. When disaster struck, we sprung into action. A financial plan allows you to act on facts, not emotion. It will be your financial emergency rescue kit.
  • Diversify your investments across size, sector, and class. Invest in a basket of globally diversified funds to give you exposure to multiple asset classes.
  • Rebalance your account. An annual rebalance will reduce your risk and maintain your asset allocation.
  • Invest in cash if you need the money in one year or less. A cash hoard allows your stocks time to recover. If you have cash on the sidelines, you won’t need to sell stocks when they fall.
  •  Invest in cash and bonds if you’re going to buy a home, a car, or pay tuition. If you need money for a large purchase, buy bonds or keep your money in cash so it’s safe and secure.

Risk and reward are linked. To capture high long-term growth rates, you need to take risks. The stock market rises about three-quarters of the time, and a quarter of the time, it falls. Welcome the corrections. A declining market allows you to buy quality companies at discounted prices. When the market recovers, you’ll be thankful you had the courage to buy when others were selling.

Be safe and happy investing.

“I always tried to turn every disaster into an opportunity.” ~ John D. Rockefeller

February 17, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Single Track

When I ride my mountain bike, I take calculated risks, or I used to anyway. I’ve ridden down mountains on beaches and through state parks. Riding down the Flume Trail in Lake Tahoe was a favorite. I’m not an overly aggressive rider, but I hold my own.

As my daughter was growing up, we went on long bike rides on the Linear Trail in Cheshire, Connecticut. She was perched behind me, tucked safely in her bicycle seat. I rode the bike carefully when she was a passenger, and we did not do anything crazy because I didn’t want to fall or put her in harm’s way. I had a duty to take care of her and bring her back home safely to her mother.

As an investor, I invest aggressively in my account. I take risks. If I suffer a loss, I analyze the trade, lick my wounds, and move on to the next investment. I don’t spend too much time worrying about the loss. Nor do I get upset if I sell too early. Over the past thirty years, I purchased many stocks late and sold them way too early. I don’t spend too much time pondering the woulda, coulda, shoulda.  

As a fiduciary, I take risk management seriously because it’s not my money. I ache when I sell an investment for a loss for a client. It hurts to realize losses for others. Like riding my bike with my daughter, my goal as an asset manager is to deliver a client to their desired destination. It’s my job to listen to their hopes, dreams, and fears and invest accordingly. I must act on their wishes – to a degree. If a client wants to invest in something counter to their goals or plan, I might say no, particularly if it may harm them financially.

We utilize financial planning to help us manage money for our clients. A financial plan determines the best path to pursue; it’s a financial trail map. How aggressively do we invest? Do we take on additional risk, or less? How much income do they need? The plan can answer our questions. During the COVID correction last March, we stress-tested accounts in real-time. Our financial plans gave us the courage to remain invested and our clients the peace of mind to ride out the storm.  Our risk management system worked.

An African proverb says, “If you want to go fast, go alone. If you want to go far, go together.” My goal is to embark on a long-term journey with our clients. We want to make sure they don’t run out of money in retirement – a worthy goal. To ensure we meet this goal, we prudently utilize a basket of low-cost, globally diversified funds. The portfolios are built for distance, not for speed – designed for the long haul. Our moderate model ETF portfolio returned 13.25% last year, an excellent return when judged on its own merits. However, we could have gone faster if we invested in the NASDAQ 100, QQQ. It was up 49%. But we could have invested in the ProShares Ultra Bloomberg Crude Oil (UCO) ETF, which fell 83%. Hindsight is 20/20. Risk and reward.

Calculated risks are essential to life and investing. Knowing your comfort zone as an investor is paramount. If you’re comfortable and confident with your holdings, you’re more likely to remain invested for the long-term, where you have an opportunity to create generational wealth.

Happy investing, and enjoy the journey.

Get a bicycle. You will certainly not regret it, if you live. ~ Mark Twain

February 16, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

I Want A Correction

Stocks have been on a tear since the March COVID pullback, rising 103%! Several companies have soared more than 500%, including Tesla, Nautilus, Tupperware, and Moderna. ARK Funds, led by Cathie Wood, had three funds rise more than 170%. And don’t get me started on Bitcoin, Gamestop, or the Reddit traders. Despite the outperformance from a few sectors, I’m hoping we get a correction, and the sooner, the better.

Why do I want a correction? Am I violating my fiduciary duty if I wish for stocks to fall? After all, investors fear losing money or getting wiped out as they did in 1929. For some, it is their worst nightmare. I’m often asked when stocks will fall, and some people only call me when their account is down. Despite their concerns, I have not met anybody who has lost all their money from investing, especially if they own a globally diversified portfolio of stocks, bonds, and cash. Despite concerns about a correction, they’re normal and healthy.

By several metrics, the market is expensive. Shiller’s CAPE ratio is 34.7, the second-highest reading in 140 years.[1] The previous high was February 2000, before the Tech-Wreck, where stocks fell 49%. Tobin’s Q metric is at its highest level in 76 years. The previous high? February 2000.  Value Line’s three to five-year growth potential for stocks is 35% – a low number. Last March, their indicator touched 145% before stocks rose more than 100%. Last, the dividend yield for the S&P 500 is at its lowest level in two decades, 1.57%. In February 2009, it touched 4% when stocks bottomed following the Great Recession.

My anxiety rises when stocks enter the feeding-frenzy phase as they are now, and like they were in 1999. Social media is fueling the fire as some investors pick stocks based on memes or rocket emojis. It appears easy to make money trading stocks or options with a few clicks of the mouse, but it’s not the case. Yes, you can get lucky if you jump on the bandwagon at the right time, but over time, valuations matter – research matters. Price matters.

I look forward to corrections because I can buy great companies at lower prices. When stocks fall, investors panic. They don’t hold the line, and their diamond hands turn weak. A bear market is where you get the best prices. Also, during a correction, you will have little competition to add quality names to your portfolio. Others will think you’re crazy for buying stocks during a market meltdown, but if you want to create generational wealth, you need the courage to buy when others sell and sell when others are buying – short-term pain for long-term gain. Buy low and sell high.

Of course, stocks can rise forever and can remain overvalued for years. No one knows when the next correction will come, including me. But when it does, welcome it with open arms and a blank check. A friend once told me, “If you’re upset that your stocks are down and you want to throw a brick through my office window, tape a check to it because it’s probably a good time to buy!”

Some of my best purchases occurred during the depths of a bear market, including Amazon, Google, Microsoft, Disney, and Pepsi. During the Great Depression, Sir John Templeton bought 100 shares of every company trading below $1 per share. Most of the companies he purchased lost money, some remained stagnant, and a few were big winners. His strategy made him a billionaire.[2]

How can you take advantage of a correction? Here are a few ideas.

  • Create a shopping list of companies or funds you want to own.
  • Keep your powder dry, and move some cash to the sidelines and wait for stocks to fall, and then pounce on your best ideas.
  • Diversify your assets. A globally diversified portfolio of funds will limit your downside when stocks fall. Allocating money to bonds, international stocks, or alternative assets is a prudent investment strategy.
  • Rebalance your accounts. Our models were rebalancing some accounts weekly during the March correction because the volatility was off the charts. Our models initially rotated from bonds to stocks because we were selling expensive assets (bonds) to buy cheap ones (stocks). As the market rebounded, our models rotated through all our asset classes.
  • Sell your winners now as stocks trade to all-time highs. Lock in some profits.
  • Write options (sell calls) against stocks you own to generate income and potentially sell at a higher price.
  • Write options (sell puts) on companies you want to own at a lower price. Selling a put below the stock price allows you to generate income and potentially purchase your company at a lower price.
  • Be patient and wait for bargains. Do not chase stocks and fight the urge to follow the crowd.

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful. ~ Warren Buffett.

February 11, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] Ycharts – 1881 to 2021.

[2] https://en.wikipedia.org/wiki/John_Templeton

Rising Rates

Interest rates are rising. Year to date, the yield on the US 30-Year Treasury bond is up 24%, and from the July low, it has risen 75%. Though rates are near historical lows, they can rise quickly. When rates rise, bond prices fall, and at some point, they will threaten stocks as investors search for decent returns with less risk. Interest rates remained below 5% from 1875 to 1966 before climbing to 15% in October 1981.[1] The 146-year average is 4.52%.

I don’t anticipate rates to approach 15%, but small, upward movements can damage a bond portfolio. A 30-year bond will fall by 19.5% if rates rise 1%. The iShares 20+ Year Treasury Bond ETF (TLT) is down 5.2% this year. Rising rates are not all bad, however. Individuals with large cash balances should see their rates rise on their accounts.

How can you protect your portfolio or take advantage of rising interest rates? Here are a few suggestions.

  • Deposit more money to a money market fund. The rate of interest you earn on your money market fund will increase without lowering your fund’s price.
  • Invest in short-term US Treasuries or CDs with maturities of six months or less. The short term duration will allow you to capture higher rates when they mature.
  • Invest in a bond ladder with maturities of one year or less.  A recommended bond ladder is to purchase US treasures with three-month maturities, so bonds come due at 3-, 6-, 9-, and 12- months. This ladder gives you liquidity and flexibility.
  • Sell your long-term bonds with maturities of twenty to thirty years. If you own long bonds, you probably have significant gains. Sell your bonds, lock in your profits, and buy shorter-dated bonds. However, if you need the income from your bonds, don’t sell. I know it’s a contradiction, but one is a risk reduction strategy, the other is an income strategy.
  • Buy a bond fund with a duration of one to five years. The short-term holdings in the funds will fare better than long-term securities if rates rise.
  • Purchase high-quality corporate bonds. Corporate bonds offer higher rates than CDs or treasuries because they are not guaranteed.
  • Invest in tax-free municipal bonds with short-term maturities. In addition to protecting your assets, you will receive tax-free income. If tax rates rise, your after-tax rate will increase. For example, a 3% taxable bond equates to a 4.76% bond for individuals in the 37% tax bracket.  
  • Purchase an inflation-protected bond fund. The iShares TIPS bond ETF (TIP) is up 8% over the past year.

Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is very low gravitational pull on asset prices. ~ Warren Buffett

February 10, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://ycharts.com/indicators/us_longterm_interest_rates

Is This Time Different?

GameStop stock soared to all-time highs last week on the wings of social media traders. The Reddit traders put the short squeeze on GME and almost destroyed two high profile short-selling firms. At one point, GameStop had risen more than 1,600%! On Twitter, Reddit Investors said, “It is the common man vs. the suits.” They added, “I’ve talked to a lot of suits this weekend, and 90% of them are extremely concerned this debacle with meme stocks is going to blow up the market in the near-term.”

As the social media warriors tried to “stick it to the man,” trading on the Robinhood app exploded, and  Wall Street made even more money. Citadel is the primary trader for Robinhood and other firms, and last year they made $6.7 billion trading “free” stocks.[1] The more individuals trade, the more money Wall Street makes. One former Wall Street veteran told me: “We are in the moving business, not the storage business.” Wall Street loves activity, and it doesn’t care about your moral victories or if you want to “hold the line.” Since GME peaked last Thursday, it has dropped 80%. John Maynard Keynes said, “The market can remain irrational, longer than you can remain solvent.”

Is it true? Will a group of day trading, social media experts bring down Wall Street? Let’s review some history.

The Crash of 1929

The roaring twenties was a decade of excess, showcased by F.Scott Fitzgerald’s The Great Gatsby. The era was ripe for speculation following the Spanish Flu, and traders bid up stocks by leveraging their accounts ten to one. According to Macrotrends, the Dow Jones Industrial Average climbed 449% from 1921 to 1929.[2] Towards the end of the bull market, several high profile stocks like Anaconda Copper, GE, GM, Montgomery Ward, New York Central, RCA, Westinghouse, and Woolworth rose an average 158% from March 3, 1928, to September 3, 1929. Less than two months later, the group fell 73% as the stock market crashed on October 29, 1929.[3] After the crash, the government established the Securities and Exchange Commission to protect individual investors. The Dow Jones did not breach its pre-crash high until 1959, thirty years later!

The Nifty-Fifty

The nifty-fifty was a group of large companies that investors loved to own during the 1960s and 1970s. These momentum stocks were made popular by the legendary investor George Tsai who managed the Fidelity Capital and Manhattan Funds.[4] The nifty-fifty stocks traded to excessive valuations, and the PE ratio for these stocks climbed to more than 100. A few of the names included Coca-Cola, IBM, Polaroid, and Xerox.[5]The party ended during the market correction of 1973 and 1974 when stocks fell more than 40%. The Dow Jones declined 71% from 1965 to 1982, and It would take fourteen years for the Dow to eclipse its 1965 top.[6]

The Tech Wreck

Technology stocks soared during the mid-nineties as the internet brought elaborate trading tools to the masses. The internet turned individuals into trading machines with access to websites managed by E*Trade, Schwab, and TD Ameritrade. If you need proof of the excess, please Google E*Trade investment commercials.  From January 1995 to February 1, 1999, the Dow climbed 144%, and the NASDAQ soared 233%. Stocks like Qualcomm, Enron, Iomega, Worldcom, Global Crossing, and pets.com mesmerized day traders. A new paradigm arrived until the market corrected. The NASDAQ tumbled 70%, and the Dow Jones fell more than 32%. The tech-wreck brought the party to a halt. It took the NASDAQ more than fifteen years to recover its all-time high!

Today

Boom and bust cycles are part of investing. Pursuing quick riches through day trading is fleeting, and it only lasts a few years, at best. It took the stock market an average of nineteen years to recover the losses from the Great Depression, Nifty-Fifty correction, and Tech Wreck.

Is this time different? I doubt it. Individuals who trade without a plan to chase short-term riches will suffer when the market corrects. Long after the GameStop fiasco is over, large Wall Street firms like Goldman Sachs, Morgan Stanley, and Citadel will still be standing.

Be careful. Trade lightly.

“The four most dangerous words in investing are: ‘this time is different'” ~ Sir John Templeton

Book Recommendations

This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff

Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger

Irrational Exuberance by Robert J. Shiller

Against The Gods by Peter L. Bernstein

Barbarians at the Gate by Bryan Burrough

The Big Short by Michael Lewis

The Panic of 1907 by Robert F. Bruner

February 2, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.wsj.com/articles/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612089000?mod=searchresults_pos4&page=1, Alexander Osipovich, January 31, 2021

[2] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

[3] Only Yesterday by Frederick Lewis Allen

[4] https://en.wikipedia.org/wiki/Gerald_Tsai

[5] https://www.investopedia.com/ask/answers/08/nifty-fifty-50.asp ,Barclay Palmer, March 24, 2020.

[6] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

Enough

Gamestop stock has soared more than 1,750% over the past few weeks, led by an army of Robinhood traders utilizing sites like Reddit and WallStreetBets. These social media warriors knocked one hedge fund manager to its knees as Gamestop soared to dizzying heights. The day traders forced Melvin Capital to cover its losing trade, and as a result, they needed about $3 billion from Citadel and Point72 to “shore up the fund.”[1] David versus Goliath.

In 1999 I managed a Morgan Stanley office. Morgan Stanley was, and is, an enormous banker for IPOs, and during the height of the tech-boom, they brought hundreds of companies public. I had a front-row seat to the feeding frenzy. The firm introduced a commission-free trading account called Choice, and it unleashed pent-up demand for traders. Some individuals made hundreds of trades per month, trading popular stocks like Qualcomm. From March 1999 to January 2000, it jumped 1,700%, but two years later, it fell to $12, dropping 87%.

Qualcomm was not flying solo. In 2000, Microsoft, Cisco, Qualcomm, Intel, and Applied Materials were the day’s darlings. An investment of $10,000 ($50,000 total) to these companies in 2000 fell to $29,903 in 2017, a drop of 40% over seventeen years! It took more than fifteen years to recover your initial investment for most of these companies, and Cisco Systems is yet to reclaim its historical high reached in April 2000.

At some point, valuations matter, and investors will focus on earnings, revenue, cash flow, and profits; until then, tread lightly and be careful with these high-flying investments.  As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.”

I’m a believer in capital markets, and the less regulation, the better. Buyer beware. If investors make money trading speculative stocks, so be it. But, I don’t want to hear them complain when the market corrects, as it always does. It might appear the best way to make money investing is during a bull market when stocks are trading at all-time highs, but this is not true. A bull market will enhance your wealth, but it won’t create it.  To build your fortune, invest in stocks during a bear market. During the dark days, prices are cheap, unloved, and undervalued – an ideal time to buy stocks.  If you’re patient, you will have an opportunity to purchase a basket of quality companies at lower prices.

The rise of a few speculative stocks like Gamestop, FuboTV, Bed Bath & Beyond, Virgin Galactic, Nikola, Tesla, Palantir, and so on may cause you to rethink your investment strategy. Don’t abandon your plan to chase momentum stocks because a momentum strategy ends quickly, without warning. And when it does, it won’t be pleasant. Have you ever played musical chairs?

After graduating from college, I bought a few thousand shares of a penny-stock from my roommate. I speculated with money I didn’t have, and I lost it all. It hurt me financially, but it was a reason why I entered the investment business. I wanted to learn how to manage my own money for the long haul, and I’m thankful I learned a valuable lesson when I was young and dumb.

I often think it’s easier to make 100% on a short term trade than earning 7%, 8%, or 9% for decades. It’s possible to get lucky in the near term, but it takes courage, patience, wisdom, and fortitude to hold stocks for generations.

If you’re experiencing FOMO and want to invest in a few YOLO trades, here are some ideas to help you with your trading.[2]

  1. Limit your trading capital to 1% to 3% of your investment assets. Do not use retirement funds to speculate on stocks with weak balance sheets. Don’t gamble with money you can’t afford to lose.
  2. Do not use margin to buy stocks. Leverage works when stocks rise, but it will kill you when they fall. While at Morgan Stanley, a broker had an account go negative because of a margin call. The client used leverage to speculate on stocks, and when they fell, he lost all his money, and he needed to deposit a check to cover his debit balance.
  3. Take gains if you made big money in the short term. Selling half to three-quarters of your original position is prudent, allowing you to diversify your assets and stay invested. You want to live to see another day.
  4. If you have never traded options, don’t start now. Options are derivatives of stocks, and if you’re not careful, you can lose money quickly. They’re wasting assets, and you must be right on the company, the direction, the timing, the price, the strike price, and the expiration date. If you want to wade into the options market, hire an advisor with years of trading experience.
  5. A financial plan or investment policy statement will keep you focused on your long-term goals. Review and consult your plan often if you feel like you’re missing out on extraordinary gains; chances are, you’re not.

Investors with enough money are less likely to chase returns, hoping to cash a winning ticket. They’re content with their holdings and don’t feel like they’re missing out on the party because they have a plan, and, more importantly, they follow it. If you’re speculating to create wealth, it will evade you like a lottery ticket. It’s better to grow rich slowly than to try and get rich quickly.

Be patient, follow your plan, think generationally, and good things will happen.

Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. ~ Proverbs 13:11

January 27, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Sources: YCharts


[1] https://www.marketwatch.com/story/hedge-fund-melvin-capital-closes-out-gamestop-short-cnbc-2021-01-27, 1/27/2021 by Willam Watts

[2] FOMO = Fear of missing out; YOLO = You only live one.

Supermarket Investing

When I walk into my local supermarket, magnificent smells of freshly cut flowers and a sea of fruits and vegetables welcome me. Further on, I encounter the aroma of baked bread, cookies, and cakes. My senses are overloaded, and I have yet to start shopping.

A supermarket layout is science-based, but pomp and circumstance also play a significant role in our shopping experience. It’s full of vibrant colors, smells, and sounds designed to keep us moving as we fill our shopping carts. The items we need are located in the back; the things we want are near the front. End caps display new or seasonal products designed to catch our attention. Between the front door and the milk section, we encounter presenters offering us free food and drink samples while introducing us to a new recipe or cooking trend. If we make it through the aisles unscathed, we must pass one final test – the checkout stand. While checking out, we stare at soft drinks, chips, candies, and tabloids, all impulse buys. I always shop with a list, and I never enter a grocery store while hungry to avoid the subtle traps.

Investing is similar to grocery shopping – a lot is going on, so a plan is recommended. Investing without one is like entering a grocery store without a list; if you’re not careful, you can get into trouble. A financial plan keeps you focused on your goals and helps you avoid distractions that may derail your future. It can also limit impulse purchases of investments that don’t belong in your financial basket.

We need staples to survive, like fruits, vegetables, meats, eggs, milk, etc. We don’t need peanut M&M’s, but they’re fun to eat on occasion. A portfolio designed to last generations needs a strong core of globally diversified high-quality stocks and bonds. An appropriate allocation for your core holdings is 85% to 95% of your total balance. Invest the remainder of your account in high-flyers, seasonal trades, or alternative investments if you want to give your portfolio a boost.  

The center aisles are a mix of, well, mixes, packaged foods, and canned foods; ingredients developed to enhance your meals. Portfolios require supporting investments as well. Small-cap stocks paired with large-cap companies mixed with a few bonds is a recipe for success.

My wife can make the rounds in our grocery store with her eyes closed, which is good and bad. She is an efficient shopper, but it’s possible to become complacent and ignore new items or products – investors who are pococurante risk missing new ideas or opportunities. If you let your portfolio get stale, you may fall behind your stated goals. I recommend reviewing your holdings and your plan two to three times per year to stay up to date with new trends. Avoid putting them on auto-pilot.

Should you always avoid end cap displays or check out items? No. These sections of a supermarket can introduce you to bargains, new products, or reflex purchases. They can also bring some fun to your shopping experience. Investing in seasonal trades, speculative stocks, or alternative investments may bring you joy if they work. Limiting your purchases to 3% to 5% of your portfolio value will avoid pain or destruction if you’re wrong.

When I was fifteen, I worked in a small grocery store with some friends. I earned $2 per hour and learned much about stocking shelves, bagging groceries, and watering produce. I was continually moving from one aisle to the next. It was our job to ensure the store looked good at all hours. It was a good primer for my chosen career.

As you build your shopping investment list, include a basket of large, small, and international companies. Add a mix of bonds, real estate holdings, and alternative investments. Rebalance your accounts annually and review your plan often. Think generationally, but pay attention to short term opportunities. A balanced portfolio based on your financial goals will treat you well over time.

Happy shopping!

Anyone who believes the competitive spirit in America is dead has never been in a supermarket when the cashier opens another checkout line. ~ Ann Landers

January 25, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Bubbles

On December 5, 1996, former Federal Reserve Chairman Alan Greenspan delivered his famous “irrational exuberance” speech. He was referencing the speculation surrounding the valuation of dot.com stocks. The market eventually corrected, and the bubble did pop, but it took three years to do so. Twenty-five years later, the S&P 500 index is up 417%. If you purchased the index on the day of his speech, your average annual return has been 7%, and a $10,000 investment is worth almost $52,000!

Today, some experts are declaring we’re currently in a bubble, and the market could crash. One high profile investor said we are in a bubble with “very seldom seen levels of euphoria.” He added: “never been a great bull market that ended in this kind of bubble that did not decline by at least 50%.”[1] On CNBC this morning, another investor said: “It feels a lot like 1999 to me.”[2]

The market will eventually correct, as it has done for centuries. The S&P 500 had three major corrections this century: 2000 to 2003, 2008, and 2020. Yet, we are currently trading at all-time highs.

During the first decade of the century, US stocks generated a negative return, but international stocks, small-cap holdings, and fixed income investments produced positive returns. This year, emerging market stocks are up 8.6%, outpacing the S&P 500 by 6%. During the past six months, small-cap stocks have trounced the S&P 500 by 20%!

Diversification is the essential component to creating generational wealth. A balanced portfolio allows you to capture returns from global markets while reducing your overall risk. Your US stock exposure may fall between 20% to 40% in a diversified account, so a majority of your portfolio is elsewhere.

Rather than worrying about bubbles, focus on your goals, save your money, follow your plan, and enjoy your life.

Life is too short, too precious, too painful to waste on worldly bubbles that burst. ~ John Piper

January 21, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Sources: YCharts


[1] https://www.cnbc.com/2021/01/21/jeremy-grantham-says-market-is-in-a-bubble-amid-investor-euphoria.html, by Weizhen Tan, January 21, 2021

[2] https://www.cnbc.com/2021/01/21/barry-sternlicht-stock-market-frenzy-feels-like-1999-dot-com-bubble.html, by Kevin Stankiewicz, January 21, 2021