A new era in more ways than one
Politics have changed. A new president has taken office and with that come a lot of changes.
President Biden wants a lot of changes. Here are some of the changes Biden wants to accomplish:
Another round of stimulus checks - estimated at $1.9 Trillion
Some type of immigration action
Student debt forgiveness
Increased business tax rate to 28%
Cancelling the Keystone XL pipleline
And the list goes on. President Biden continues to sign executive orders daily.
We are still dealing with the global pandemic.
The virus is far from over.
So far only a small portion of older and high risk Americans have received the vaccine. Biden wants a lot more vaccinations. The country will only return to some type of normality when the vaccine is administered to the working population age 20-65yrs. Until that time people will still get sick and many parts of the economy will not recover.
The parts of the economy that cannot reopen without people being vaccinated:
Restaurants to 100% capacity
These are the areas of the market that are going to take years to recover back to preCorona days. There is likely money to be made investing in these areas, but it is going to take a long time to get there.
The market is going to continue to be volatile. Getting people vaccinated is crucial to the growth of economy. It is impossible for everyday investors to time this type of market. The best thing to do is invest on a regular schedule.
GameStop Short Squeeze To The Moon
There appears to be no stop to the share price climb for GameStop.
The stock continue to skyrocket in value with no change in the underlying business model or numbers. GameStop is not the only stock to experience this short squeeze phenom. AMC and BB - Blackberry has also increased in value because of Robinhood.
Robinhood appears to be go to platform where speculative retail investors live. They follow Elon Musk and read the Reddit thread r/WallStreetBets to find the next hot stock that is going to pop.
What is a ‘short squeeze’?
When an investor ‘shorts’ a stock they are betting that the stock will decrease in value over time. If an investors shorts a stock and it increases in value this is bad. In order to make up for the losses of the price increasing they are forced to buy shares of the equity. This drives the share price even higher.
This is what is happening to GME, AMC and BB. Retail investors are watching which stocks are being shorted the most and then buying heavy into the equity forcing large investors like Melvin Capital to buy back huge amounts of stock driving the price of the equity to new heights.
Is this legal? Yes
Can you make a lot of money in the short term? Yes
But it is also gambling. The fundamental of a business have not changed so if investors decide that the business will not continue to grow the price of the stock can drop just as fast. But you potentially could make a lot of money in the short term.
Future Travel Protocol
Travel and specifically airlines are aiming for a rebound in 2021, but is it really going to happen?
Airlines are predictable.
It seems like all protocols are the same across the airlines. When American Airlines banned emotional support animals the other airlines quickly followed suit.
Once the vaccine has been delivered, airlines are going to require passengers to prove they have been vaccinate before getting on the plane. This type of identification will be required to travel in the air going forward from now on.
This move will essentially force all Americans to take the vaccine whether they want to or not.
Oh and I still think airlines are a bad investment.
I love traveling and the idea of quickly moving around the globe. 2 people in my family work for the major airlines. I live in Dallas the meca of airlines, home to American Airlines and Southwest Airlines. But the financials for airlines are terrible. Management leading into the pandemic was horrible, using debt to make share buybacks. Yikes. Planes are expensive. Labor is expensive. Regulations are high.
All of the those things I could deal with but…
My problem with airlines is innovation and lack of focus on the customer.
How have airlines innovated?
They have added more flight routes
They have increased the number of airplanes in the fleet
They have increased the number of seats that can fit on an airplane
They have increased plane ticket prices
And in the process of this innovation they made the flying experience worse.
But that is really not the problem.
Lots of competition.
One source of revenue.
Here are the major airlines stocks in the US:
AAL - America Airlines
UAL - United Airlines
DAL - Delta Airlines
JBLU - Jet Blue
LOV - Southwest
ALK - Alaska
SAV - Spirit Airlines
HA - Hawaii Airlines
Airlines only make money by selling plane tickets to passengers. And whenever this source of revenue drops or is taken away the taxpayers must bail out the industry. Not a good business model.
They could do so much more. They could become an entire lifestyle brand. Resorts, hotels, luggage, clothing, magazine, entertainment. The list is practically endless of what they could provide to customers. They could even sell collectibles. People love airlines and all the aspects that go into travel. Model airplanes, blankets, carts etc.
But instead of diversifying their income and create more streams of revenue they focus on how many people they can possibly squeeze onto an aircraft.
As an investor, airlines will not provide you much long term growth.
There may be a short term play for airlines. As more the world reopens and more people start traveling the airlines stocks may rise based on travel optimism. This is also true of other Travel related businesses:
But the reopening of the world does not change the profitability or the business model for these businesses. Be cautious. Or avoid buying into these stocks at all.
What business do I really like?
ABNB - Airbnb
They went public on the stock market in 2020. A travel business in the year of a pandemic. What is the number one reason I like Airbnb?
Their inventory and number of customers is infinite. Anyone with a home of any kind can list it on their platform and then any citizen around the globe can sign up on their phone and use their service. This is not true of airlines or even traditional hotels.
Airbnb basically created an entirely new marketplace and anyone can participate. And then I love businesses that can have multiple streams of revenue. Service fee, advertising, online shopping etc. Airbnb can expand the business in a thousand different profitable direction.
Action: Buy ABNB and hold for the long term or at least add it to your watchlist to where it goes.
What does more stimulus mean for the market?
We are now in the era of Biden. And he has big plans.
First on the agenda is the Corona virus aka stimulus.
When the US Treasury sends out checks to individuals they are literally printing massive amounts of money. In a normal economy this could create potential for inflation and there is still that possibility, but in the current economic climate people are spending nearly as much as they normally would, because they are still working from home and not going out. So the money they are printing is just a substitute for money that would be generated during normal economic times.
There are a lot of people that need that money to pay their rent and bills. But then there are also a lot of people that are still working and will just save that money or invest that money.
A lot of individuals will invest that money in the market.
One of the reasons that so many people are investing into Bitcoin is a hedge against inflation and the FED printing money. As more money is introduced into the market more people will increase their investment into Bitcoin driving demand up.
Every time new stimulus is passed money is included for businesses. Businesses receive government funds. This drives us the profitability of businesses. This drives up stock prices.
Government spending rarely decreases.
There are a lot of businesses with government contracts.
You can play this several different ways: you could invest in defense contractors: Northrop Grumman, Lockheed Martin, Ratheon, General Dynamics
Or you could invest in healthcare aka medicare:
Moderna, JNJ, CVS, UnitedHealth Group, McKesson
Which business do I think as the most potential with the government?
The biggest of them all is Microsoft.
Microsoft sealed the JEDI contact with the US government worth $10 Billion to put everything into the cloud. This pretty much guarantees Microsoft revenue for life. And that is just the US government. I am sure Microsoft will also ink deals with other western European governments.
Microsoft is a growth story with their cloud, but also a dividend payer like Apple. I am betting that they will increase their dividend payout in years to come.
Action: Buy and hold MSFT - Microsoft for the long term.
Should you be afraid of “The Bubble”?
2020 was terrible for individuals, but great for the market. It reached all time highs!
And this primarily because the FAANG increased in tremendous value.
And when things are going good, people start to fear the downside. They get into protection mode rather than growth mode. They do not want to see their account balance decrease. And just like clockwork I start to see everyone talking about a stock market “bubble”. As if 1999 and 2008 are right around the corner.
But this is not 99 or 08. Tech businesses have real revenue and real profits. Banks are required to hold more money on hand. This is 2021. The last 3 major stock market declines happened because of some major economic event. The rest of the time the stock market continued to increase.
One of my favorite podcasts is Rule Breaker Investing. I love it because they take many traditional investing ideas and turn them on their head. Like buy low, sell high. Instead he says to buy high, sell higher.
You should invest more in companies that are doing well.
You cannot invest in bad companies and expect them to do great things.
The same is true with “bubble” talk. Do not fear a market downturn right around the corner. Find great companies that can thrive is good economy and a bad economy. One of them is Wal-Mart - WMT.
People need food today and they will need food tomorrow.
There are so many amazing opportunities out there. Even if the market does go flat and the pace of increase slows there are still great companies that will continue to rise, continue to grow revenue and net income and increase the number of customers they serve.
The Space Race
Everyday I am hearing about more and more companies focused on monetizing space.
It amazes me that only ten years ago NASA was the only space game and today you have Blue Origin, SpaceX, Virgin Galactic, Virgin Orbit, Momentus etc.
Cathie Wood and her ARK funds are coming out with a space ETF and you better believe that the other big boy financial firms are going to be launching space ETFs which will flood these companies with investor money.
Everyone seems fascinated with Space. There are tons of movies, people build rockets, Richard Branson has his sights set on space tourism. Honestly, I am not that interested in Space. I do not want to go to space and think that it will be a very long time before humans ever actually live or work in Space. Except for the International Space Station of course.
The biggest opportunity I see for Space is satellites.
More and more companies and countries will launch a plethora of satellites to watch over us and provide an infinite amount of data to mine. Maybe they will even provide internet access to various parts of the globe.
What is the problem with Space?
It is expensive. It takes so much capital to launch things into space and then bring them back down safely. Engineers, fuel, supplies, astronauts. It all adds up. And then you still have to have the infrastructure of a traditional business to monetize these products that are going to be created in space.
Even though space travel will become more prevalent and more companies will get into the space race it is going to be a long time before any of these businesses are actually profitable.
Unless you are truly interested in Space travel and are willing to hold these stocks forever, avoid investing in Space. There are too many other great opportunities out there.
Clean energy and the EV car stocks have been a tear in the past year and it does not look to be slowing down. Which is interesting because traditional energy aka oil has also been a tear. Two different sides of energy are increasing in value.
Oil was crushed in 2020 for good reason. With the world shut down there was no demand for oil/gas. As people get vaccinated and the world reopens demand will slowly increase.
What is the different between traditional oil stocks and clean energy stocks? Technology and dividends.
Exxon Mobil refused to cut their dividend in 2020. Oil stocks are some of the highest dividend payers on the market and it looks like this trend is going to continue.
Early in my investment career I made the mistake of chasing high dividends. Easy money looks attractive, but high dividends drive down share prices.
Clean energy has the wind at its back. The Biden administration is going to do a lot to promote the adoption of clean energy. But clean energy adoptions is going to take a lot of investment from institutions and governments. Why? Because of technology. It takes a lot of money to build up the technological infrastructure of a clean energy business. Wind Turbines, new electrical grids, energy storage, batteries.
Batteries. The demand for more batteries and battery components is going to explode in the next decades. Electrical cars require a ton of batteries. And then there are all the other electronics that use batteries - phones, computers, watches etc.
Investors are changing. More and more young people are becoming investors and they care more about the future than returns, but they want both. They have values that they want built into their investments and employers. They want to be a part of a positive future, not part of the problem.
Are you a stock picker or index investor?
I have this debate with myself all the time, should I invest everything in index funds or should I invest in individual stocks that I believe in?
Warren Buffett famously said that the vast majority of invest would be better off buying into the S&P500 index and holding it forever. And he is not wrong. The S&P over time will deliver handsome returns to any investor. Since 1950 the S&P has gone from 200 points to 3,500 points in 2021, that is a big increase. The great irony is that Buffett does not own index funds, but is a stock picker. But you could argue that Berkshire Hathaway itself is an index fund. It holds so many different assets that one failure will not bring down the entire business.
Every stock investor should start out with an index fund like VTI. It is a great way start learning about the market without taking on much risk. But index funds are a slow path to wealth. They work over time, but do not move much in the short term.
If you want to scale your portfolio faster it is better to have less diversification more concentration of assets.
This is why I graduated to picking stocks. I have a solid foundation of index funds: VTI, VUG, VGT
I am young and can afford to take more risk. So I have done my research and pick individual companies like Tesla and Twilio that I think are going to grow faster than the overall market in the long run. I may be wrong or right, but I still have that foundation of index funds.
Picking stocks can have big rewards, but also requires work. You have to do your homework beforehand and then keep buying over time. It can be emotional. People do not like to lose, they only want to see their stock go up. But honestly if you pick a few different businesses that you believe I really do not think it is much of a risk. One stock might not do well, but then you may have one that goes to the moon and makes up for the losses. This is also what happens on the show Shark Tank. The sharks do not win on every investment, but the few that do win make it all worth it.
You have to decide for yourself. Take a chance picking stocks and getting higher gains or be happy with your index funds gains. Only you can decide what is the path for you.
Harness Money Wrap Up
2021 is going to be a wild year. Hopefully the world will get vaccinated and 2022 we can all get back to traveling and going to restaurants without a mask.
People will get vaccinated and there will continue to be political divisions. Former President Trump will have an impeachment trial. TBD if there is going to be another round of stimulus.
I am predicting that 2021 will be a big year for the market. People are still afraid and where is there is fear there is opportunity.
Lots of businesses are going to go public
More SPACs will be created and be used to go public that ever before. Shaquille O’neal even has a SPAC!
Travel businesses will slowly rebound
Tech businesses will still be in highest demand.
The best thing you can do as an investor is dollar cost average into the market. Don’t try to overcomplicate your investment. Make a few great choices and then stick with them for the rest of your life.
The best way to build wealth is to become an owner. Buy more and more assets. Im not talking about consumer junk like clothes and cars, but stocks or real estate. Things that will appreciate over time. The wealthiest people: Bill Gates, Warren Buffett, Jeff Bezos even Oprah are all owners of really successful assets. Even if you are an employee you own a 401k. Take ownership of your life.
The more you can own the wealthier you will become.
Avoid GameStop, AMC and BB
Buy or watch ABNB - Airbnb
Buy MSFT - Microsoft - Long term buy and hold
Buy WMT - Wal-Mart - Long term buy and hold
Listen to Rule Breaker Investing
Define if you are a stock picker or index investor
Index funds that I like: VIT, VUG, VGT