What Markets Do To You, And What You’re Supposed To Do

Facebook advertising can be overwhelming because of how inconsistent it can be. Despite it’s inconsistency, it still is and will continue to be my go to place for marketing. I’ve been busy with the launch of our new store as I mentioned in my last blog yesterday. So I’ll be writing this one in a hurry, so I can head back to work.

Markets. They are a good place for everyone to passively build wealth while you actively work on your business or in a job. But in times like this, markets can get the best of you. Let me tell you a story.

The first time I bought a Bitcoin was for $1000. The first time I sold a Bitcoin was for $200. I think most people are aware that Bitcoin went all the way up to $20,000 and trades today at $6000. I was a newbie in the markets. I continue to be even today, but I wouldn’t make that same mistake again. You shouldn’t either.

If you always wanted to own a certain asset whether it’s Bitcoin or stocks or gold, now and the weeks to come could be the time to do that. 2020 is a better time to buy these assets, as they trade 30% below the price they traded in 2019. 2021 could be an even better time than 2020, but we don’t know that. What we do know is 2020 is a better time to buy than 2019.

As cliche as it may sound, buy when there’s blood in the streets and if you can’t, that’s okay. At the very least though, don’t sell when there’s blood in the streets.

Currency? Store of Value? Uncorrelated? What is Crypto?

During the market meltdown that started about 10 days ago, crypto-assets crashed the most. With Bitcoin going as low as $3500 from the high of $8000 in a single day posting the largest value drop since inception, everyone wondered what is Bitcoin?

People didn’t expect this drop to happen. Here’s Brian, CEO of Coinbase, tweet about this

People wondered if Bitcoin isn’t currency (volatile), or store of value (posting massive losses in value), and it’s also not uncorrelated with stock markets or other assets, then what is it?

Personally, it made me wonder that too. If it can’t even act as an hedge against the other markets, what is it? This drop affected my confidence in this asset-class. However, only a week later, my confidence picked up, at least by a bit.

During the first 3-4 days of the meltdown, I started to see that gold is losing value too. What is often seen as the safe haven during financial turmoil, was losing value too. The oil markets crashed as well, although that likely happened for a different reason, but it did. There was pretty much nothing that didn’t lose value.

What I concluded in the end is that during a financial crisis like that, people sell everything to move to cash. It doesn’t matter what asset class. It doesn’t matter what safe haven. All assets are sold so people can sit on cash and take their time to understand what’s happening before figuring out what to do next.

In the next week, I saw crypto-assets and Bitcoin rebound by a lot. It is trading above $6500 at the time of this writing. It is still below where it dropped from, but has recovered by a lot. Meanwhile, the stock market hasn’t recovered at all. The S&P 500 index for example is still down by 30%. What I’ve concluded from that is while all assets are correlated at the time of turmoil, only 10 days later, I can see crypto-assets moving in a different direction. I feel that in the coming weeks and months this uncorrelation will be very well established.

And that would be the first real world test that this asset-class would pass.

Are Stocks Manipulated?

I wasn’t old enough in 2008 to see, feel or understand what happened to the world, economically. It was only later that I learnt about the financial crisis and recession from the documentaries and movies.

When I started investing a few years ago, I invested in crypto before I invested in stocks. Once I tried to invest in stocks, I was turned off by how far behind the tech was. But I liked stocks for being the real thing. Representing real companies, with real earnings. More substance, and less speculation. Today, however, I’m confused between the two asset classes, and I thought to compare them a bit.

One of my first disappointments with stocks was that the trading hours were restricted to 9-5 / Mon-Fri as opposed to crypto-assets which are traded 24/7.

Another disappointment with stocks was the inability to own and store them the way I can own and store crypto. I had to leave the stocks with the broker account. I couldn’t move my stocks around between brokers and I couldn’t store my stocks in an hardware wallet. This is unthinkable in crypto. Only newbies leave their assets on an exchange or with a broker. Not your keys, not your money.

As for crypto, I hated the fact that markets were manipulated so much. USDT (Tether) faced allegations year after year that they are just printing USDT out of thin air and using them to manipulate crypto and specifically Bitcoin prices. That they don’t have the actual USD in their bank account in the same amounts as the USDT in circulation. Eventually, they were able to prove it time and again that they have the equivalent funds available with them.

What I’m seeing today happen to stocks makes me think that stocks are perhaps manipulated even more than the crypto-assets. For example, how the Fed is cutting interests to put market on steroids. The fact that Fed has injected trillions of dollars created out of thin air to solve what they term as “liquidity crisis”. But the most mind boggling is how these dollars are created, let’s hear that out from the ex-Chairman of Federal Reserve

I want to finish this off with circuit-breakers. What are these circuit breakers? Whenever markets dip more than 7% in a single day, trading is halted for 15 minutes. When markets dip 13%, trading is halted for another 15 minutes and at a 20% dip, trading is halted for the rest of the day.

This is unthinkable in crypto where we’re used to seeing 70% dips in a single day but no circuit-breakers are introduced to manipulate the prices. The amount of effort Fed puts in in keeping the stock prices afloat is nothing short of manipulation as these practices are unthinkable in crypto trading which we see as the free markets.

Why Does the Fed Cut Interest Rates When Stocks Fall?

As you may have seen that worldwide stocks are falling as the COVID-19 fears have completely taken over the markets. The S&P500 index has fallen nearly 20% from it’s ATH. Asian and European stocks are also following suit.

When markets crash like that, Governments step in and offer certain incentives to businesses like tax-cuts and cheap credit / lower interest rates etc. The governments say that cheap credit will enable businesses to fuel growth with lower borrowing costs. However, there’s an interesting theory on why the Fed really offers cheap credit and what the businesses really do with that credit, read below.

TL;DR: Companies use cheap credit (e.g 0.5% interest rate) to buy back their own stocks which post 5-10% profits per year.

One Crypto Project That Everyone Should Watch Out For

In the last 2 years, much of which has been a bear market for crypto-assets, there’s one crypto project that has been invincible. Compared to market peak value in 2017, it has lost only about 15% value through the bear market in USD terms while it has gained 30% value in BTC terms. I can say with certainty, that it is one of the few, if not only, crypto-assets to gain value in BTC terms during the bear cycle.

In the last 10 quarters, the parent company behind the project has posted nearly a billion dollar in profits. While the founder of the company is worth over $2 billion. I’m talking about Binance, and the crypto token is $BNB.

The thing about Binance is that it is a market leader crypto exchange with more trading volume than any other exchange. $BNB, which is Binance’s native token has a maximum supply of 200 million tokens. Of this, 100 million tokens are meant to be burnt or destroyed every quarter based on the revenue generated by Binance. This causes the supply to constantly decrease therefore increasing the price per token. In my opinion, this is the dividend equivalent of stocks in crypto-sphere.

So far Binance has burnt ~17 million tokens in 10 quarters. As mentioned earlier, they plan to continue burning tokens until 100 million tokens are destroyed. At this pace, it would take 58 quarters or 14.5 years before Binance is able to burn all 100 million tokens. And as more and more tokens are burnt, the price per token will constantly be rising.

Moreover, crypto trading has continued to happen as usual despite the bearish sentiment. As the time keeps passing by, trade volume flows between different coins and different pairs, but the trading goes on as usual. This is evident and can be seen in Binance’s case where trade volume and coin burn continued happening and Binance kept posting profits month over month despite the bear market.

While there’s uncertainly surrounding every other crypto project regarding price, speed, reliability, tech, SEC, FinCEN, FATF etc, the fate of most crypto projects is unclear. But as investors continue to bet on and trade one of these projects, Binance wins. And regardless of whichever project(s) come out to be the winners, Binance still wins.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

What To Expect From COVID-19 Coronavirus

Bill Gates wrote, and I quote

In the past week, Covid-19 has started behaving a lot like the once-in-a-century pathogen we’ve been worried about. I hope it’s not that bad, but we should assume it will be until we know otherwise.

I recommend that you read the full article written by Bill Gates to get in depth insight on the epidemic. In the meanwhile, just like Bill Gates, I hope it’s not that bad, but for now there’s no reason for me to believe that it isn’t. So I’ve done some reading on the subject myself, and want to present some facts below.

Please note that I’ve no intention of driving panic, and all intentions of initiating correct preparation for the Covid-19 epidemic by sharing my thoughts below.

1) Stock Market

The American stock market is down 15% in last 1 week. Companies will publish their Q1 2020 earning reports between 15th April and 15th May. I expect the stocks to be in downtrend until April/May timeframe, and if earning reports are quite bad, they may trigger a potential recession. Apple has issued an early warning for investors. Actions to take: Sit tight and wait until April/May for more clarity on investment strategy.

2) Vaccination

According to Bill Gates, June could be the earliest time-frame for large-scale vaccination “trials” meaning we are unlikely to have vaccination available at scale and approved by FDA before Q4.

3) China

There’s a unified opinion that China is under-reporting cases. There’s complete lock-down in China and I wouldn’t expect China to cause such damage to their economy for something that’s not very serious.

Most researchers believe the actual number of cases to be 10x more, and hence 800,000 people could be infected in China.

4) Death rates

Death rates are 2-3% in Wuhan and 10% in Iran. The death rate is 1% in rest of China. This makes me believe death rates are obviously dependent on the conditions of health-care available as well as the capacity of number of patients that can be treated simultaneously. Assuming China has the ability to provide better healthcare than global average quality, the death rate could be more on global level.

5) Death numbers

Researchers believe that up-to 20% of the global population could get affected. Assuming 20% of global population and 1% death rate, there will be 14 million deaths. Assuming 0.5% death rate there will be 7 million deaths. And assuming 3% death rate, there could be 42 million deaths.

6) Virality

The virality rate is 3 which means every individual will at average infect 3 other people. This is much higher than common flu where the virality rate is 1.5.

7) What to do

In addition to all the advice that you’ve heard/read so far about washing hands, not shaking hands, avoiding gathering, etc, I recommend that everyone should stock minimum 1 month of grocery and 2 months of medication if someone uses regular medication at home such as for heart or diabetes etc. 60% of all medicine is manufactured in China which is on complete shutdown right now. There will be delays and shortage in medication.

May God protect us all

The Lazy Entrepreneur – And Why It Isn’t Bad

I achieved many of my goals by the time I turned 24, and most by the time I turned 28. Of course, my goals weren’t as big as many others have. They were rather small.

I tried to find happiness in things outside of work accomplishments and financial success and also tried to live a modest lifestyle. I also slowed down at 28 because I felt burnt out by working really hard in the past 10+ years. I felt that I don’t have the same kind of energy anymore that I used to have before, and I turned lazy.

I understand this could be a controversial opinion, and others may disagree. But I think laziness isn’t as bad as it sounds. In fact it can be good. Initially I didn’t like the fact that I’ve turned lazy. Even now, sometimes, I don’t like it especially when I FOMO about interesting opportunities. But I’m in a transition to becoming what I call the lazy entrepreneur. I haven’t achieved the status properly, but I wish to.

The lazy entrepreneurs don’t like working actively. They are tired of working. So they find lazy solutions to the problems that need to be solved. They like investing in things to create passive income. Lazy entrepreneurs also build lazy stock portfolios. But my favorite kind of lazy entrepreneurs invest in and empower active entrepreneurs.

Lazy entrepreneurs wish to move from being CEO of 1 company to having CEOs for multiple companies. Unfortunately, I have already achieved being lazy but haven’t yet mastered the art of being a lazy entrepreneur. Although, it’s a journey I’m excited about.

Lazy Portfolios; Simplest Way to Invest In Stocks

Stocks are often misunderstood, especially in Pakistan. I haven’t met many people who are comfortable investing in them. Stocks make Pakistanis so uncomfortable that less than 1% Pakistanis invest in stocks compared to over 50% Americans.

Personally, I also never understood stocks until recently when I realized how easily Americans are pouring in part of their earnings every month in stocks without having to pick and choose, re-balance, trade etc. They would simply build what is known as a “Lazy Portfolio”.

Lazy portfolio generally comprises of 2-3 funds. But it can even have as little as 1.

There are 2 reasons in my opinion why this kind of investment works.

Firstly, you pay close to nothing in management fee. Such funds have low operating costs as there is no human intervention and the fund only tracks a particular index such as the S&P500 Index. You buy one fund, and your money goes into 500 largest publicly traded US companies automatically in the same ratio as their market capitalization.

Secondly, since you’re not picking stocks yourself, you’re not exposed to the risk of each individual company. Instead your only bet is that collectively largest 500 publicly traded US companies will be larger in size tomorrow than they were yesterday.

To learn, what basket options you can buy, check out this. To learn more about investing in stocks, read this and this.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

The Power of Compounding When Investing

Yesterday, I wrote a bit about importance of investing. I showed the returns of S&P 500 Index for 10 years from Jan 2009, to Jan 2019. I mentioned that your returns would be over 200% in 10 years in USD. I further mentioned, that if you re-invest your dividends, you would have a return of 270% in the same period. See the additional 70%? This is where all the magic happens.

Let me explain this with an example. Suppose you receive a sum of Rs 100,000 at your graduation at the age of 22. You invest this money at an average rate of return of 10% per year and you keep this money invested for 40 years until your retirement at 62. During this investment, you have two options; you can either withdraw your returns every year at Rs 10,000 per year or you could re-invest your profit. Let’s discuss in detail what happens in both cases.

If you withdraw profits every year, after 40 years you would have Rs 400,000 (40 x 10,000) profit and Rs 100,000 principal. Giving you a total of Rs 500,000 after 40 years. Not so interesting, is it?

But if you re-invested Rs 10,000 profit every year, you would have Rs 4,525,925 after 40 years. A bit more interesting, isn’t it?

You invested the same amount of money, your rate of return was identical, and with the first option your capital stood at 5X while with the second option it stands at a whooping 45X. Here’s a compounding calculator for you to test all sorts of cases.

Is Cash Really Trash?

If you’re like me, born and raised in a Pakistani middle class family, you would have to earn your financial freedom. You weren’t born with it and you have to work your way up. Thankfully, unlike the previous generations, it’s easier for us to do so. With access to global markets, and a potential reach of 3.2 billion, you’ll make it even if you get fraction of the market.

But what happens once you achieve your financial goals? You earn a certain amount of money, and you stash your banks with cash and you feel it’s going to last for a certain period of time. But along the way, you also realize its running short faster than you thought.

There are 2 reasons why that could be happening. You may be over-spending and not keeping track of your finances. And that the inflationary financial system is not designed with you in mind. It is eroding your purchasing power, and pushing you two step backwards as you try to take a step forward.

This is especially true for Pakistan where inflation is high as well as the PKR has only weakened against the USD since the inception of the country. But it is also true for US where inflation at average is 2% per year for the last 10 years. Bitcoin on the contrary has only increased purchasing power in its life cycle and hence can be categorized as a deflationary currency, although some disagree.

But how do you solve this crisis? By not keeping the majority of your savings as cash. Cash can be bad, especially if it’s PKR you’re holding onto. Over 50% Americans invest in stocks for the long-term to preserve and grow their wealth while 0.125% Pakistanis do the same in comparison.

If you had held on to S&P 500 index for 10 years starting from Jan 2009 to Jan 2019, you’d have had a return of over 200%. It would have been over 250% if you re-invested dividends and this would be in USD, of course making additional money for you if your base currency was PKR.

Even if you invested in 2007 at the market peak and went through the financial crunch of 2008, you’d still be up over 100%, and 150% if you re-invested dividends.

If stocks isn’t your thing, and it wasn’t my thing too, you could invest your money anywhere you like. But it is absolutely necessary to do so. Because at the very minimum, you have to preserve your purchasing power, even if you’re not trying to increase your wealth with aggressive investing strategies.

It is still a good idea to hold on to some kind of cash. It’s great to have it in emergencies, and it’s what you need to survive. Having access to cash is also great when things are trading at a discount and markets are in turmoil. At the same time cash is the only asset that is guaranteed to lose value, other assets may or may not. And the only point I’m actually trying to make is cash isn’t as safe as I originally thought or as most people probably think.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. I do not make any guarantee or other promise as to any results that may be obtained from using my content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.