Which is riskier for investing - Cryptocurrency or the Stock Market?

A question from the FB page today:
Jerome shared with us he started learning about the Stock Market and recently about cryptocurrencies. He also managed to save some money aside and wonders where to invest with less risk of losing it.

First let us say that there is always a risk to lose all your investments, investing in Cryptocurrencies and in the Stock Market. With that being said, there are a wide variety of possible stock market investments, with a wide range of possible risks.

Some stock market investments are pretty safe and are likely quite a bit safer than investment in cryptocurrency. Some stock market investments are pretty risky and are likely quite a bit riskier than investing in cryptocurrency.

So, ‘Risk; is a relative term. The stock market would indeed be very risky is you are buying stock without knowing what you are doing and without analyzing the companies upfront.

Very often people buy stock based on somebody’s else opinion. Instead, should you learn how to determine yourself what would be good stocks to buy. You also set up safeguards to keep you from losing all your money.

For instance, when you buy a stock, you set a Stop Order.  Let's say you buy shares of a stock at $20 a share. You've determined, by (for instance) studying the charts of that stock, that you would be willing to risk losing $2 a share in case its performance goes down. (Which is 10% of its price and your total investment)

So you buy the stock at $20 a share and set a stop order at $18 a share. In the worst-case scenario, the price of the stock drops under $18 a share, and the stock automatically sells itself. You lost only $2 a share.

But, if your research on the stock is correct, the price of the shares will go up long-term. Another example: the price of the shares rises to $30 a share. You've already determined if the stock goes that high, you will reset your stop order for $25 a share. That way, if the price goes down below $25, it automatically sells, and you've lost nothing, and even made some profit.

Those are just some examples for using safeguards when trading. When you invest long-term you might decide ETFs are the better option. Long-term they always go up (as the economy will overall go up long-term).

The big problem with the long-term investment would be the inflation or more specifically the hyperinflation. So be sure to read about those in the previous topics where we discussed them and gave good advice - how to protect yourself.

On the other end, the cryptocurrencies are extremely volatile which creates huge fluctuations in their price – some people made a fortune there, but the majority lost their money.

In general, nowadays, investing in well-performing stocks, companies and ETFs should be considered less risky than investing in cryptocurrencies.

Warren Buffett: how to invest during high inflation?

As inflation is a very hot topic in the mid of 2021, we've seen the FED saying, ‘this inflation we're seeing now is short term, and there is nothing to worry about’, on the other hand we've seen Warren Buffett talking about how he's seeing big inflation throughout Berkshire Hathaway's businesses. We've also got Michael Burry making a new big-short on bonds.

So how does high inflation affect the investors and what's the best way to deal with a period of high inflation?

All the investors want to do is - commit a certain amount of money to an investment and get more money back at some point in the future. But when we talk about inflation and investing it's more helpful to think of investing like - giving up a certain amount of buying power now, to have more buying power in the future. Like  giving up the purchasing power to buy 100 apples now in the hope that we have the purchasing power to buy 150 in the future

While you may make a 20% gain on an investment on paper over a few years if inflation is running rampant, there's a potential that your real return is zero. E.g. you could buy 100 apples before, then you make 20% on your, investment then you sell it, but after that you can still only buy 100 apples now. You've had no gain in purchasing power.

This is what Warren Buffett talked about in 1979. He said that a business with per-share net worth compounded at 20% annually, would have guaranteed its owners a highly successful real investment return, but now such an outcome seems less certain for the inflation rate coupled with individual tax rates will be the ultimate determinant as to whether our internal operating performance produces successful investment results.

It is just as the original 3% savings bond, a 5% passbook savings account, or even an 8% US treasury note have in turn been transformed by inflation into financial instruments that chew up, rather than enhance purchasing power over their investment lives

A business earning 20 on capital can produce a negative real return for its owners under inflationary conditions not much more severe than what presently prevail. And this was in 1979 and the inflation rate was 11%.

Buffett says the combination of the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business, i.e ordinary income tax on dividends and capital gains tax on retained earnings - can be thought of as an investor's misery index when this exceeds the rate of return earned on equity by the business the investors purchasing power real capital shrinks even though he consumes nothing at all.

Inflation is a crummy time for investors because when you take into account its rate - you can think about the annual percentage loss of purchasing power. If you couple that with either taxes you have to pay on income received through dividends and the capital tax the capital gains tax you have to pay when you sell then your real return on your investment could be negative even if the business is going well.

In 1980 Warren Buffett made the following analogy ‘the average tax paying investor is now running up a down escalator which pace is accelerated to the point where his upward progress is nil.’

And even if you are not an investor inflation can be a crappy time for businesses as well. Inflation eats away at the purchasing power as well and businesses generally need to buy a lot of stuff to keep operating. And if this stuff is now all of a sudden more expensive, they're trapped in a dilemma either they pay the higher price to operate, therefore making less profit or they raise the prices (produce more inflation) and hope that their sales volume doesn't shrink.

Inflation can also put upward pressure on interest rates which can make it harder for companies to access loans or make pre-existing loans more expensive to pay off, and this makes it much harder for the investor to pick great stocks that are going to compound money over time.

Warren Buffett explains what type of businesses tend to do well even in periods of high inflation. Such favored business must have two characteristics:

1. An ability to increase prices rather easily even when product demand is flat and capacity is not fully utilized, without fear of significant loss of either market share or unit volume

2. An ability to accommodate large dollar volume increases in business often produced more by inflation than real growth with only minor additional investment of capital

So, on the first one - an ability to increase prices and face no consequences. The business is feeling higher costs which hurt their margins so why not push those extra costs onto the customer if they can.

And you may think –‘ that is ridiculous, no company could do that, and the customers would just go and buy the cheaper product elsewhere, but not if the company has a moat.

If you're a small production company you've spent money to train all 50 of your employees to use Photoshop and Premiere pro and After effects - that took time, and it took money. Adobe suddenly decides to up the subscriptions ten dollars more per month.

Your company management might be thinking – ‘let's switch to a cheaper alternative, maybe you find a cheaper alternative, twenty dollars a month cheaper, great but it doesn't have all the same features as what the team's already using. Plus, it's going to cost two hundred dollars per employee to train them on the new software, not to mention the downtime your business will experience to get that training done and to switch everybody over.

If you think about the clients - they are already stressing you out, they're trying to get their productions finished, and at the end of the day it's just not worth switching. So, what can you do? You just pay the increased subscription, and you stick with Adobe, and pay more.

Another example: Apple has such a strong brand mode and a strong ecosystem that it's completely normal for them to squeeze a little bit more, and a little bit more out of all their customers each year.

In 2012 iPhone average selling price was just over $600. At the end of 2018, it was almost $800. Nowadays, it's even higher, and that's not even considering the plethora of add-on subscriptions. Apple will somehow force upon you whether it be AppleCare or iCloud or Apple Music, there's no escape and that's the point. So, during inflationary times look to the companies with very strong moats which can raise prices without consequences.

Secondly, you want the business to have an ability to accommodate large dollar volume increases in business with only minor additional investment of capital. So, if your business is not just able to pass on extra costs to the consumer, that means that you're going to have to cope with those costs, which means lower margins to generate your profit. It means you need to be able to increase the amount of business you're doing.

Essentially, what Buffett is saying here is - you want companies that are growing and are also easily scalable. For example - a shipbuilding company would struggle on this point. It costs a lot to build a big ship, you're not going to make huge margins doing it, but it's also very hard to increase the number of ships you're delivering each year. That would take enormous investment, into new shipyards and it'll be slow to wind up.

And if you consider a company like Facebook on the other hand if they can’t pass on the extra cost to their customers (which are the advertisers),  they could just choose to bump up the frequency of sponsored posts or of other ads. When a user is scrolling Instagram or Facebook they see three ads, instead of seeing two, and Facebook could do that very easily, and very quickly.

3. And Buffett has one more piece of advice for those seeking the best strategy during a time of inflation. Invest in yourself!

Sometimes there's just no escaping. Stock market investing in these times can be hard, so and given the fact that we're dealing with fairly high levels of inflation what can we do?

To improve your own earning power, know your own talents. Very few people maximize their talents and if you increase your talents, they can't tax it while you're doing it, they can't take it away from you. If you become more useful in your activities your profession - doctor, lawyer, auto repair, etc… - that’s the best protection against a currency that might decline at a rapid rate and the best investment.

And a good passive investment – is an investment in a good business. If you own an interest in a good business, you're very likely to maintain purchasing power no matter what happens to the currency.

Warren Buffett is indirectly acknowledging that it's hard to do well as a stock market investor when inflation just keeps ramping up. It's a bad time and your real return can be zero, so probably a better thing to do is invest in yourself, up-skill so that you can achieve a higher level of income. And your personal buying power would not fall - make yourself more valuable.

Overall, Warren Buffet gives us those 3 invaluable points. Those just come back down to the competitive advantage of you and your business – have a moat, be able to scale quickly and cheaply, and the last one is to invest in yourself.

Will the next market crash be worse than 1929 or 2000

Jeremy Grantham is a co-founder and chief investment strategist of Boston’s GMO. Jeremy believes that in 2021 - U.S. stocks have become an epic bubble and will burst so badly to outshine the crashes of 1929 and 2000.

Here is what Jeremy Grantham outlines

1. What happens when the market crashes
I believe that the bull market, started in March 2009, the longest bull market in history, have matured into a speculative fever of rare proportions, a fully-fledged epic bubble. It would be surprising if we have one that long that didn’t end up with animal spirits beginning to freak out a bit.

Achievement like that normally takes a friendly economy and even friendlier FED behavior, but this one managed to do with somewhat wounded economy on a global basis. We even had more spectacular FED and Government friendliness. The usual moral hazard that has been going on since Greenspan arrived the 90s.

The result of that is that confidence has risen and risen and risen until finally people are reaching for the greatest demonstration of confidence, they have had in their investment career. They are borrowing more money to throw it into the market, their belief in the market is profound, the common wisdom is that the FED on your side, how can you lose. And nowadays there appear to be no doubters at all.

The belief is that – all you need is the FED on your side and the stocks will rise forever.

And some of the signs to look for a bubble are, e.g. look at over-the-counter trading. Last Feb it traded about 80mil shares for the month, and it worked its way steadily through the year until Nov, when it was about 380mil. And then in Dec it went to 1.15 trillion shares for the month, having tripled and tripled again in just a month. These are spectacular performances.

My own stock at Quantum scape came into the market at 10 and shot up to 130, and it became bigger than GM or Panasonic. And it is a brilliant company, but it already admitted it won’t be producing any batteries for 4 years. So, no sales, no income for 4 years and yet bigger than GM.

There has been nothing like that in 1929, nothing of that scale. Nothing like that in 2000 either. 1929 run into great depression and global trade problems, so you really want to the first leg down, which was big enough.

The analogy with 2000 is better, and it went down 50% back then. And the reason it went down only 50% and bounced back relatively quickly was because FED came charging into the rescue. And you can have a lot of rescues when you start at a 16% long government bond for example in 1982. You can have a bull market as you go down from 16 to 12 and another bull market from 12 to 8, and 8 to 4.

And now we are down at about 2.5% and you have to realize that most of the easy pickings of saving the game by ramping rates down is behind us. At the lowest rates in history, you don’t have a lot in the bank to throw on the table.

The idea that the real world doesn’t count and all you need is money – to generate real wealth – I am pretty sure most of the people feel it’s an illusion. The situation where we have a deadly virus, and the economy is obviously on its knees and the FED is doing everything it could – and would that be enough to save the system?

In the end the system is about the amount of people working and producing, the amount of capital spending, the quality of education and production of the workforce.

COVID-19 brought spectacular excesses on the part of the FED and the Government writing checks. Unprecedented, and the combination was very powerful.

And the market had the opportunity to crash a couple of times, e.g. in 2018 – the last time. And those bull markets can go on forever. You don’t know how high and how long they could go.

In the back of everyone with bear’s mindset must be surely Japan in 1989. During that time, they managed to get to 65 times the market earnings. It has never previously gone over 25. So, the markets are unpredictable – when we avoid the burst of euphoria.

Tesla is an emblematic as crazy investor behavior. At the same time, anyone who has bet against Elon Musk has lived to regret it so far. Going short is only for experts because you can get into bankruptcy very quickly. My recommendation is to not go short individual stocks.

When you reach such levels of hyper-enthusiasm, the bubble has always, without exception broken in the next few months, not few years.

“You can’t maintain the level of near ecstasy for a long time. It can’t be done because you’ve put in your last dollar. You are all in. What are you supposed to do – beyond that point? Time comes when you can’t borrow any more money and can’t take any more risk.”

How do you keep this level of enthusiasm going indefinitely?

And if the Government is going to write unprecedentedly large checks, then indeed the all-in position can expand one last desperate notch. The sad truth about the so-called stimulus is it didn’t increase capital spending significantly; it didn’t significantly increase the real production. This will lead to an even more spectacular bust.

The flow of dividends and earnings – that’s the only think you can end up eating, and sooner or later the stock market – will once again – sell on the future flow of dividends.

On 23 Mar 20 the FED managed to engineer a revival of the credit market and ultimately a spectacular rebound in stocks. But if we go before COVID you would notice we have already lost considerable power on the economy. We had fewer people working and we had a reduced stream of goods and services.

This is a monetary game, and you can keep these little monetary bubbles going for just so long, as long as you keep confidence rising. And when confidence reach extraordinarily high levels – the history books are clear – it’s very difficult to increase the confidence further.

2. Investing in 0-rate world
Although there are many arguments why the current valuation might be even low, e.g. discounting future cash flow at a lower rate – I don’t find them appealing enough.

Seen 30 years bonds yield dropping down from 16% to about 2%. In about 2000/2001 those were about 4.1/4.2% and we thought this will be the lowest forever and now it is even lower, and negative all over the world. We have got an artificial interest rate structure, driven down into negative territory, e.g. 20% of government bonds have a negative real return. In other words, you pay to lend them your money, not the other way around.

The same happened with cash – it is deeply negative. Many people literally pay the banks to deposit money, instead of earning anything out of that deposit.

Selling everything in the high will work just fine, however there are major discrepancies as there were in 2000, between US tech, which is overpriced. So, the value of the low-growth stocks is about as cheap relative to the high-growth stocks. All of them are at risk at some degree.

The good news is that oversee they don’t have the same bull market and the same overpricing as we in the US. You can go to the emerging markets – they are not that expensive, compared to S&P they are as cheap as ever could be.

As you won’t be able to make a decent return 10-20 years on US growth stocks (they are heavily overpriced now).

The higher you bid up the price of an asset, the lower the long-term return you will get. There is nothing you can do to change the equation. Every day the market goes higher, you know one thing for sure – that the long-term return will be less than it was the day before.

Growth stocks have outperformed (over the course of the bull market) value stocks by almost 400 basis points. What if, after the bubble pops growth, growth is still ahead and there is no redemption for the value investor? It will be historically unprecedented for that to happen.

“I have no confidence and have not had any for over 20 years in price-to-book and P/E and price-to-cash flow, price-to-sales, even, as a measure of true value. A measure of true value is the long-term discounted value of a future stream of dividends.”

A growth-stock is of course worth a higher ratio than the low-growth stock, but that doesn’t mean they can’t be overpriced. And value should be cheap for what you are. You should build-in the growth, build-in the quality.

I am also worried about an inflation. We don’t live in a world where output doesn’t matter, and we can just print paper forever. Sooner or later, this will bring huge inflation, that we haven’t seen in 20 years. Everywhere across the globe the price of critical food and metals is going up. Together with the rapidly declining growth rate in the workforce, towards zero and negative.

So, this is a bad time to be caught over speculating.

It is very difficult to allocate in a world of zero rates, stimulus, declining productivity, potential for inflation. Secondly, of course, diversifying – it’s always a huge advantage, and third – the low-growth stocks in the emerging market world are perfectly reasonable if you need to own stocks, and most people do, that would be the way to go.

It will take trillions of dollars to decarbonize the global system – all those companies, doing that, will raise and grow significantly. Those will dominate everyone’s portfolio. Find a good climate change fund and invest into it.

If you think about investing into Bitcoin or any other cryptocurrency – ask yourself – what is the future value of the dividend stream of it? It is nil, it will never pay you a dividend. If you are desperate, can you eat it? Its entire value is on the greater fool. Bitcoin could be worth a million dollars a unit if you find someone to pay it.

And we could think in a similar way about Gold. The difference is that Gold has had a 12,000-year test, and it passed it very well. And Gold also has some other fallback qualities – it doesn’t tarnish, it’s unique, everything ever made of gold is still around and will be around for a very long time. On top of that Gold is heavily used in manufacturing and production of expensive goods and materials. Bitcoin lacks all those.

Bitcoin is 100% faith. Come the next market phase where faith is at a minimum, what do we think will happen to something whose entire reason for existing is faith and nothing but faith?

3. What US government is doing for the economy
Ironically, I believe that Alan Greenspan is responsible for the current situation we are. The FED policy of acting and talking along the lines of moral hazard played a tremendous role.

Alan bragged that he contributed to the strength of the economy through the wealth effect. And  there is such effect indeed. If you have the market doubled – 3 or 4% of that gets spent and helps the economy. But the cost of this is tremendous – we live in a real world of people and production and overinflating the value of something does not justify the little growth.

In the end it will all get to a negative wealth effect when the market regulates itself.

Another example are SPACs. Those should be a completely illegitimate instrument. They are just an excuse for people with reputation and marginal ethics to raise a lot of money and take 20% of it for themselves, and a complete rip-off in the sense that the professional hedge funds always liquidate before taking any real risk. And of course, SPACs will make money in the late stages of the bubble, but if you look at the first six years, they had a sub-average return for taking all the risk.

SPACs don’t have enough legal requirements, enough restraints, enough checking. They’re a thoroughly reprehensible instrument and should be disallowed.

The IPO should also be reformed. IPO is a license to reward the fidelities of the world at open. Direct listing made a little easier would be the way to go, but SPACs are terrible.

If you are looking for the very early warning signs of a bubble breaking you find the stocks that have done the best, some particular SPACs, and Tesla, and Bitcoin – and you see that they start to have these big daily drops, and then they recover, and they drop, and they recover.

And the market in 2000 didn’t go together – they took out pets.coms and shot them, the rest of the market continued to go up. Then they took out the junior growth stocks and shot them and the market kept going up, and then they took medium growth stocks and shot them too, and finally by the summer they were shooting the ciscos and the entire tech part of the market. And that had been 30% at the market peak of the total market cap. And yet the S&P by September was at the co-equal high of March which meant that the other 70% had continued to rise.

So bubbles don’t necessarily break on mass, but having sliced off the tech, and the dot coms, then finally the 70% like a giant iceberg rolled over on mass and went down for two and a half years by 50%.

4. US capitalism crisis
The right way to fix the economic inequality is to stop nurturing the moral hazard, and start leading and managing through a monetary policy as opposed to fiscal policy.

By simply pushing up asset prices, you make it difficult to impossible for people to get into the game. The purchase of a house is too expensive, the purchase of anything in stocks is much higher per unit of dividend.

Secondly, the compounding of wealth is reduced. If you have a 6% yield on your assets, you can reinvest them and you can double your money in 12 years. If you turn it into a 3% yield by doubling the price, you are worth more on paper but in real life you only eat the dividends and now they are 3% a year and you double your money in 24 years. So, in 48 years, you are down to a quarter of what you would have been, and so on.

And the gap becomes ruinously wide. The higher the asset price, the lower the rate at which you can compound wealth. And the rich get richer, as you price down the yield, and the poor get squeezed. You are not creating any real value; you are not creating more production and government spending is quite different.

Instead of writing check to everybody, if we write checks for particular infrastructure – we will be doing necessary investing. If we invest into an efficient grid – everybody benefits. So, the Government should come with a strong public spending program, emphasized at the repairing bridges and roads, and green infrastructure, research, training and retraining of people for green jobs.

A corporation in the mid 60s felt it had responsibilities to its workers, it was on the cusp of starting a nice pension fund, a defined benefit. The corporation felt the duty towards the city and the country. All of that is largely gone, but it didn’t go overnight. The idea that the corporation should only care about maximizing profits is a terrible business formula.

If you say as an individual ‘My only interest is to maximize my advantages,’ which is what they say at the corporate level, you are a sociopath. And we are not, as individuals, like that. A lot of us do the odd altruistic act and those are incredibly important in the long run.

Why Bill Gates sold out his stocks (Mar ’21)

We all know who Bill Gates is. He's one of the richest men in the world with a net worth of around 127 billion dollars. He did this through creating his own company Microsoft, but he also did it through very smart investing.

Lately Gates is making some very interesting investment moves. His recent 13 filings he sold and reduced 11 stock positions and he bought just one.

Let's take a look at some of these:
1. Uber the worldwide ride-hailing company - he sold a hundred percent of his position.
2. Boston properties - he did the same thing he reduced it by a hundred percent, selling 1.1 million shares.
3. Alibaba - one of China's biggest companies here sold in his recent 13th filings a hundred percent of his position.
4. Google or Alphabet (same thing) he reduced by 50%.
5. Amazon - he sold all his shares.
6. Apple – even it was not immune to the wrath of Gates investment decisions – 50% gone.

These are big moves that Gates is making. Normally when an investor sells some of his position, it's normally a couple of percent. If it's  5%, it is usually a big deal.

And Bill Gates, he's selling 100% out of his positions like Uber and Alibaba, and 50% out of big stocks like Amazon, Apple, and Google these are big moves.

Some of his other moves include
7. Liberty group - the communications company, it was reduced by 25%
8. Great Berkshire Hathaway - was reduced by 10.6%
9. Canadian national railway - the only small sale of 0.86%

And if we take a look at all of the stocks that he bought in the first quarter of 2021 it was just one a stock called Schrödinger a healthcare stock.

And what the investors really want to know is why has Gates made such big sales in these massive companies.

One of Gates’s patterns is that with a lot of stocks he sold – he did it when they're very high in price which a lot of investors avoid.

Uber, that's currently selling for 56 dollars a share, market cap is over 100 billion and it's not even generating any profits.

Amazon price wise has gone up more than 400% over the past five years. It's got a p/e of 72. That's considered very high and not good.

Apple is up over 350%, p/e ratio is 33.

Google or Alphabet is up 170% with the same p/e ratio as Apple of 33.

These stocks that Bill Gates is rushing out of, you'd have to say, he thinks they're overvalued. It's not like he's selling them because he's desperate for cash, his net worth is over $127 billion dollars.

Most probably Gates is worried about a market crash.

if you look at a lot of stocks in the market their prices are up to crazy levels, and we’re sure Bill
Gates and his investment manager Michael Larsen have been closely looking at this market.

As per the latest report they have decided to dramatically trim or exit some of their positions.

We've seen a lot of crazy behavior in the market, people just seem to have so much spare money on them and what do they do with it - they put it into stocks

Bill gates is not a fan of this uneducated investing style he linked it to a casino. He said ‘we don't think of the stock market as just performing a casino-like role, we have restrictions on gambling activities’

The current situation reminds us of the 1930s, to some degree so with all this crazy behavior that was seen in the market, Gate says it reminds him of the 1930s, something which Ray Dalio has also pointed out before

What happened back then was you had the roaring twenties, when everyone was putting their leftover cash into the market, because they thought it could only go one way and that's up but then in the late 20s and 30s, we saw one of the biggest market crashes that the world has ever seen.

That’s a big  reason why Gates has decided to trim his positions.

So, look at the only position that Gates is buying - Schrödinger the drug discovery and material science company.

Schrödinger - they use computer simulation to design different medicines and drugs to help cure diseases. They also use computer stimulation to design different types of materials too.

And Bill Gates is  someone who is well educated in healthcare and he’s invested in a relatively small company, five billion dollars in market cap.

They sell for 76 dollars a share, and revenue wise they're doing pretty good as well. Their revenue has been growing steadily over the past couple of years, as they look to discover new drugs.

Schrödinger earnings are decreasing and that's just because they are reinvesting every single dollar.

Back in 2018 Bill Gates was asked if in the near future there will be another financial crisis, similar to the 2008? And Gate said “yes, it is hard to say when, but this is a certainty.”

With the amount of stocks that he has sold recently there is a lot of people questioning if that when is 2021?

Let's look at some statistics of the overall market in 2021.

1. The market cap to GDP ratio. Warren Buffett said on it that it's probably the best single measure of where valuation stand at.

And it is very high right now, it's eighty percent higher than the zero percent equal fair value market range, and it's miles above what it was in the 2008 financial crisis

It's even higher than what it was in the 2000 internet bubble.

And we all know what happened to stocks after that. This indicator says prices are high and is very worrying sign.

2. Looking at the market p/e ratio it tells a similar story. It's currently sitting at the 40 mark now. This is near the 2000 technology bubble but not quite as high as what things were in the 2008 housing bubble.

Nevertheless, a market p/e ratio of 40 is high if you consider the average that it has been throughout history - that's 15. So, it's more than double that, and therefore Bill Gates portfolio right now is conservative.

His top 10 stocks that makes up 95 percent of his overall portfolio are value-oriented safe place

His number one position even though he sold some is still Berkshire Hathaway.

Next it goes Waste management, Caterpillar (conservative), Canadian national railway (conservative), Walmart, Ecolab, Crown castle, Fedex, UPS - all conservative.

And the last one is Schrödinger. Apart from Schrödinger which is his 10th largest position that is a very safe portfolio.

When looking at Bill Gates’s stock positions - he's got a very guarded and cautious portfolio for the current market conditions and we should keep a close eye on the upcoming future as it might not be so bright for the stock market.

The dark side of a company bankruptcy

Nowadays, in the full unstableness of the market and the economy as a whole, some companies declare bankruptcy, and those are good examples of what is going to happen with your stocks, in a case of any company declaring bankruptcy.

Companies like JCPenney and Hertz and are declaring bankruptcy and you wouldn’t believe what happened to the shares price… It skyrockets instead of crashing down. So, in case of not aware of what usually happens when a company declares bankruptcy, there it is...

There are two options for a company to declare bankruptcy – using Chapter 7 or Chapter 11. If a company declares Ch.11 bankruptcy, what basically happens is – the company is asking for a chance to reorganize and recover. It asks protection from the court from the creditors. If the company survives, your shares may also survive too. But there is a very small chance of that happening. The company may cancel existing shares, making yours worthless. This is what happens in most of the cases. If the company declares bankruptcy under Ch.7, the company acknowledges the inability to function anymore. Rarely, any shareholders get something, as the creditors of the company are served first.

So essentially when a company announces bankruptcy the shares have zero value or close. You might be thinking – what if the company survives bankruptcy in the future and manage to cut costs and reorganize and survive somehow? You might think that the value of the shares will rise significantly. But, in reality, it turns out that the shares are almost always deleted during bankruptcy. The existing shares are just completely wiped out, most of the time. And if the company does survive the business owners, who credited the company in the past just create new shares for themselves. The new shares are not shared with the old shareholders.

A good example of the dark side of a company bankruptcy is the case with United Airlines. They went bankrupt in 2002. And four years later in 2006, the company managed to stabilize, and new shares went public. The same shares are still trading today but none of these new shares were given to the old shareholders. The people who held shares before and during bankruptcy lost everything. For them, it doesn't matter that the company survived.

So, nowadays, as an investor - you buy shares in Hertz, hoping for the company to survive, keep in mind that it probably won’t even matter as if the company does really survive, the business owners will most probably simply issue new shares and none of those will be shared with the old shareholders.

The stock exchange usually delists such shares and tries to stop them from trading. But some companies are fighting the delisting, as they would like to squeeze the most out of the market and the naïve investors.

The bottom line is that owners of common stock often get nothing when a company enters bankruptcy. Those shareholders are usually the last in line for compensation.

The Stock Market is a bubble - and it will burst

During the last decade, the investors have come to believe that no matter what - the market only grows, in a long term. Long-term investment in index funds (like S&P 500) has somewhat proven to be the most profitable strategy. But do you know that the nature of the stock market is to grow as a bubble and eventually burst?

We are currently in a pandemic situation. The economy is struggling, unemployment is rising, and there is a lot of uncertainty. On top of that the S&P 500 recovered so quickly from the mini-crash in Mar 2020, and it looks like it have entered a bubble.

Let’s quickly explain the nature of the stock market. There are consistent patterns that emerge in every bubble in history and these consistent patterns are emerging again right now. Unfortunately – every time the investors believe in “but now it’s different” mantra, repeating the same mistakes again and again.

Above you see a chart representing the life-cycle of the stock market. This chart shows the stages of every bubble in history. It starts with the early stealth phase. Next comes the awareness phase as the investments begin to attract attention. Followed by the mania phase – where the bubble grows extensively. Finally the blow-off phase or the so-called crash.

The chart shows perfectly well - how every single bubble in history has grown and burst.

Above is an example of the dot-com bubble. Notice how the charts are pretty much identical. Did people learn from previous bubbles? Well, not so much it seems, at least not enough to avoid it playing out the stock market in the same way again and again.

Above is another example. We have the notorious Bitcoin bubble. This time it's overlaid on the stages of our bubble charts and we can see how closely it does follow it. It is clearly the same pattern so whether it was the "dot-com bubble" or the "Bitcoin bubble" the truth is the majority of the investors never learn and the same patterns are repeated over and over. 

Every now and then new technology is invented, it changes the world and the majority of investors think “this time is different”. It’s also important to note that the burst of the bubbles are not always the end. For example the Bitcoin is obviously very contentious as it has shown tremendous staying power since the bubble burst, and maybe hasn't had as much time as the others to prove its worth.

The key point is that many investors fall victim to the same patterns because they think “this time is different”. This mantra have caused every bubble in history to get out of hand, and it is a well-documented pattern with lots of analysis.

Finally, keep in mind that we have clear signs that (in Jun 2020) we are currently in the mania phase of the bubble chart and as the charts show - the crash usually isn't too far behind. So, if you are an investor – be careful and don’t get overexcited.