NWP Monthly Digest | December 2022
I started my career in 1999 in the finance industry in Denver. As a young man in the early part of the 2000s, I would proudly tell everyone in the older generation how easy their lives were because it was sooooo much easier (it least in my mind) for them to buy a house and start a family than it was going to be for me. My favorite stat to bring to the conversation was that the Denver Metro area had the largest gap between median wages and median home price (i.e., home affordability), making it the least affordable home market in the country. I’m not even sure where I got that nugget, but boy did I run with it*. Whether or not it was true wasn’t important. I needed the world to understand the plight of my generation, albeit the smallest one. (I’m a Gen Xer)
*note: trying to find this historical information has proven difficult. I did see that Denver was the second least affordable market back in 2008, however.
Woe is me! My 23-year-old self had a very rough time with this horrible situation that I created for myself in my own head.
Fear and Greed are very prominent factors in behavioral finance, but I’d also add Jealousy to that list. One of my mentors used to say, “nothing makes people make bad decisions with their money more quickly than watching their neighbors get rich.”
We like to say that history doesn’t necessarily repeat itself, but it often rhymes. Being angry at, and jealous of, previous generations seems like a rite of passage and occurs with each passing decade.
The reason I bring this up is that only a few years ago, Twitter and social media everywhere were loaded with many individuals from younger generations lamenting everything from the stock market being rigged to the Baby Boomers making housing unaffordable. For Generation Y (the Millenials), they spent the 2000s defending themselves from media harassment for living in their parent’s basements and their affinity for avocado toast. As they moved to their mid-30s and the next decade, the anger shifted, and the general consensus from them was that they couldn’t afford a home or ever attain the wealth their parents’ generation had hoarded. “OK, Boomer” was all the rage.
Why is this important, Jeff? Well, we now enter the world of cryptocurrency…
I’m not a lover or a hater of Bitcoin and the overall cryptocurrency/blockchain world - I am staunchly agnostic. Some of it is fascinating, and some of it is downright silly (digital pictures of apes come to mind). I find it hard to believe that any of it has become useful to the average person…yet. (Admittedly, that is a very big “yet”)
Where these two stories meet, however, can be summed up in the famous Twitter battle cry of so many crypto zealots, “have fun being poor, bro.”
Matt Damon is amongst the many celebrities being blasted in the media for endorsing cryptocurrency
The Story of FTX and Sam Bankman-Fried
Perhaps you know the story of Sam Bankman-Fried already, who is affectionately known as SBF. Perhaps you want to know more? Perhaps you just wish the story would go away.
It’s a tale of fraud and a tale that is not dissimilar to all of the other fraud you have likely witnessed in the financial world over the last 50 years.
If you want a lot more information on what’s going on with SBF and FTX, you can get a great deep dive here.
But here’s a summary if you don’t have time:
SBF owned a crypto exchange and custodian called FTX (similar to Fidelity or Charles Schwab, this was supposed to be a place where customers could deposit funds and trade cryptocurrencies)
He is only 30 years old
He is a major donor to the Democratic party and has been cozying up to regulators over the past few years to help move the cryptocurrency world into the mainstream
He is eccentric and considered by many to be a “boy genius” despite telling everyone lately that he’s “not good at math” and “can’t code”
He also owned a hedge fund/trading firm called Alameda Research, which inexplicably used FTX to trade very large positions and borrowed money from FTX and their clients without them knowing…yet nobody, including SBF, paid attention to it
The crux of the wrong-doing centers around Alameda Research getting into some trouble with some losses in their portfolio and their margin leverage and then using client’s funds (as much as $10 billion) from FTX to cover Alameda’s losses - again, without anyone knowing, including the clients and SBF (allegedly)
John J. Ray, the new FTX CEO placed in charge of restructuring the company for bankruptcy, said, “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here” and “this is worse than Enron.”
I do not envy Mr. Ray, who is responsible for sorting this mess out. FTX and Alameda made numerous, very large investments and didn’t keep a record of any of them. Ray was informed that he could use Google to search for some of the investments made by the two firms when he asked for the records.
Back in August, Fortune Magazine put SBF on the cover and asked if he was “the next Warren Buffet” and he was worth over $15 billion. Today, he is worth nothing, he is being compared to Bernie Madoff as one of the biggest crooks in financial history, and is likely headed to jail.
When this story is done being told, FTX clients are very unlikely to get any of their money back. Estimates of between $2 billion at $10 billion have been lost or stolen from the firm’s client accounts.
And where this all comes full circle to me are quotes like these:
Emanuele, who has invested about $200,000 in crypto tokens to date which, at their peak in April 2021, had climbed to a combined value of about $500,000, says he has learned his lesson from the collapse, but the episode has not put him off crypto generally. “I’m disappointed, but everything is risky in this world, and there are many ways to lose money. I’m still hoping to make big profits with crypto – the dream is still that it’ll enable me to retire one day.” ~The Guardian
…and:
Jamie reckons it will take him about 20 years to save the amount he lost in the FTX collapse. The tech worker, who is in his 30s and lives in Germany, doesn’t want to reveal how much he had lost, but he’d made a significant return on the £3,500 he invested in cryptocurrencies since 2017. He says he lost some money trading in 2018, but that “pales in comparison with last week”. Nevertheless, he would invest in crypto again: “For many my age with decreasing life standards, no way to get on the property ladder and meaningless jobs, crypto has been a godsend. The real world has scant opportunities compared with the digital wild west.” ~The Guardian
The last part really hurts to read…
“For many my age with decreasing life standards…” and “The real world has scant opportunities compared with the digital wild west.”
FEAR, GREED, JEALOUSY AND OUR innate ABILITY TO BE HOODWINKED
Fraud will never go away and it can never be legislated out of our lives. Human beings have a tendency to want to steal from others, and we also have an innate tendency to allow ourselves to be fooled when we so desperately want something to be true. It’s a bad combination.
The FTX debacle is only the most recent story of fraud to grace the news. There will be more in our lifetimes.
Fear, greed, and jealousy are traps that lead us down the wrong path. Here are some of the greatest hits just from the last 20 years:
The Great Financial Crisis (Greed)
Adjustable Rate Mortgages (ARMs) and interest-only mortgages, zero-down mortgages, “125% of purchase” loans, and “low documentation” or “no documentation” loans allowed people to speculate on real estate in ways previously unthinkable. Believing that this was a “guaranteed path to wealth” motivated people to make incredibly bad decisions in their attempts to build real estate empires with homes they couldn’t afford, paid too much for, and ultimately were foreclosed upon.
Bernie Madoff and Madoff Securities (Fear)
The stock market crash resulting from the collapse of the tech bubble in 2000-2002 made people very afraid to invest their hard-earned savings. Enter Bernie Madoff and his promise of a low-volatility investment (an options strategy called a split-strike conversion, which is real, but was actually never used by Madoff) that never lost money and generated returns consistent with the overall stock market. Something with equal upside to the stock market but with no downside should have been scrutinized to the hilt, and yet investors gave Madoff billions at the promise of this holy grail that only he possessed. The money, of course, was only placed in a bank account, and new deposits were used to pay off older account holders that needed their money back, a classic Ponzi scheme that Madoff ran for decades without regulators even catching a whiff.
Cryptocurrency (Jealousy)
“Have fun being poor, bro.” Oh, the irony. We’ve hit on this one enough today, but it will take a long time for the crypto world to recover from the collapse of FTX and the brazen fraud of its founders.
One way to innoculate yourself from fraud is to be much, much more skeptical of things that are presented to you as “hot investments”.
For whatever reason, Americans tend to have a bit more of a risk-taking spirit with their money than other countries, and it’s easier said than done to tell people to just be a bit more skeptical.
The other way is to simply realize that there are some tried and true ways to build wealth, and patience will always be your best friend. Don’t allow yourself to go down the path of fear, greed, or jealousy. Remember some very basic things:
There is no such thing as a free lunch - RISK and RETURN are forever and always linked - if someone promises return with no risk, walk away
There is no investment that is so good that it can’t be turned into a bad investment by attaching a high fee to it
“A fool and his money are soon parted.” ~english phrase credited to Dr. John Bridges, 1587
Noble Wealth Pro Tip of the Month
As we approach the end of the year, taxes tend to start becoming a real thing for people to consider.
Whether you have a large bonus coming your way, your business had an incredible year, or your investment accounts produced some capital gains taxes, you are going to want to start considering (legal) ways you can reduce that income number and, simultaneously, your tax burden for 2022.
Here are a few things to consider today:
Check your paystubs to see how much money you’ve withheld for taxes - consider making an estimated payment to the IRS if you haven’t withheld enough to avoid potential penalties
Check your 401k statement to make sure you have contributed the maximum ($20,500 or $27,000 if you’re over 50) and make sure that it’s done on a pre-tax basis
If you have a high deductible health plan that is HSA eligible, make sure you max out your HSA this year ($3,650 for individuals, $7,300 for families)
Do you have carry-forward losses from previous years that can be used to offset gains this year?
If you’re charitably inclined, you could make a large contribution to your favorite charity to increase your deductions (limits apply, and you need to make sure you have the opportunity to itemize your deductions first)
All of these things take time, so make sure you start now. You don’t want to wait until the last minute, or the administrative burden could cause you to miss the deadline.
Things We’re Reading and Enjoying
The Crypto Story | Bloomberg and Business Week | by Matt Levine
Matt Levine did the entire world a huge favor when he put this 40,000-word piece together for us to consume. If you think you know something about cryptocurrencies but need more, this is your article. If you’re a beginner and just trying to figure it out, this is also for you. Rare is the article that can say “yes” to both of those types of readers.
There was a moment not so long ago when I thought, “What if I’ve had this crypto thing all wrong?” I’m a doubting normie who, if I’m being honest, hasn’t always understood this alternate universe that’s been percolating and expanding for more than a decade now. If you’re a disciple, this new dimension is the future. If you’re a skeptic, this upside-down world is just a modern Ponzi scheme that’s going to end badly—and the recent “crypto winter” is evidence of its long-overdue ending.
-Your team at Noble Wealth Partners
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” Ernest Hemingway