Annual Update: 2021– Bobbo Jetmundsen
I start this letter weighing in on Blockchain, NFTs and the coins such as Bitcoin. If none of that means anything to you, not to worry! I will give some basic descriptions. But large pools of money are finding their way here, so I cannot ignore it any longer. There is little doubt in my mind the valuations are pushed to extremes we have never seen in such a short period of time. Digital Tulips maybe, but the money is real. Google tulip mania! But there is no doubt, there is something substantial happening in relation to the future applications being built on blockchain technology.
The asset class of ‘Crypto’ is as intriguing as it is confusing. Few people really understand it, and even the instructional videos that try to educate you to the idea they are discussing often end up falling short. So here are some observations:
-They are not going away. Here to stay in some form for a long time.
-They will likely fall under some regulatory oversight just as most every other asset class does.
-Money will be made and lost, but I suspect a bunch will be made over the next 10 years.
-Blockchain technology is awesome, and you should try to understand the power it delivers. IBM, for example, has a big effort in the future of Blockchain applications for their customers and maybe that gives blockchain a dash of credibility for you.
-The positive returns that have already been achieved on some coins are off the charts, so much so that these could be the greatest returns achieved EVER in this short of a time frame.
-I find thinking of coins as shares of stock helpful only to grasp the concept better. Not all coins are alternative currencies. Many represent ownership in the application they are designing.
Blockchain is the next generation database that creates a better way of tracking and calculating the ownership of something. The information is built in blocks of data…as the data grows, another block is added to the chain. This data sits all around the world (distributed) on computers (nodes) that must be in total agreement. If one node goes haywire, the rest of them will quickly correct any issues locally. If you bought investments in stocks or real estate with other investors, you would own a part of an entity that would indirectly give you a fractional share of that company or property. That worked well, but the documents of who owned what (stock certificates, titles) were originally stored inside file cabinets or bank safety deposit boxes, requiring paper trails to exist to prove ownership. This worked great until trading volumes skyrocketed and digital stock certificates were invented. As more and more uses of blockchain evolve, and more coins are created, Bitcoin is looking better from a believably standpoint. Blockchain by nature gives security to the ownership of something. Google non fungible tokens.
I expect over the next few years there will be many opportunities to invest in this area. We have gotten huge pullbacks in these assets several times and more will come. But each time the crypto market has recovered. Is now a good time to start investing? The answer I believe is yes and I’m looking around. I would view a potential crash of these markets as an opportunity to make substantial investments across an array of ideas.
Venture investments are commanding amazing premiums for companies even in the idea stage. These illiquid investments require follow on funding to keep growing, and if valuations grow faster than capital available to fund them, this vacuum might spread over to the public markets and cause concern for stocks. According to KPMG, VC investments hit a new record high of $157.1 billion for Q2 2021. If the funding stays robust, expect more and more wealth creation and welcome revenue for the US Treasury from capital gains taxes received.
The Stock Market:
Stocks continue to perform; the smaller cap companies have seen a bit more interest. Large Cap growth are driving incredible returns and valuations that almost certainly will continue to flow downstream to the smaller cap growth.
Is this a historic 1929-type bubble? Consider this, in the 30-year period from 1970 to 2000, the Dow Jones went up roughly 13 times. So, if it is, it is just getting started in my opinion. Right now we are roughly up three times from the 2000 year-end level twenty years ago. But worry is something I do, and I am aware that something horrible and unexpected could go wrong. Google stagflation if you forgot that term.
There are structurally some differences to the current financial system. Worldwide worry about investment ideas has led to many trillions of dollars invested at extremely low to negative interest rates. A large negative sentiment has existed since the 2008-time frame, which older investors and their financial managers built a thesis that is basically a worldwide kumbaya that says, "I must be diversified and own (an extreme amount of) fixed income that will protect me no matter what." It also says that many investors are of the opinion, best articulated by my late friend George Baker, Sr, ‘I’d like more but I don’t want less’. Valuations are high, no doubt. But times they are a changing.
Covid seems to have put 30% more people on the planet in the past year, per my observations. Airports are packed, even though business travelers have yet to return. Restaurants are busy, and hotel room rates are climbing. Where were all these people before? Tech infrastructure was in place and ready for the pandemic as evidenced by Amazon deliveries, Zoom meetings, Door Dash food to your door, and Zillow helping you find a new home in Florida. These companies are years ahead of plan and the acceleration might keep on going. The backbone was in place for this to happen and they benefited from this most unusual perfect storm, the first of its kind, I think, in history. This not only helped save our economy from an extended recession but launched us into the next era of investing; Post Covid. New inventions are moving ahead quickly and the lifecycle of one company might be enhanced when the other company gets stomped. Infrastructure can be bridges, highways, and airports, or 5G technology heading to 6G. Again, this transformation is accelerating on all fronts. We can’t fully appreciate what is already in place to enhance our technology footprint over the coming decade; let’s just say from what I see, it is going to be amazing to watch and hopefully a nice time to stay well invested.
Expect stock buyers to continue to buy the dips and prepare for the growing possibility that we might see historically high market valuations in the next 5 or so years. Note this: A 18% correction in the DJIA would mean a drop of about 6400 points if it happens today and we could easily get a 1500 point down draft at any time to start that process.
A lifetime of investing does not protect us from mistakes. Forty years of experience can hinder making good decisions in times like these. It reminds me of Picasso who said, ‘it took a lifetime to paint like a child’.
Cheers to the healthcare professionals
