Peek Behind The Curtain

As we kick off 2024, it’s likely going to be another interesting year – elections, geopolitical issues, and investment trends. I’d like to spend the balance of this focusing on the latter, as technology has led the way over the last four months. 

There are two ways to learn tough financial lessons: 

1. The hard way – on your own¹. 
2. The easy way – by watching what others do and avoiding those same mistakes.

We have an interesting vantage point. We’ve counseled 1000s of families, and we’ve seen firsthand some of the mistakes they’ve made. Let us peel back the curtain for you with just one example.

It was around 1999/2000 and I was working at a national brokerage firm. We inherited a client that was a dentist. He was only using the firm to place trades in two stocks: Yahoo and AOL². He’d managed to amass roughly $1,000,000 in each of those two stocks. He knew we did a great deal of planning work and wanted to come in to meet with us to get a plan built to hit his goals. At the meeting, our 52-year-old dentist client announced that he was going to retire from dentistry as he was going to spend his time trading AOL and Yahoo. We gave him our best advice – it was a terrible idea. And more importantly, he needed to diversify his two tech positions. He was too young, hadn’t saved enough to support his lifestyle, and was concentrated in just two stock positions. He chose not to listen. He shut down his dental practice and set out to do exactly what he wanted – trade his way to millions more. 

The account remained with us but under his control and direction, and we, unfortunately, got to see the ensuing aftermath of what happened to him: 

* Star represents when we met with client

No one has a crystal ball. No one knew these two stocks were going to tumble. We just knew that, statistically, it was asking for trouble.

When greed works, dopamine is released. Dopamine feels really good. And with more dopamine, we experience more pleasure. That can keep you coming back over and over. 

But greed is also brutal. Most of us never recognize it as greed. We justify our decisions to take chances – but often at the root of the decision-making, if we are honest with ourselves, greed is the deep motivating force. It will cause you to take chances (oftentimes unnecessarily) to attain the goal of “more.” After all, who couldn’t use “more”? But “more” is ambiguous, which makes it elusive and unattainable.

Today, it’s not Yahoo and AOL. It’s NVIDIA³ and MSFT. While we don’t do much in the individual stock arena – we do pay attention to what drives markets. Due to strides in Artificial Intelligence (AI), these two companies have driven 57%⁴ of the gain of the S&P 500 over the last month. Or, another way of looking at it, the other 498 stocks that make up the S&P 500 haven’t contributed much to the overall return.

We could quite easily invest clients into NVIDIA & MSFT. Does that make sense? Is it worth the risk? AI is here to stay, but how does it manifest in companies generating earnings? That remains to be seen. What is obvious is the flood of interest in AI. We saw the same thing in the tech bubble of 2000 and 2001, and it burst spectacularly (which took 15+ years to fully recover). 

But it is not just tech. This is a recurring theme when it comes to chasing money.

During the California gold rush of 1854, 300,000 people hitched up a wagon and headed West to strike it rich. To put that in perspective, if that happened today…that’s the equivalent of 4,300,000 people getting in their cars and moving to California. How many people struck it rich? Very, very few. Who made the most money? Those that sold picks, pans, and shovels. 

When it comes to AI, it is likely that all companies will address AI and incorporate it into their business⁵. It should make those companies more efficient and profitable and, therefore, more valuable. That’s why we choose to have clients invested in a wide array of companies in various industries (think: picks, pans, and shovels) who will figure out how to make AI work for them. Not picking which one company will be the undisputed champion of providing AI resources. 

With biology (dopamine) working against you, this is why it is imperative to have a plan and a team working for you to help execute against your plan. “More” isn’t a strategy because it’s an undefined goal. This is why we lean so heavily into planning work for our clients.

As challenges arise this year, know that your Wealth Manager and team are always here. And when those challenges arise, we will see how they fit into the greater context of your personal plan.

²Every time I type “AOL”, I can hear the whine of a dial-up modem.

³ NVIDIA is not a video game console; it’s a software company known for strides in Artificial Intelligence.

⁴ Isolating the performance contribution of NVDA and MSFT for the month of January 2024.

⁵ Yes, I’m fully aware of what happened in the movie ‘Terminator’ and realize the downsides of AI. I choose to be optimistic.