Index Funds, Bitcoin, Real Estate etc. The guaranteed secret to getting rich?
Let's suppose tomorrow Jesus himself decides to come back down and he decides to launch a tech company (That's where all the prophets are these days). Since he is Jesus, he can tell you that the company will generate exactly $500b free cash every year for the next 10 years, solve every problem of humanity, and then return the cash only to vanish forever. This is great! He launches an IPO asking only $100b and since we know exactly what is going to happen, we all pile up to buy the stock. Every single investor on the planet. We know what the value is because Jesus told us. We discount those cash flows to incorporate inflation and this company becomes the most valuable company in the world overnight. Assuming 5% inflation, the company would be worth ~$4 trillion on day 1. Guess what, on the opening day, the $100b invested will give you a 4000% return on the first day. This is the greatest trade ever if you got the IPO. On day 1. But:
What about after?
You know for sure what was gonna happen, you got the stock of Jesus's company and made a 4000% return. Now will this company continue to be a good investment? If something is only going to go up in value, everyone has piled in and guess what, now it won't go up in value. If everyone is early to the party, then no one will be early to the party. Our fictitious stock will only rise by 5% every year because we've assumed constant inflation rate of 5%. After day 1, people will start selling and cause the "small" price fluctuations. There will be other investments that people will look at. Inflation expectations will change because you know, inflation can be 3% or 7% because of different macro factors and thus the expected PV of our company will change. Different investors will expect different inflation rates for the future. Here is what the values would like under different inflation scenarios where inflation is expected as constant for 10 years:
And this is such a simplistic scenario that I've laid out where cash flows are guaranteed. But in reality, there is no company by Jesus, no one knows what inflation will look like, there's so many different factors. We're all playing a guessing game. Which bring me to what the "Magic Pills":
Real Estate, Bitcoin, Index Funds: You spend long enough time in the finance world you'll encounter worshippers of all these three investments. Now don't get me wrong, I like all three. But advocates of these assets will tell you that their asset is the sure fire way to make it. Real Estate people will tell you to look at past price and rising populations that Real Estate is a guaranteed win, Bitcoiners will tell you it has been the best trade of the past 10 years, Index Funds guys will say bet on the whole economy, no one outperforms them over the long haul etc.
But Real Estate is illiquid, comes with taxes, paperwork, lots of maintenance costs (which are HUGE), people need to have rising wages to be able to afford rents and interests. You net all of these things out, your returns may not look as pretty as you'd have hoped.
Index Funds mean you buy at any price even if the market is pumping and dumping overvalued garbage into your index. You can be left holding the bag (Gamestop, AMC etc.). One of my favorite places to visit is Bogleheads. You spend an hour browsing the site and you'll come out thinking buying an Index Fund is the only thing one should do and everything else is garbage (not exaggerating, try it and you'll know). Indices won't always be outperforming, think about places like Japan or Greece. If you were just an Index investor in these places, you'd be starved for great returns while other asset classes outperformed. We keep hearing "Passive" as the way to invest, but is it really passive if you choose to invest in the Sensex instead of the Hang Seng? If you allocate 80% to the S&P 500, that is an active bet on the US instead of India. Sure, it is less active to picking a stock, but it is still a macro bet.
The most interesting and cultist asset is Bitcoin (or other cryptos). It has almost become a religion. A deflationary, decentralized asset/currency accessible to everyone in the world and controlled by no one. Closest thing we have to the stock by Jesus described in the beginning if you'd believe a Bitcoin Maxi. But is it? Do we really want hard money back again? Where the supply and liquidity cannot be adapted to suit the world's or a geographic region's needs? Currency supply should depend on economic productivity, not pre written code. I personally think not, even though there's great use cases. What about when electricity is cut off or the internet goes down? Bitcoin hasn't solved much, yet, though we may see it in the future. But we don't know. No one knows. It is all interesting when we see people escape some tragedy using BTC, but if it is a great asset for that, is it really a great asset for the places which are doing well?
Do we make these things out more than they are? A utopia that is disconnected from reality? These topics have been covered a lot more in depth than I've covered here but my basic point stand: There are no magic pills. There will be periods when all these magic pills will underperform. They'll crash and get wiped out due to random events. There's no guarantees. Just guesswork. You want to be diversified enough to be able to take these crashes. You don't want to so all in that you get wiped out. At the same time, you don't want to be diversified so much that everything is diluted. Even if you know that something will go up for sure in the long term, you want to have a plan for short term volatility in place. That is the only way to stomach these crashes. And there will be more crashes.
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