🧠 Embrace the Messy Middle


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Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better.

Today's Issue Read Time: <2 minutes

  • Lesson: Lessons on bubble investing
  • Timeless Content: Is it Time for Bonds?
  • Stock Dive: A full breakdown of IREN Limited
  • Resource: Practical Guide to 10x Your AI Productivity
  • And more!

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Friends,

In April 1999, Mark Cuban (who later became the owner of the Dallas Mavericks and star of Shark Tank) sold his company to Yahoo! Cuban got 14.6 million shares of Yahoo -- trading at $95 apiece. That's roughly $1.4 billion.

But Cuban didn't like his wealth sitting in a highly volatile, richly valued stock. So he used a hedging strategy that limited his upside, but also limited his downside.

Less than one year later, the Nasdaq peaked. It would fall 78% by 2022. Yahoo would fare even worse -- losing over 90% of its value. But because of Cuban's strategy, he retained over $1 billion of his fortune. He was one of the few dot-com billionaires who remained a billionaire.

We all want to be like the blue investors on the left and avoid the pain of the red investor on the right.

We bring this lesson up because there are lots of signs that today's market is richly valued:

  • The S&P 500 P/E currently sits at 31. This century, it has only been this high in 2022 (when growth stocks collapsed due to rising interest rates), during the Great Recession of 2008, and during the Dot Com bust.
  • The Buffett Indicator of the stock market's value-to-GDP is at 217% -- well over the 200% benchmark that represents extreme risk.
  • The Motley Fool's Potential Growth Indicator is at 10.7% -- when it falls below 11.5%, that indicates investors are pumping lots of money into the market.

It might be tempting to sell everything in the face of this. But we think that's not a great view either. Consider

  • Dot Com: Alan Greenspan gave his "irrational exuberance" speech in 1996. The Nasdaq climbed nearly 300% from there before crashing.
  • Great Recession: Nassim Taleb warned about the housing bubble in 2003. The markets didn't crash until five years later.

Here's the core problem: the very same investors who capture all of a potential AI-bubble's gains will be the very same investors who experience the greatest losses.

Here's how to visualize this:

So what are investors to do?

Embrace the messy "middle road."

  • No one is required to put 100% of their portfolio into growth stocks.
  • No one is required to fully liquidate 100% of their portfolio to cash.

As stocks rise and valuations become frothy, it's ok to move some gains to cash. But don't do that with ALL of your stocks -- there could still be lots of room to grow.

Right now, two of us (Stoffel and Feroldi) are sitting on cash positions of over 20%. The third (Withers) has shifted a large chunk towards dividend-paying stalwarts.

Does that mean we'll miss out on gains? Absolutely.
Does that bother us? Not a bit.

If the stress of a richly valued market, or the real-world effects of experiencing a 30%+ drawdown, would materially damage your experience of life, it's just not worth the upside.

Over the long run, the whole point of investing is NOT to optimize returns. It is to make your experience of life better.

Wishing you investing success,

Brian Feroldi, Brian Stoffel, & Brian Withers

Long-Term Mindset

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P.S. It's Official, we are splitting up our YouTube Channel. Brian Stoffel is starting a new channel that will cover earnings, his portfolio moves, and more. Subscribe to his new channel by clicking here.

One simple graphic

One piece of timeless content

Market feeling too frothy? It might be time to consider bonds. Market Sentiment wrote a great piece on the basics of bonds, how they might fit into your portfolio, and whether it's a good time to buy.

One Stock Dive

​Fiscal.ai has introduced a new feature for premium users, enabling them to generate AI-powered stock research reports. This week, we're highlighting IREN Limited (NASDAQ:IREN), a requested stock from one of our subscribers. Click the button below for free access:

Do you have a stock you'd like us to feature here? Reply to this email with your pick.

One resource

Are you unimpressed with your A.I. prompt results? Stanford's Jeremy Utley suggests that maybe it's because you aren't treating the A.I. like a summer intern. Curious? Check out his instructional video titled Practical Guide to 10x Your AI Productivity.

One quote

Brian Feroldi

Brian Stoffel

Brian Withers

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β€‹πŸ§  Do better​

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Long-Term Mindset

I teach investors how to analyze businesses. Each Wednesday, I share six pieces of timeless content that can be read in less than 2 minutes. Read by 100,000+ investors from a16z, Amazon, Google, Microsoft, and more.

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