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Cycles of Right and Wrong

Not only is Warren Buffett usually right, but he’s been right for so long. His longevity is singular.

Since 1965, the S&P 500 has returned an average of 10.5% per year. Buffett’s Berkshire Hathaway has returned 20.1% per year.

The S&P turned $1 in 1965 into $300 today. That’s fantastic. Buffett turned that same dollar into $36000.

Doubling the S&P over one year is great, but won’t make you famous. Doubling the S&P for six decades means you’re the most famous investor of all time.

Warren is usually right. But for the rest of the investing world, right and wrong are cyclical.

Further reading: Check out Buffett’s 2021 Annual Report here.

Triple-Levered FAANG

“Triple-levered FAANG” makes me think of a mean viper.

Patch modeled after a snake's fang could deliver drugs and vaccines •  Earth.com

In this case, though, it refers to an investment.

The FAANG stocks are Facebook, Apple, Amazon, Netflix, and Google. And triple-levered means “$1 of investment buys your $3 of exposure.” It’s an investment with 3x the risk and 3x the reward.

In August 2020, reader-of-the-blog Sidd asked me about FNGU. It’s a triple-levered ETF that holds:

  • Facebook (now Meta)
  • Apple
  • Amazon
  • Netflix
  • Google (now Alphabet)
  • Baidu
  • Alibaba
  • Tesla
  • Nvidia
  • Twitter

I responded:

FNGU is a risky investment. It was risky then and it’s risky now. Risk, as we know, is tethered to reward. It’s the fundamental relationship of investing.

I wanted to caution Sidd on the downside potential of his investment. But, at least initially, I was wrong.

FNGU’s Roller Coaster

For 15 months, the reward from FNGU appeared well worth the risk.

115% gain in 15 months is nothing to scoff at. Did I caution Sidd too much?

But one of the dead horses in The Best Interest’s stable is reversion to the mean. Hell, I’ve beaten that poor horse four times this year alone.

Investments that fly like Icarus tend to fall like Icarus. FNGU is no different.

FNGU is now down 60% from where Sidd bought it, and down over 80% from its November high. I’m not sure if Sidd sold (or bought more!) since we spoke in August 2020.

But my point is that concepts like “wrong” and “right” can be cyclical. Especially in investing.

FNGU looked great for 15 months. My risk-aversion appeared misplaced. Then 6 months later I look like a genius. In 2 or 3 more years, FNGU might be at $100 and I’ll look dumb again.

In my opinion, an ideal portfolio is “built for all weather.” It’s diverse in its assets (stocks, bonds, alternatives, etc.) and diverse within those assets (e.g. low-cost funds, not single stock picks).

Such an “ideal portfolio” isn’t going up 100% of the time. It still rises and falls. But it never feels “wrong.”

That’s the benefit of diversification. That’s the benefit of a margin of safety. I always feel confident I’ll stick with my investments, and I always feel confident I’ll live to invest another day. Investing is psychologically difficult, but I never feel the urge to panic sell.

It’s less-than-exciting during bull runs. It’s also better than panicking during bear markets.

Back to Warren

Funny aside: even Warren has had “wrong” years. The S&P has beaten Berkshire in 20 individual years since 1965. There have been long periods where critics ask if he’s “losing his edge.”

The past few years were a case in point.

After the “COVID crash,” popular media was asking if Berkshire Hathaway (orange) had lost its edge on the market (purple). Warren Buffett appeared, for a short time, wrong.

The last 6 months have turned the table. Right and wrong are cyclical. For some (me and you) more than others (Buffett).

But an ideal portfolio rarely feels “wrong.”

Thank you for reading! If you enjoyed this article, Subscribe to get future articles emailed to your inbox.

-Jesse

P.S. – If you enjoy podcasts, check out the Best Interest Podcast!

P.P.S – I wrote a book! Check out the ebook here and the physical Amazon book here.

2 thoughts on “Cycles of Right and Wrong”

  1. Another great blogpost. If one could only time when to get in and out of a leveraged product like FNGU to make crazy returns consistently they would be rich! I wonder if Sidd is one of those people?

    My timing sucks so buy and hold the whole market index is for me.

    I once thought about just holding Berkshire Hathaway stock since like you pointed out he has beat the market consistently. After looking into it I could only purchase the “B” version of the stock since I could never afford a class “A” share which is trading close to half a million per share!

    I never did buy Berkshire Hathaway stock directly but knowing it’s held in the total market index funds like VTI I can feel like I do own part of Berkshire Hathaway even part of a class “A” Share!

    1. Thanks a bunch, Tech. Very kind of you to say.

      I agree – the timing is 100% the hardest part, and probably not something that average investors should get involved with.

      Funnily enough, the *only* individual stock I own is Berkshire Hathaway. Three class B shares. Bought them back in December, simply because of admiration for Buffett. It’s not an investment as much as it’s “buying my favorite player’s baseball card.”

      -Jesse

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