Transcription
(upbeat music) - Hello, hello everyone. Welcome back to another episode of "Signal or Noise." It's episode 75. Charlie Bilello. Here with me as always, Peter Mallouk. Peter, different kind of topic today. I'm calling it the Mark Cuban bet. It's really the Cuban Mallouk bet that became an investing lesson. This is going to be a fun one, an interesting one and a lot of good lessons in here for investors. Let's begin with the backdrop, how it started.
So back in April 2021, as people might remember, there was a little bit of a mania going on in the stock market, especially in crypto, especially in meme coins. And Mark Cuban decides, I'm going to endorse Dogecoin. And essentially he's saying that the dollar is going to go down and Dogecoin might not go up, but I'm saying there's a chance. That's why you should take a flyer on Dogecoin. He actually goes on the Ellen Show promoting it and he's responding to this post by CoinDesk. It was just essentially saying, "There's an infinite supply of this Dogecoin. They're issuing way more of it." And he dismisses that saying, "The fact that they create five billion of new Dogecoin is actually a good thing because it keeps the price of the coin low, which makes it more accessible."
Now, Peter, I follow you, of course, on social media. A lot of people here do as well. You rarely, rarely engage, but I think this was something that you just couldn't help but enter the fray here and give your opinion. And you didn't pull any punches here with this post. "So many people are going to lose so much money listening to this. Straight out of "Dumber and Dumber." That was the reply to Mark Cuban's promotion of Dogecoin. What were you thinking at the time? What got you to post this?
- So I think what, by coincidence, I was a guest speaker at a university, and I was talking to a room full of sophomores in college, couple hundred kids. And I was talking about all these things. And one of the kids mentioned Mark Cuban Dogecoin and he's really smart and I'm going to buy Dogecoin. And I remember just being like, this is such a terrible lesson. I knew enough to know Dogecoin is probably the, was one of the worst major cryptocurrencies that there was because they were just kept, like to your point, printing more and more and more of it. I mean, it was just, we, this was like the most telegraphed way to lose money, right? And so I think just seeing, like, kids are listening to this and they're taking action based on it. It just, it caused me to maybe respond in a way, not that I don't traditionally respond, like, I had never responded to anybody that way before, but I found it very frustrating because he's very smart guy, very successful and very well known and people are listening, you know? And then you've got people that can't afford to lose money taking action there. And that's what kind of started this all.
- And I think that's the big point. It's people who can't afford to lose it or they're most likely to take a speculative play at this and put way more of their net worth into something like this than Mark Cuban. And I had to do a little digging to find what he actually held of Dogecoin when he was promoting this. But he said in one of these interviews, he owned $494 of Doge. And yeah, he said the Dallas Mavericks, of which he was an owner at the time, they were accepting the coin as payment, which obviously if they held it was not a very good thing, but there was less than $15,000 of that. So it was, to say it was a minuscule percentage of his net worth would be to put it mildly here, Peter.
- Yeah, I mean, that's straight to the point. I mean, like it, he's, people are listening, people that can't afford to do it are doing it and he's not even doing it himself.
- Exactly. So let's go where this led. So it didn't end up being a bet over Dogecoin. It's transitioned here to a bet between you and Mark Cuban over two cryptocurrencies, the two biggest. Ethereum and Bitcoin, a 50/50 split of that versus the stock market. Tell me how this came about.
- So this was really frustrating. So he responded to the "Dumb and Dumber" thing and we got in a little bit of a, for Twitter, not that big of a deal, but a little bit of a conflict. And ultimately he, I said, okay, great. You take Dogecoin, I'll take the S&P 500. He then backed off Dogecoin and switched it and said, I'll do two cryptocurrencies I pick against the S&P 500. Now that's very different than Dogecoin. Like, if you were to ask me at the time, what are the odds that Dogecoin's going to outperform the market over a decade? I would have said, you know, less than 5%. Whereas, you know, randomly picking, you know, the top two of the 9,000 cryptocurrencies, just changing the bet almost completely. I still though the odds were tremendously in my favor. I mean, S&P 500 has earnings. You got two cryptocurrencies that have to, you know, a long way to go to be accepted as currencies. So when he switched the bet from Dogecoin S&P 500 or the topic to Bitcoin, Ethereum versus S&P 500, I still liked my odds so I went ahead and took his bet.
- And this is a million dollar bet where the winner would get the proceeds for their proposed charities of choice, correct?
- That's right.
- Okay. And so that was one bet and it didn't end there. It morphed then into a stock picking versus index bet here where Mark Cuban is picking a 50/50 split of Netflix and Amazon and you again are picking the S&P 500.
- Yeah, so this came about because when I took the S&P 500 against Bitcoin and Ethereum, he said that was, you know, stupid. Only a fool would have a diversified portfolio like that and that, you know, if you know what you're doing, you just pick stocks. Obviously, there's stocks that will do better than owning the S&P 500. And so I said, okay, well, I'll take my index. You know, which he said only a fool would buy and you pick whatever stocks you want. And so he picked Netflix and Amazon 50/50. He set the terms. He said, you take the S&P 500, biggest increase wins. And I took the S&P 500 and he took Netflix and Amazon and that became the second bet.
- Okay, so we got the two bets, a million dollars each. It's been over five years. We're going to show what happened since then in a little bit. But first, Peter, I just have to talk about what was also going on that year back in 2021. In January 2021, we had the meme stock mania. So this was a few months before the bets that you made with Mark Cuban. And this really struck me at the time. And I remember posting on Twitter, it was Twitter back then, about this. Mark Cuban goes on CNBC the day of the peak in GameStop. This is January 28th, 2021. Essentially promoting it, saying why he likes it. It's a good thing. It's going to help the little guy. He says, he does a whole host of interviews around that time. And then it starts going down, Peter, in early February. And he's saying the best thing you can do is hold onto this stock. If you still believe in the reason you bought the stock and that hasn't changed, why sell? And if you pick your right spots and work as a group, you can hit it again and again. And once again here, Peter, very similar to the Dogecoin situation, he's saying, I don't own it. So Dogecoin, he owned about $500 worth. Here, he doesn't even own a single dollar of this share of GameStop. And he says, the lower it goes, the more powerful Wall Street bets, which is the message board that promoted it, can be stepping up to buy the stock again.
- I mean, to me, like, I don't even know what to say. I don't know what to say.
- I'm going to post what you did say back at the time.
- Yeah, the same thing, right? The same thing. The people most likely to lose money are the ones buying it.
- And that's what you wrote right around the peak while he was on CNBC promoting this while not owning a single share. You wrote January 27, "Those running up stocks like GameStop are likely going to lose a ton of money when rationality kicks in. The stock market isn't perfectly priced every moment of the day, but over time it gets it right." It's hard to explain to people what a crazy mania this was. This was something that had a market cap of a few billion and it went to 35 billion, Peter, in, like, a two week period. And really most of that was concentrated within a few days. And you had people like Mark Cuban out there promoting it and ignoring all of the fundamentals, the fact that it was losing money, the fact that its revenue was declining, the fact that this was clearly very obviously a mania. They were ignoring all that and essentially saying just play the greater fool game. And once again, people were doing it with money, probably they couldn't afford to lose, okay.
- Right.
- So let's talk about how it's going. So a little over five years now. We'll just do a quick rundown of what the performance has been for the different bets here. And then we're, I want to get into the lessons here. So first, Dogecoin, probably not a shock to most people, down 77% since Mark Cuban said Doge might not go up, but I'm saying there's a chance. The chance, as you said, was pretty low that Dogecoin would outperform the S&P 500. The S&P 500 is up 94% since then.
- Right. This one I think was an in the bag one. I wish this was actually a bet. But it is how it all started. So it's good to kind of see what happened.
- Okay. Then we got the crypto versus the S&P 500 bet. A 50/50 split of Bitcoin and Ethereum since the bet was made is down 7%. The S&P 500 total return up 91%. And then let's go to the Amazon Netflix 50/50 split, up 39%. Again, S&P 500 up 91%. So a good lead here in both of these bets, the crypto a little bit better. This isn't the main takeaway as we'll talk about the fact that you're winning this bet. But five years in, Peter, what do you think in terms of the situation that we're in right now over the next five years?
- So I think people, the pushback would say, you're just taking a snapshot in a moment of time. Can't these things recover and eventually outperform the S&P?
- Yeah, I mean, I think we're, I don't know, we're five and a half year, a little over five years into these bets. And I think that the premise of going into the bets, which is that the S&P 500 is going to pick, is going to beat selecting a couple of stocks, your best picks. The S&P 500 is probably going to win that the majority of the time over a long period of time. And that crypto assets that don't produce earnings are likely to lag in assets that do produce some sort of earnings in the future or have expected earnings probably over a long period of time. When we made these bets, there was not total certainty. I consider them both in my favor, good bets, but not in the bag. And even at the halfway part, I would say there's a long way to go and anything can happen. And the odds are probably just a little bit better than they were five years ago. You know, instead of a, you know, 60, 65% chance of winning, maybe it's closer to 70, but it's still, both of these have a long, long way to go to get to the finish line.
- Okay, and let's just give the update here on GameStop, down 82% from the peak back in January 2021. The S&P 500 has more than doubled actually since that January 28th level. And what happened here, Peter, unfortunately, was that the promoters of GameStop and all of these other meme coins, many cases like Mark Cuban, they didn't own very much or own any at all, and then they left the arena. They didn't mention it, talk about it. They said, hold on, HODL, hold on for dear life, never sell. Never heard from them again. But the people that did hold on, Peter, they were essentially became the bag holders. And I don't know if you know where the term originated from, bag holders. You got to go back to 18th century Britain. And it was actually a situation. You got a group of thieves, they go out and rob something. And most of the group leaves, they get away and they leave the guy holding the bag and he gets arrested. So different situation here, but similar in that the people left holding the bag here were the retail investors. They were the ones who were supposed to do so well, that's why this thing was being promoted. They ended up holding the bag. And the ironic thing, Peter, is this was sold kind of as a David versus Goliath situation, that the evil hedge funds were going to get what was coming to them. And really the hedge funds and high frequency traders, they profited tremendously over the volatility in the meme stocks and crypto area. And it was the retail investors who bought into this story at the worst possible time that was left holding the bag.
- I learned something new today. I've been saying bag holder for forever and not knowing where the story came from. So that's interesting.
- There you go. There's a story to everything and you don't want to be left holding the bag. And you won't be in the future if you take into account these timeless lessons here. Let's start, Peter. This is probably the most important lesson from the Mark Cuban bets that you made. Number one would be beware the halo effect. So you have Mark Cuban extremely successful, sold broadcast.com, timed it perfectly in 1999, made billions of dollars. That's how really, he generated most of his net worth. And he's a celebrity, has a TV show, "Shark Tank," a lot of people follow him. And what they attribute to his success in these many different areas, he's an owner, was an owner of the Dallas Mavericks. What they attribute is that therefore is going to be successful as a prognosticator, as a predictor of what will happen in the stock market, in crypto and meme coins. So the halo effect is really a saying because he has expertise in one field, he's necessarily going to have it in another.
- This is very real. I mean, I can just tell you, even in my position, I get called and asked advice on things I know nothing about. Just because in this one area we're having, I'm having some success, you don't want to really get advice from me in other areas. This is something very, very real. We tend to see somebody who's doing well in one area and we just want to get advice for them across everything. Like, I don't want marital advice from Warren Buffet, for example. You know what I mean? Like, I think that it really the halo effect is it's a little, it's just something that seems to never be contained.
- Right. And this was something and at the time, people probably forget the mania, like how crazy it got back in 2021, and most of these assets haven't recovered, definitely all of the meme stocks have not. But this extended to crypto, extended to celebrities launching their own SPACs at the time. And if you remember, I think probably the peak of this was with the ads, Tom Brady ads over with FTX.
- Right.
- And if you go back and watch some of them.
- Matt Damon part of-
- Sure, he was at Crypto.com, I believe.
- Right.
- So there was a whole host of celebrities that were getting paid. And these are successful people, actors, obviously Tom Brady considered the greatest of all time. And he's telling people don't miss out. Like, trust FTX, and that halo effect was enormous there.
- Fortune favors the brave.
- Absolutely. So the interesting thing beyond the fact that obviously you shouldn't assume that people who are experts, or great athletes or celebrities in one field are going to be knowledgeable on another is that they could change their mind. And this is what exactly what's happened essentially, Peter. So the bet still stands here, but a few months ago, I don't know if you saw this, Mark Cuban actually said that he sold most of his Bitcoin holding saying Bitcoin has lost the plot. And I believe he's essentially saying he sold it because the dollar was dropping and Bitcoin should have gone up. And I guess that was last year, but it didn't. And that gold is, he thought he was a better version of gold than gold, but it's not.
- I actually have a lot of respect for this, you know, to basically just advocate for something so strongly and then later just say, hey, look, I don't believe in this anymore. I mean, not a lot of people do that.
- Sure. But no comment here saying, Peter, perhaps I shouldn't have been promoting the most speculative version of this in terms of Dogecoin. That part he left out. Maybe at some point, someone will ask him about that. Let's talk about the second lesson here. Concentration cuts both ways. This is what Mark Cuban said back in April 2021. "Only a fool would buy 100 stocks or 100 crypto assets. But let me ask a question. What rights do you have as a shareholder in any public company stock you have bought?" And that's essentially in response to your post saying you have better odds, which is in line with all of modern financial theory and thinking that a diversified portfolio gives you a higher probability of success.
- Yeah, I mean, I said, if you buy 100 stocks, odds are most will go up. If you buy 100 cryptocurrencies, most will go to zero, big difference. I mean, that to me was the crux of this whole bet. You got speculative assets versus more proven assets, assets that bring you income versus those that don't bring you income. Really, no comparison.
- And he could have picked, to be fair, Peter, right? He could have picked a few stocks that did wildly outperform. He could have picked-
- Oh, of course.
- Nvidia, right?
- Yes.
- But he didn't because no one was talking about Nvidia obviously, at the time. I think the broader point here, and people should understand this, is how, why it's so difficult to outperform the broad stock market picking stocks. It's not that you can't pick a few winners that will outperform. So certainly you can get lucky and do so. It's often that by just picking a few stocks, you're going to leave out the winners of the future that you're not thinking of today. So Nvidia would be a prime example of this, but the stats are pretty clear that most of the shareholder wealth that has been created in the US equity market, Peter, has only come from a small percentage of stocks, 3.7% of stocks. So if you're missing that group of stocks by picking just a few, you're not going to get the market return. And there was this great study recently that Morningstar did where they looked at 5,212 active mutual funds. So these are active stock funds trying to pick stocks and outperform. And they found 10 years later, only 430 out of these 5,200 funds survived and outperformed. And then if you looked at when investors timed their exposure to this, we look at dollar weighted returns, there are only 12. So the idea that you can even outsource this to a professional manager and they're going to pick the stocks, incredibly low. So yes, concentration is the fastest way to build wealth and it's the way that Mark Cuban initially got his wealth, but that doesn't mean for the average person, that's the highest probability bet for themselves. Instead, it's the opposite. The highest probability bet for most people of gaining wealth, although it's going to happen more slowly, of course, is having that diversified portfolio. And that's a hard concept for people to understand.
- 100%. Control your taxes as much as possible and quit looking for the needle in the haystack and buy the haystack.
- Let's go to number three here. The price you pay matters. So Mark Cuban didn't just pick two stocks. He picked two stocks that were incredibly popular at the time, Peter. And because they were incredibly popular, what came with them is high valuation. So you had Amazon trading at 66 times earnings back in April 2021. Netflix, 62 times earnings. And these companies have grown. Their income has grown, their revenues have grown tremendously over the last five years, but because there's been a multiple contraction getting closer to what the market multiple has been, that caused that return differential to be in your favor and against him. So now today you're talking about P/E ratios in the 20s. And I think that's a hard concept for people to understand because they say, well, this is a great company. They have a lot of growth. It doesn't really matter what I pay for it, but oftentimes it does.
- Yeah, the folks that I know, I think of the private capital firm Apollo and their kind of almost tagline and religion is purchase price matters. You know, whether it's stocks, real estate, anything else, what you pay is going to really have a big impact on your expected return.
- And the longer the period of holding, the more that's going to be true. And the tough thing is in the short run, it can mean nothing, right? A highly valued stock can get more highly valued. It's only only over long period of time that mean reversion sets in. So let's talk about the last lesson here. Very important. Simplicity is underrated. And I just want to give this quote from Charlie Munger. "I can't think of a single example in my whole life where keeping it simple has worked against us. We've made mistakes, but they weren't because we kept it simple." And this is really applicable, Peter, to every investor because if you listen to celebrities, listen to pundits, they're often preaching complexity. They're often preaching market timing, stories, excitement. And they're essentially saying that's the way you have to win. And that pulls a lot of people in, of course, because getting rich quick is very attractive. But what actually builds wealth in the long run is really the opposite, isn't it?
- Yeah, and it's the opposite of the media and what you see online. You know, the media and everything you're going to see is about excitement, complexity, huge upside like GameStop, Dogecoin. The future's going to change narratives and famous people get tied to it like you pointed out with Tom Brady, Matt Damon, Mark Cuban and it's really focused on what's winning now. But we know and the data show, over and over again, that you have a much higher chance of building wealth, looking at the long run, being patient, keeping it simple, being humble. Don't think you can outsmart certain markets that most people have never outsmarted. And what you pay matters, and control your behavior. Don't hang on to something too long. That's the endowment effect. Don't think that certain money's not yours, like, the mental accounting. Don't rely on other people to be strong in this area just because they were successful somewhere else. That's the halo effect you mentioned earlier. So much of this is behavioral, and patience and simplicity. Unfortunately, you're not going to see that on cable news and you're not going to see that in financial media in general.
- Yeah, simplicity really doesn't sell very well, does it? And these are great lessons for anyone to learn. And again, it's not so much the outcome here. It's the process that went into your thinking, right, Peter? You could have been losing this bet and the process would still have been the same and the odds that you were, why you were making the bet in the way you did, is really the lesson for investors. It's helpful that you're winning the bet because people would say, hey-
- Yeah, not bad.
- Yeah, but.
- Two charities very much keeping track of it, by the way.
- Awesome. What are those two charities, Peter?
- One's Pathway Education, which is something we started that does financial education for adults, kids in college or business owners in socioeconomically underdeveloped communities. We're very, very involved in that, as of a lot of people at Creative Planning have been incredible at donating their time to that. And then Harvesters, the food bank.
- Awesome awesome. So great cause. I hope you win the bet. We'll revisit this in a few years and we'll invite Mark Cuban on to share his thoughts. I think that'll be a fun one. We'll see if he takes us on that offer. If you're watching this and you're thinking about what to do in terms of your portfolio, your plan, how to avoid getting sucked into manias like we talked about and the halo effect, at Creative Planning, we're here to help with all of that more. Reach out to us today. I'll have a link in the show notes. Creativeplanning.com/charlie to get a free wealth path analysis at Creative Planning. We're in all 50 states and now we're abroad as well. Over 700 billion in assets under management and advisement. We're here to help so reach out to us today at creativeplanning.com/charlie. Awesome show today, Peter. Hope everyone enjoyed it. Thank you everyone for watching. If you're watching this on YouTube, hit that subscribe button. We're also on Apple and Spotify. Peter and I will see you next time on "Signal or Noise." (upbeat music)