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Market Rally and Risk Thumbnail

Market Rally and Risk

By Alexander Hutchison

With the recent rise in Bitcoin we have seen a re-emergence of neanderthal investing articles. “If you had bought $X of Bitcoin in year Y it would be worth $Z today”. These articles emerge whenever a stock or an asset experience a meteoric rise, and ignore all context and everything we know about human behaviour.

Every investor wants to be like Forest Gump. The everyman who charmingly bumbled his way to historic fame and fortune. In the film he invested in a fruit company to find out it was a different sort of Apple all together. Unfortunately, most people either miss the rise all together or sell too early.

At the opposite end of the spectrum is Ronald Wayne, the man who sold his 10% stake in Apple for $800[1].  What a maroon!  If our friend Ronald never sold his shares, he would be worth over $200 Billion today. That is billion with a B.  That must hurt. 

Of course, hindsight is 20/20 and it’s easy to see that action as a mistake now.  It’s much, much harder to realize that along the way.  At the time, the Steves, Wosniak and Jobs, were start up founders in their 20s who knew a lot about programming, very little about business, were in huge debt and personal computing was in an infantile stage.  There were clear risks in being involved in the business. Even after they somehow survived through the start-up phase, Apple had a rocky road to the 2 trillion-dollar company it is today. 

Poor Ronald sold the Apple pipedream in 1976. Apple went public on December 12, 1980 at $22.00 per share. The stock has now split five times since the initial public offering, so on a split-adjusted basis the IPO share price was $0.10 in 1980.  Ronald probably thought he was pretty smart in that 4 year period before the IPO launched. That is four years of pain and growth before many early-stage investors had an opportunity to get their money out.   

Since its IPO Apple shares have finished down more than 50% on the year 3 times.  Would you continue to hold shares of a company down that much on a given year?  On 7occasions Apple had annual return above 100%[2], would you not take some money off the table?

Another story that is bound to pop up over the next few weeks is the man who paid for a few pizzas using bitcoin. In May of 2010 Laszlo Hanyecz ordered two large pizzas from Papa John’s. He paid for the pies using bitcoin. The cost was about $30 USD or 10,000 bitcoin. These two pizzas represent an opportunity cost of $560,000,000 US. Can you believe anyone would choose pizza from Papa John’s over being a multi-millionaire?

What is commonly missed is that this man’s dinner was a huge step towards legitimizing Bitcoin and crypto currency as a payment method. It has been said by many that crypto is a solution looking for a problem to fix. It does not have a clear use and its adoption as a currency or payment method has been slow to glacial. The Papa John’s order is the earliest time that Bitcoin was accepted as a real-world payment with physical delivery. Yes, those 10,000 coins would be worth a lot more today, but would the rise have happened the same way without this example of early adoption[3]?

If Laszlo were willing to buy 2 pizzas with his coins, do you think he would not have used them to buy anything else since? Maybe a new computer, Lamborghini, or house. Its absurd to think that even the staunchest believer would keep the entirety of their investment through all the ups and downs.

From October 2013 to November 2013 the price rose from $200 to $1,200. By April 2014 it was back in the 300s, it would not return to the $1,200 mark for another 3 years. On December 22nd, 2017 it shaved 30% of its value in 24 hours. Followed by another 50% slide of 16 days in February of 2018. December of that year the price was down 76% from the previous highs. It would take 2 years for the value to get back to 5 figures. With a price that volatile could you hold?

            As we learned with the other buzz financial story du jour Gamestop, what goes up sometimes comes right back down. There are a lot of ‘investors’ who didn’t sell any shares after the large run up, or even bought on what they thought was a dip and ended up increasing the size of their loss. Most of the time after a large spike, what goes down never comes back up again, sometimes the party is just over. Look at almost any chart for a stock on the TSX venture or if you prefer more recognizable names; GoPro is down 90% from its highs, General Electric is off 76%, and even during the peak of its Reddit Rally former Canadian tech darling BlackBerry was still down 85% from its all-time highs. 

            There is no point in pretending that anyone would hold an entire stock position forever. Even CEOs, founders, and presidents sell their shares. Those houses in the Hamptons do not pay for themselves. Keeping position size within reasonable parameters is a great way to remove the guess work of when to sell. You can hold Apple forever, but it should not be allowed to grow past 5 - 7.5% of your entire portfolio. This way you are selling the entire way up. Sure, you are not going to be Forest Gump rich, but he was lucky, slow, oblivious, and fictional


 Photo by Gilly on Unsplash

[1] https://www.timesnownews.com/business-economy/companies/article/this-man-sold-shares-worth-over-95-billion-for-just/595998#:~:text=Most%20people%20might%20not%20know,his%20co%2Dfounders%20for%20%24800.

[2] https://www.macrotrends.net/stocks/charts/AAPL/apple/stock-price-history

[3] The Age Cryptocurrency -Micheal Caser & Paul Vigna