Selling Everything

What's up, you guys? It's Graham here. So over the weekend, I've received hundreds, if not thousands, of comments either mentioning or asking me to share my thoughts about Meet Kevin selling off his entire 20 million dollar portfolio with the expectation that things are about to get a whole lot worse over the next few months.

Now, I'm not one for drama, and I really do my best to stay out of heated discussions, but it's hard not to read the comments and see the polarization that his video has caused. People either feel as though he was encouraging them to buy the dip while he unexpectedly sold everything 48 hours later without warning, or they wholeheartedly agree with his decision and think it's a great choice with a high probability of paying off.

So here are my thoughts about his decision to sell everything, how and where I'm investing, the markets continuing to drop, and several of the issues that I see in today's market that are worth addressing. Because let's be real: during a bull market, everyone is going to look like a genius, but now is the time that you're going to see who's investing responsibly. By the end of the video, you're going to know exactly how to do that.

But before we start, this video is sponsored by the Subscribe button, which for the cost of absolutely nothing gets you three videos a week on personal finance and investing for totally free. Or if you're already subscribed, feel free to hit the like button if you've lost money in the markets like I have today. Thank you guys so much. Now with that said, let's begin.

Alright, so first, let's jump right into the drama with Meet Kevin. For anyone who's not seen his entire 35-minute long video, I'll link to it down below in the description. But for those that are watching here, I'll summarize his rationalizations as well as my own thoughts about what's going on. He starts his video by comparing today with the events that took place in World War One when agriculture shortages led to an increase in prices and therefore an increase in debt as farmers took on more land to maximize their profits.

However, farmers expanded too much, and when demand began to slow down, that caused a mass sell-off amongst prices. The Great Depression in 1929 also saw something similar. Prior to then, speculating on stocks became a hobby as banks began lending money for the sole purpose of investing because prices only went up. But that created a problem in that the stock market rally was almost entirely financed by debt. So when prices no longer kept increasing, people began to sell off, causing the price to fall even further, causing banks to then call their loans and causing the entire market to fall into a depression.

That's somewhat similar to the 2001 dot-com bubble as well. This was a time where internet innovation was expected to change the way we interact and do business. As a result, speculation was everywhere; people were just buying anything they possibly could, whether or not they were profitable, because the internet was going to be the future, right? Well, that was unsustainable, and as internet companies couldn't actually make any money, they ended up collapsing, wiping out most of their value.

And then finally, we have the 2008 Great Financial Crisis. This happened when banks began lending money to people who were not qualified, who went to buy houses, boosting their values to the moon. And then once those people couldn't sustain those payments, they began defaulting. The banks who issued those loans began defaulting. People were losing their homes left and right. The entire market dropped 50 percent in value. The Fed stepped in to then bail them out.

Now that brings us to today as Kevin theorizes our days of cheap money, supply chain shortages, and a tight labor market are coming to an end. These companies begin to realize that interest rates are about to increase, stimulus is going to wind down, growth is beginning to slow, and things will begin to normalize to where we once were. That means that either our entire economy is going to shrink or it grows much more slowly.

But that's just the tip of the iceberg, and in terms of the psychology behind his all-or-nothing massive sell, he says this: since the stock market is largely built on expectation, if companies report really great earnings over the coming few weeks, people will rationalize that it's already been priced in. Unless the outlook over the next year is strong, they're likely to go lower. So sell!

On top of that, good earnings would only give the Federal Reserve more reason to raise rates, which is bad. On the other hand, if companies report weak earnings, people may interpret that as only being the very beginning. Financials could get so much worse when the Fed actually starts raising rates, so because of that, you should also sell.

It's also worth mentioning that the personal savings rate in November of 2021 dropped to just 6.9 percent. So that brings the fear that people now have less discretionary income to spend throughout the next year. Given this, he believes that everyone is looking at the Federal Reserve for guidance with hopes that they'll either provide support for the markets or take it easy for rate increases, so as not to cause everyone to panic.

But in the meantime, he's taken the approach to sell off his entire 20 million dollar stock and real estate portfolio, with the expectation that he'll be able to buy in at a lower price over the next 60 days, so as to profit the difference. This, of course, caused quite the controversy because most of us preach the strategy of buy and hold and don’t time the market, with this being well, pretty much the exact opposite. Quite literally, this is the epitome of what every single highly respected investor tells you not to do.

In a way, I think that his viewers felt misled because his actions changed so quickly. For the longest time, he was always an advocate of buying the dip. Now, in reality, what Kevin does with his money is his business, and he's free to do whatever he wants. In theory, it really makes no difference to you if he sells, doubles down, takes on margin, or just holds as usual.

But in this case, it appears as though a lot of people look at Kevin as a leader for their own decisions. So when he holds, they hold; when he buys, they buy. Now, this is not Kevin's fault necessarily, but when he places himself in front of so many people, a large enough portion inevitably is going to copy those trades. With that comes a certain level of trust that you should, in theory, practice what would be in the best interest of the majority.

It's really tough because on one hand, I agree that he should be able to make whatever trades he wants to when he feels like it. But when you broadcast those trades to hundreds of thousands or sometimes millions of people, it's going to leave a portion of those people feeling as though you’ve altered their own strategy or if they end up holding through, going against the person who they're listening to.

Personally, in Kevin's case, I've been quite open throughout a lot of these livestreams that if I were him, I would have sold a long time ago. By the time his account grew to 30 million dollars with the rapid appreciation of Tesla, Apple, and 7 other tech companies, I thought he already won the game. So why take the extra risk? He's got low expenses, more than enough invested to live comfortably for the rest of his life. He has a high income, and that would be a great time to sell everything, diversify into a slower growing, safer portfolio of index funds, and then play around with 10 percent in a risky, speculative portfolio that you could just mess around with.

From this perspective, purely from a diversification standpoint, I think selling off his highly concentrated portfolio was a good thing, only because he was so heavily invested in a few very volatile, risky stocks that could either skyrocket to the moon or lose a lot of money. Up until recently, I think the risky approach worked quite well.

But when you see your account drop from 32 million down to 20 million dollars in a few months, let's be honest with ourselves, that would cause even the best investors to rethink their risk tolerance strategies in investing to the point where selling is probably the best possible outcome.

So in terms of Kevin selling, yes, I do think it was rather abrupt and rather confusing to his viewers who see him as a soundboard for simply just buying the dip. But the issue is that there’s so much nuance when it comes to investing that no two people are going to be the same. If Kevin was all in index funds, for example, and then decided to sell everything, I would say that would be a very foolish decision. That’s no different than gambling.

But when he has life-changing money highly concentrated in a few very volatile companies, I do think that it was somewhat smart to rotate out and hopefully invest in a more diversified portfolio of index funds, even though probably he’s not going to do that at all. We'll see.

So in terms of what I'm doing about this, here's what you should know. First, let's talk about the market. As of today, the S&P 500 officially enters a correction, which marks a 10% decline from the recent peak. The Russell 2000, which encompasses small-cap companies throughout the U.S., is also officially now in a bear market with more than a 20% decline from the peak.

The tech-focused NASDAQ is also on track for a bear market with a similar decline. In terms of how common this is, a market correction between 10 and 19% happens on average every 16 months. Plus, if you're anything like me and you like averages, the average drop so far has been 15.6% and lasts for 71.6 days.

Now, bear markets of 20% or more happen on average every 7 to 10 years with an average drop of 33% over a period of 363 days. Now, any drops of more than 39% though are actually pretty rare. Throughout the entire market, a drop of 40% or more has only happened four times throughout the last 120 years.

So even though it's certainly possible and all of us will probably see one to three drops like this in our lifetime, it's also not that common. All of this is to say that, honestly, what we're seeing in the markets right now is not unique, it's not special. If the market has taught us anything, it's that it happens on a regular basis and every single catalyst is always going to be different.

Second, no one knows what they're talking about, and there's no way to give an accurate prediction. Even though it's easy to point to a Michael Burry quote that the "mother of all crashes" is coming during times like this, we often forget about all the incorrect predictions that people just forget about when they don’t come true. Take Ray Dalio, for example. In 2021, he called for a market crash, calling it a bubble. In 2020, he said we're heading for a Great Depression.

In 2019, he said the next crash is coming. In 2017, he said the magnitude of the next crash will be epic. In 2015, he said it reminds him of the 1937 market crash, and that continues. The same thing applies to Michael Burry. In 2017, he predicted an imminent stock market crash. Then in 2019, he called passive investing a bubble. In 2020, at the bottom of the market, he warned about a selling stampede.

It also reminds me of this chart here going all the way back to 2010, quoting each economist and hedge fund manager calling the top each and every year. Even though a decade later, we're 200% to 400% higher, and you would have missed out on quadrupling your money just waiting around for the right buying opportunity.

All of this goes to show that, yes, if you cherry-pick data, you could successfully find someone who was correctly predicted when and how the market is going to fall. But to me, that's no different than calling a person a genius who correctly predicted the right number on the roulette wheel. Sure, it might happen, and some people have correctly predicted market cycles over time, but in the big picture, consistently getting them right is next to impossible.

And because of that, here's what I'm doing: I've acknowledged that I'm terrible at timing the market and I shouldn't even bother trying. However, I have a slightly different strategy than most, and I take on a rather conservative approach when it comes to asset allocation. See, two months ago, I posted the breakdown of my entire 22 million dollar portfolio, and in there, you could see that only 35% of my assets are held in stocks and index funds.

The remaining 40% are held throughout residential real estate, 8% is allocated to private startup ventures, 5% in cryptocurrency, and the remaining 12% in cash. Over the last 13 years, I've done my best to design a lifestyle where I could keep my living expenses extremely low. My rental properties are either completely paid off in full, or they have relatively low leverage compared to the value of the property.

I've diversified my income so I have plenty to fall back on, and as a result, market swings like this have absolutely no impact, making it very easy to continue buying as usual as though nothing has happened. Even though losing money sucks, and seeing my account down two hundred thousand dollars in a single day is horrifying, at the end of the day, I just know that it's part of investing.

And as long as I don't need this money over the next 20 years, anything that happens between then is just white noise. The only time I would ever suggest somebody panic is if they're over-leveraged, over-invested, overly concentrated in highly volatile or risky assets, and cannot afford to hold on to them if they drop even further. Those people might be able to benefit from the risk of selling, reallocating to a diversified, safer portfolio, beefing up an emergency fund, and then sticking with a long-term portfolio that doesn't put them at risk of losing everything.

For anyone who wants to get started with long-term investing, by the way, I'll put a link down below in the description where you could sign up for Public and get a free stock worth all the way up to a thousand dollars when you use the code Graham. They're not sponsoring this video or anything, but since we're on the topic of stocks and it's free, may as well. The link is down below in the description.

Anyway, in terms of what you should do about this, I want to give a shout-out to the Instagram account Personal Finance Club, who made this graph that really stuck with me. He analyzed the last 40 years of the S&P 500 and simulated three investing styles. Tiffany had the worst timing in the world and invested 200 a month in a high-interest savings account, only to invest it all entirely at every single market peak right before a crash. Over 40 years, her 96,000 dollar investment turned into a 663,000 dollar mini fortune.

At the same time, we also have Brittany, who had the best market timing in the world. She saved her money and invested it all precisely at the bottom of every single crash. Even though it would have been virtually impossible to perfectly time the market like she did down to the exact day, her 96,000 dollar investment turned into a 956,000 dollar amount today.

And then we had the slow and steady Sarah. All she does is set 200 a month to be automatically invested in the stock market regardless of where it's trading. And guess what? After 40 years, she has 1,386,000 dollars. That just goes to show you that with real data and real numbers, timing the market is horribly inefficient, and it's the best instead to just invest consistently and then do absolutely nothing.

That's why even if we do see a further decline, it's only going to be bad for the people who stop investing. For anyone who continually buys in through the highs and the lows, you'll have the ability to increase your returns a lot as long as you just don't panic. Don't sell. Subscribe and hit the like button for the YouTube algorithm.

So with that said, you guys, thank you so much for watching. Also, make sure to add me on Instagram and to my second channel, The Graham Stephan Show. I post there every single day. I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time.