Creative Planning’s Peter Mallouk and billionaire Mark Cuban have two bets going, with the winner determined by performance over the next 10 years. Peter put his money on the S&P 500, while Mark backed two cryptocurrencies and two individual stocks. Who will win? In this month’s podcast, Peter and co-host Jonathan Clements discuss the two wagers.
Hosted by Creative Planning Director of Financial Education, Jonathan Clements and President, Peter Mallouk this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Jonathan Clements: Hi, this is Jonathan Clements, Director of Financial Education at Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, president of the firm, and we are Down The Middle. Cast your mind back to the start of 2008. Warren Buffet struck a bet with a hedge fund manager, with the winner determined by performance over the next 10 years. Buffett bet on the S&P 500, the hedge fund manager bet on a portfolio of five hedge funds. Over the next 10 years, Buffet and the S&P 500 won hands down. Well, guess what? We have another wager involving the S&P 500, and it involves my partner in crime, here on the podcast, our very own Peter Mallouk. On the other side of the bet is billionaire, Mark Cuban, owner of the Dallas Mavericks basketball team, and participant on the TV show, Shark Tank. This past week, Peter and Cuban ended up in a Twitter argument, and that led to not one, but two wagers. In both cases, Peter, like Warren Buffet before him, took the S&P 500. On the opposite side of the bet, Cuban took two cryptocurrencies in one instance, and two individual stocks in the other. Whoever has the worst performance over the next 10 years has to make a charitable donation. So I’ve got to ask you, Peter. We’ve worked together for five years. You’re a mild-mannered guy who doesn’t seek out the spotlight, and yet something about Mark Cuban, his financial pontificating, clearly bothers you. What is it?
Peter Mallouk: Well, it’s nothing personal with Mark Cuban. His success speaks for itself, and I think you could actually learn a lot from him. My kids learned a lot about investing in startups and private businesses watching Shark Tank. So his success speaks for himself, I find him very entertaining. But there were basically two different occurrences. I think it was a combination of them that finally got me engaged. First, when we were going through the pandemic, a lot of clients were pointing to CNBC articles where Mark Cuban was talking about going to cash, or he was hedging, or he was being defensive, and so on. You know, he’s really smart, and that’s what he’s doing, and that’s what we should do. He would go through all the data and statistics that say you should be buying more as we go through this. We should be selling bonds and buying stocks, we should be tax harvesting, we should be staying in the game. We’re going to come out ahead if we do those things, and that’s what we did, and that’s what happened. But to get through it, this topic came up so much with our wealth managers and planners, that we actually went back three years, and just took every prediction we could find in the public that Mark had made from 2017 to 2020, and it’s… Look, if you follow that advice, you dramatically lacked the market. But when you follow him on social, you get the impression that he’s all in on two stocks, and he’s… a big portion of his net worth is in Dogecoin, and things like that. The second thing that happened is, I teach a lot of students. So yesterday I was at a university, taught two business classes, and occasionally go to a high school or grade school, and I talk about money. And we talk about needs-based investing. Most people are not multibillionaires, right? So they have a certain earning power, they have a certain amount of money, and they’re trying to accomplish things. They’re trying to retire at a certain age. They’re trying to become economically free. They want to do charitable things, whatever. And so you pick a combination of stocks and bonds and real estate, and if you’ve got a lot of money, maybe you include alternative investments, like private equity, and private real estate, and so on. And so we talk about those concepts. And we talk about cryptocurrency, and how it’s an emerging asset class, and there will probably be winners in this space, right? But then the inevitable questions become, but Mark Cuban’s saying buy Dogecoin. And I have to explain, Mark Cuban does not have 50% of his money in Dogecoin like you do. He maybe has one 1,000th, or one 10,000th of 1% in it, if that, and he is not all in on one or two things all the time. If you look at the public record, he’s going to cash, and he’s hedging, and he’s doing all these things all of the time. And so I think, just getting the point across, I called him out on that. And it basically, the conversation, because it’s Twitter, quickly descended, where he said only a fool would buy a hundred stocks. And as you and I know, a hundred stocks makes up an index, right? A hundred stocks, whether you want to take the S&P 500 or the S&P 100, they do about 99% the same. And we know that over five years, that the S&P 500 or the S&P 100, will be about 80% of professional managers picking individual stocks. And of course, if we do it over 10 years, the odds are even better. And so, when he said only a fool would do that, I said, well, I’m happy to be that fool. I’ll take those stocks. You pick whatever stocks you want. So anyway, this wound up getting into two bets. One bet was, he’s taking Amazon and Netflix, and I’m going to have the S&P 500 for 10 years. And in one bet, he’s going to pick two cryptocurrencies, which I will point out, he has abandoned the cryptocurrency that he started out touting on his Twitter account, which is Dogecoin. All of a sudden, he’s not interested in investing his own money on that, despite encouraging his followers to do that, which I thought was really, really interesting. And by the way, for the record, he can buy whatever cryptocurrency he wants. So if he wants to add Dogecoin, he’s welcome to do that. So we ended up with these two ten-year bets, and now we’ll see how they play out.
Jonathan: So the first bet is the S&P 500, versus a 50/50 split of Amazon and Netflix. And then the second, as I understand it, Peter, is the S&P 500, that’s your pick, versus Cuban’s pick, which is a 50/50 split between Bitcoin and Ethereum, got it?
Peter: That’s exactly right. You’ve got it. And again, he can add whatever cryptocurrencies he wants, and we’re obviously including dividends, right, because we’re counting on the total return, all the money that’s coming to us. And listen, Amazon and Netflix are amazing companies, but Amazon’s trading at 82 times 12 months’ earnings, Netflix is at 62. Could they double, triple, quadruple? Oh definitely, they could. Anything can happen. And this is not a slam dunk. The odds are in my favor, but it reminds me of when I was teaching my son to play Blackjack, and he had a face card, and the dealer was showing a six. And so I was basically walking him through how to play, but the dealer won that hand, and he said, “Well, dad, you were wrong.” It wasn’t that I was wrong. It’s probabilities, right? You’ve got to play the game a long time. And that’s what I like about this bet going for 10 years. The longer the bet goes, the more the odds favor what the statistics tell us.
Peter: I think it’s interesting that even Jeff Bezos, who is an absolute genius, even he acknowledges things like this. He says if you look at large companies, including Amazon, their lifespans tend to be 30 plus years, not a hundred plus years. All companies have their cycles. Competition catches up with you. It’s, what seems really strong at one point, might not be at another. So I’ll just give you a couple of examples. The year 2000, the top five companies were General Electric, ExxonMobil, Pfizer, CitiGroup and Cisco. But if we went 10 years later, we now had Apple and Microsoft, or Berkshire Hathaway in the mix. If we go 10 years later, then you get Amazon, and Google, and Facebook in the mix. So these big, indestructible companies, they can continue to do well, but can they outperform, can they continue to double, over and over and over again, over a short period of time? That’s the tough part.
Jonathan: Yeah, well I think one of the hardest things to say in investing is, I don’t know. And when you have the illusion of knowledge, that’s when dangerous things happen. People look back at how great the performance has been at Netflix, or how great the performance has been at Amazon, and they assume that these stocks are indestructible. But the fact is, great companies fail all the time. We don’t know which individual stocks are going to sparkle in the future, but we do know, that as long as the economy keeps growing, that the broad market’s going to do just fine, and that’s why we bet on the broad market. That’s why we bet on the S&P 500. It’s why we don’t go out on a limb and put everything on Amazon, or everything on Netflix. When you buy the S&P 500, yeah, you get exposure to those companies. Amazon and Netflix account for about four and a half percent of the S&P 500. So yeah, if they continue to do well, you’ll benefit. But if they implode, and we have new stars rise to the top of the stock market, you will participate that as an investor in a broad market index.
Peter: Yeah. I don’t think they’re going to implode. I think they’re going to do very well. There’s the next big winner that’s going to be there. That next Facebook, that next Google, that next Apple, and that’s going to be in the S&P 500, that Tesla, or whatever it is, and that’s why the S&P 500. The S&P 500 has the needle in the haystack, and it’s going to be somebody’s stock picking. But I’d say two things. One, I don’t believe, fundamentally, that Mark Cuban is all in on Netflix and Amazon and cryptocurrencies. I think he probably sits on a ton of cash, and a bunch of other stuff, that he’s not telling people on social media to do. But the second more important point is, it doesn’t matter if these things go to zero for Mark Cuban, right? But if you’re a 25-year-old, or a 30-year-old, and you have $70,000 in savings, and you think people that invest in stocks and real estates, and things like that, are complete idiots, and you’re going to put all your money in Dogecoin, a couple of current cryptocurrencies, or even one or two stocks, and hope it works out so that you can retire in 10 years, you’re increasing the probability of really having a problem later. You just are. I’m totally good with having an investment account to get on track for your goals, and then having fun with a side account. There is nothing wrong with that. You have an account where you buy and sell cryptocurrencies and NFTs, and whatever you think may be the… a grand slam or strikeout, but don’t look at the whole thing as investing. When you see somebody like a Mark Cuban talking about owning, only owning two stocks or cryptocurrencies, maybe don’t believe that completely. Maybe they’re really doing a lot of other things, and also, again, he can afford for those things to go to zero. Nothing in his life is going to change. If Amazon and Netflix underperform, the S&P 500 and Dogecoin goes to a penny, he’s not going to change anything in his life. But if you’re a young investor and you’re trying to get somewhere, you’re going to wind up being in a very different situation if things don’t turn out.
Jonathan: As I like to say to people, we get one shot in making this journey from here to retirement, and we cannot afford to fail. One day, you will indeed leave the workforce, and you will need to have some savings to live on. If you bet everything on cryptocurrencies or a couple of individual stocks, maybe you’ll hit a home run. Maybe you will indeed retire in comfort. But the odds are against you. But if you’re broadly diversified, if you own a fund like the S&P 500, you save regularly, and you stick with it through the tough times, your chances of retiring in comfort are really, truly excellent, and the chances that you end up broke are far, far smaller, right? I think, let’s switch gears. Let’s go to bet number two, the S&P 500 versus Bitcoin and Ethereum. What is it about large exposure to cryptocurrencies that bugs you? Is it, is there something about it that you’re just like, this is not going to fly?
Peter: Well, so first I will just say again, Mark Cuban’s welcome to add Dogecoin back into this bet, which is how this all started. I just think it’s interesting that he’s thrown that out the window now. But look, I do think that there are going to be cryptocurrencies that become generally accepted, and emerge, and are used, and have a store of value, and we’re seeing the institutionalization of some of these. And I think that if you look at how many there are though, there are thousands and thousands of them. And oftentimes, when things seem late, they’re not late. You’re still early. If you look at if you’d bought Amazon after it had gone up 10, 20, a hundred X, you still had a long way to go with the success of Amazon, or Apple, or something, or Instagram within Facebook, and so on. These companies just can continue to go on when they really emerge and become accepted. The issue within cryptocurrencies is that we don’t know, generally, what’s going to happen. So if you look back several decades ago, some of our listeners might remember when everyone walked around with a Palm or a Blackberry. Well, now you don’t see anybody walking around with those. That was unfathomable that those companies would go away, and that somebody, out of nowhere, the iPhone would show up and just destroy everybody. Those of us that were around when the internet started, we remember using AOL, and Excite, and Lycos. Which one of these was possibly going to emerge? Oh my god, here comes Yahoo, they’re going to kill everybody. And then, search engine. I don’t know if it was the hundred or whatever search engine, it came very, very late in the game, was Google, and just destroyed everybody, right? So I think, with cryptocurrencies right now, we’re in a speculation phase. We’re seeing it emerge as something that’s going to be generally accepted, and we don’t know who the winners and losers are yet. And so when you buy, when you put a lot of money in one or two, or a disproportionate amount of your portfolio in it, that’s really speculation, which again, nothing wrong with speculation if it’s in the speculation bucket, the I can afford to lose this money bucket. So I can see this becoming a generally accepted asset class where people might put 1% of their portfolio in it someday, but telling your followers, really encouraging heavy investment in this area, and in particular, one or two, I don’t think that’s great advice.
Jonathan: Yeah. Over the past year, we’ve seen Bitcoin rise more than 500%, we’ve seen Ethereum up more than 1,200%, and I think the number for Dogecoin is like 12 or 13 thousand this year.
Peter: Yeah, yeah.
Jonathan: And it’s hard to know how you justify this. There is no fundamental value to cryptocurrency. The only reason that you would buy a cryptocurrency today as a speculator, is not because you expect great earnings, or you expect to receive a dividend. You’re only buying it today, because you expect some greater fool to come along tomorrow and take it off you at a higher price, and there’s no guarantee that’s going to happen.
Peter: I look at it, as it becomes more accepted, as more of a precious metals, a gold replacement, than anything else. Something that, if it’s accepted at a store of value, then it does have a store of value, and it becomes a way to protect that purchasing power, the way people see gold. And so the irony of this is, when it becomes generally accepted, it will no longer be going up this much, right? It will no longer be going up 1,000% or 2,000%, it’ll behave much more like gold, which basically buys you a good suit today, and bought you a good suit a thousand years ago. It’s basically kept generally paced with inflation. And so when we do see that cryptocurrency emerge, it’s just going to wind up being the store of value that its advocates want it to be, and that will, in and of itself, lower the rate of return at that point.
Jonathan: Well, both these bets that you’ve engaged in here, they do run for 10 years, so we’re going to be talking about this for some time to come. So, until the next discussion about Dogecoin, Bitcoin, and your bet with Mark Cuban, this is it for this month. This is Jonathan Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, president of the firm, and we are Down The Middle.
Disclosure: This commentary is provided for general information purposes only, and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.