bitcoin and ai
Shaun Scott No Comments

AI and Bitcoin

I learned three valuable lessons on a 2014 Rocky Mountain climb that have claimed the lives of many mountaineers, but God graciously preserved me. Flying from sea level to Denver, hitching a ride the following morning to 12,000 feet, and climbing the Continental Divide in winter taught me the importance of proper climatization. Establishing an investment position in any security at too high an entry point is equally reckless; price always matters. I also learned that daily pack walks on flat ground at sea level don’t constitute proper training for a winter expedition at 14,000 feet, but failing to perform proper due diligence on a security already priced to perfection before committing one’s precious capital is equally negligent. Thirdly, the section of the ‘The Divide’ we traversed offered no escape route, but maintaining a position in a speculative bubble without an exit plan is equally dangerous. Are Artificial Intelligence (AI) and Bitcoin sound investments? Is it wise to buy them now?

The AI sector and Bitcoin are being evaluated together because they are both enjoying the euphoric investor sentiment associated with past bubbles, like that of the internet in 1997 and housing in 2003. Consider how bond guru Howard Marks, of Oaktree Capital Management, characterizes a bubble: “a security, asset class, or market being driven by:

  • Highly irrational exuberance

  • Outright adoration for the investment, and a belief that it can’t miss

  • Widespread fear of missing out (FOMO)

  • Broad conviction that for this investment, there’s no price too high”¹

It’s difficult to confirm the presence of something as subjective as “irrational exuberance”, but with Bitcoin trading at 7 times its price of 27 months ago, and AI posterchild, Nvidia, increasing 11 times in the same period,² rational buying seems to have departed these markets some time ago. The fact that I am asked every day about AI and Bitcoin by people who do not ordinarily occupy their time thinking about financial investments suggests to me that adoration and FOMO are affecting the price of both, and since FOMO invigorates purchases aimed primarily at quenching fear, the 4’th destructive sentiment is also likely present.

It’s important to understand that both of these investments provide something of value to humanity and are actively changing the world we live in, and as a result, will likely be around for a long time. Bitcoin provides a store of value that is uncompromised and private, and AI is shortening the learning curve in virtually all industries. The question is not whether these are legitimate investments, but in what manner and capacity they should be purchased, and at what price. Investments in internet stocks in 2007 evaporated immeasurable wealth, but it went on to change the way people gather and store information and communicate globally. I suspect in another 18 years something similar might be said of AI and Bitcoin.

We might summarize this brief analysis by understanding that God put the Continental Divide there to be climbed, but it must be done thoughtfully, with adequate preparation, and the risks must be mitigated to the extent they can be. Most stocks that soared in the internet frenzy later went to zero and don’t exist anymore, and the same will likely happen in both AI and Crypto. I suggest the following before you venture into these expensive markets:

  • Do your due diligence and know what you are buying and why

  • Realize these are speculations and limit your investment to an amount you can afford to lose

  • Maintain an exit plan to limit your potential loss

Think about it, Shaun.

“When something is on the pedestal of popularity, the risk of a decline is high” ~Howard Marks

“Give a portion to seven, or even eight, for you don’t know what disaster may happen on earth.” ~Ecclesiastes 11:2

 

1 Oaktree Capital Management, Howard Marks’ Memo, “On Bubble Watch”, January, 2025 2 Yahoo Finance, 5 Year Price Chart for BTC and NVDA, January 31, 2025.

The opinions voiced in this material are general and are not intended to provide specific recommendations.

Mt. Shasta
Shaun Scott No Comments

Prospects for the Economy and Financial Markets in 2025

The Mt. Shasta guide team my climbing buddy and I hired to get certified in Crevasse Rescue in 2011 were the strongest young climbers we’ve ever seen, but over the five-day expedition three separate misjudgments of both terrain and technical strategy unnecessarily placed us in immediate life-threatening danger, harrowing ordeals still scary to think about today. The decisions were so bad that with only modest mountaineering experience we were able to identify each miscalculation, only to be overruled by the authority of the head guide. There is undoubtedly widespread confusion today over the 2025 U.S. economic and financial outlook due to recent ‘Fed’ misjudgments, in particular with trends in inflation, earnings, and interest rates. What is the true condition set for the economy and stock market, which direction does each pursue, and what is the potential range of outcomes?

‘The Fed’ has been promoting a narrative that lower rates will bring the economy to a soft landing in controlled inflation, but the economy isn’t slowing, it doesn’t need lower rates, and inflation isn’t contained. S&P 500 businesses have seen 8% average earnings growth in the last decade, only 7% annually long-term, and yet the forecast for 2025 is 9.5%.¹ Fidelity sees 14% earnings growth ahead and thinks the estimate is too low!² Tuesday’s employment report shattered estimates, revealing 256,000 new jobs were created in December and dropping unemployment to 4.1%.³ Let’s understand these simple facts about the economy today:

  • There is no indication of an oncoming recession anywhere on the horizon as far as the eye can see, though another increase in bankruptcies is possible in this new higher rate era.
  • Interest rates are probably net neutral at best in this economy (meaning, about right or too low).
  • Absent a recession, the probability of a significant bear market is low, and risk of a systemic crisis is even lower.
  • A strong economy is constructive for business investment.

The stock market is far less correlated to the true condition of the economy than most investors realize. The market looks forward to future earnings, while a recession is identified only in hindsight; also, economic reporters are bankers and politicians who never admit to a recession until it’s over. Let’s think about relevant market factors and the two most probable outcomes for a frothy market with a strong economy underneath it:

  • 22 times earnings places the S&P 500 into the top decile of observations,⁴ making it the top concern for stocks in 2025. By my count the S&P 500 could drop 23% just to get to its average long-term multiple, all other things being equal, and the market seldom lingers amongst its averages.
  • Higher valuations always lead to lower forward returns, and vice versa. A study of people who paid today’s rare multiple for the S&P 500 over a 27-year period universally earned ten-year average returns between -2% and 2%.⁵
  • A new administration with new policies, especially when tariffs are involved, will probably add to the increased volatility generally associated with an expensive market.
  • The two most probable outcomes I see, in this order, are a) a volatile market moves sideways or even down in 2025, allowing corporate earnings to catch up to prices and lowering multiples while avoiding a bear market and setting the stage for more sustainable growth, or b) a blow-off top, in what would be a third consecutive year of huge gains, but ending in a significant and protracted bear market bust that would likely take the economy with it.

Focus on quality and look for value and income. Diversify, but don’t risk the cash you may need for expenses or emergencies in the next five years. Ride the bull for its duration but have your “risk off” plan in place and honor it.

Think about it, Shaun.

“It’s not what you buy, it’s what you pay that counts. Good investing doesn’t come from buying good things, but from buying things well. There’s no asset so good that it can’t become overpriced, and thus dangerous, and few assets so bad that they can’t get cheap enough to be a bargain.” ~Howard Marks

“Be shrewd as a serpent, yet innocent as a dove” ~Matthew 10:16

1 Google, “Average S&P 500 Earnings 2024”, December 17, 2024
2 FPA (Financial Planning Association) Live Lunch Presentation, Iron Works, Warwick, RI, January 8, 2025, Fidelity Investments 2025 Outlook
3 MarketWatch, “Jobs report shows big 256,000 increase in December. Unemployment drops to 4.1%”, January 11, 2025
4,5 Oaktree Capital Management, Howard Marks’ Memo, “On Bubble Watch”, January, 2025

The opinions voiced in this material are general and are not intended to provide specific recommendations.

Shaun Scott No Comments

Advanced Financial Concepts Embraced by Inflation-Resistant Wealth Builders

Hiring a guide service and Sherpa and successfully summiting Mt. Everest is a respectable feat, but precious few who do so will ever step foot on Annapurna, a mountain in the Himalaya known as the most dangerous and technically difficult to climb on earth. While conditioning and perseverance may sustain a climber up and down the former, the latter also requires superior climbing ability, advanced technical gear and the skill set to use it effectively in the most treacherous environment imaginable, where only the most accomplished mountaineers have ever tread, and where a third of them lie frozen in the ice today. Building and retaining wealth in today’s heavily indebted, centrally managed, inflationary culture far more resembles the level of difficulty found on Annapurna, and requires an understanding of financial concepts that go beyond these basic tenets of wealth-building:

  • Maximize income with hard work and career specialization.
  • Minimize spending with strict budgeting and prudent debt management.
  • Establish the financial foundation of emergency savings, a specific plan to eradicate non-productive debt, and the right amount of the right type of life insurance.
  • Consistently and wisely invest expendable income.

While these four simple principles are sufficient to lead even the most conservative investors to financial success in a stable, sustainable society, continuously excessive government overspending and the destructive policies that always accompany it necessitate an understanding and application of more refined financial concepts:

  • The biggest risk today isn’t loss of principle, it’s loss of purchasing power. Assuming a measure of increased investment risk comes with the ownership of assets that have historically appreciated in real terms within inflationary cultures, namely stock in high quality businesses, high quality real estate, and other real assets. Much of the perceived wealth-building in America today is illusionary; it is nominal, not real (net of actual inflation).
  • Concentration on income-producing investments, as opposed to non-income-producing speculations, reduces investment risk, reduces bear market volatility, and results in the compounding of returns over time. Wealth-builders confidently purchase shares of capital-efficient, dividend-paying, industry-dominating businesses when they find them at a reasonable price, and they generally never sell them.
  • The understanding that when the globe loses confidence in the currency of a nation actively monetizing its debt, three things necessarily occur: 1) further money-printing results in full and immediate domestic inflationary consequences, 2) currency units formerly exported return home, and 3) tax rates escalate meaningfully. ‘Annapurna-like’ wealth builders in America today are fully engaged in advanced tax and estate planning strategies aimed at maximizing taxes paid in lower brackets, minimizing taxes paid in higher brackets, and reducing exposure to future tax abuse. The goal is to achieve the lowest average lifetime tax, not necessarily the lowest tax each year.
  • Remembering the most important aspect of investing is avoidance of a catastrophic loss, coupled with the knowledge that inflationary policies produce infrequent but pronounced market crashes, engages wealth-builders in asset protection strategies like trust and LLC ownership, separating business and personal interests, increasing insurance coverage on catastrophic risks,¹ and stop-losses orders.

In closing, remember the goal is stewardship, not accumulation. Money is to be earned, saved, invested, enjoyed, given away, and passed from generation to generation. It is something that He who owns everything has temporarily entrusted to us, and we should say thank you with faithful stewardship. Think about it and God bless your 2025, Shaun.

“God loves a cheerful giver” ~2Corinthians 9:7

“A wise man leaves an inheritance to his children’s children” ~Proverbs 13:22

“Without counsel plans fail, but with many advisers they succeed” ~Proverbs 15:22

1 Smart Asset, “5 High-Net-Worth Principles to Manage Your Wealth”, December 28, 2024

The opinions voiced in this material are general and are not intended to provide specific recommendations. Dividends can be terminated at any time by a company and do not protect against loss.