Uncompensated Risk in Investing

Since the new year began, my investing portfolio is looking rather basic and boring – and I love it! If you happened upon my last post on tax loss harvesting, you know that towards the end of 2022 I unloaded my position in a lot of hand-picked stocks (where I was in the red) to offset some taxes I was going to be paying from a real estate syndication that cashed out late last year. Truth be told, I have a slight degree of remorse about selling off the several hundreds of shares of Tesla that I owned – as it has rebounded/recovered rather quickly since then. Regardless, essentially, I have nothing but a couple of index funds (i.e. VTI and VXF) and a couple of stocks (i.e. COST and BRK.B) remaining that I stayed profitable in. In that simplicity, I have found I have a lot less stress about the going ons in the market day-to-day, and I feel strongly resolved to stay this course and filter out the noise and temptations of following grifters that make promises of higher returns and unfathomable riches.

As of writing this post, the current rate of inflation in the United States is a 6.4%. Taking on some degree of risk is essential if we hope to grow our money in a way that combats the toll inflation takes on our hard earned dollars. I first learned about the concept of ‘uncompensated risk‘ on the White Coat Investor blog. Basically he says that when we make an investment, a compensated risk will provide us a reasonable expected (but not guaranteed) return. However, in an uncompensated risk scenario, we take on additional risk without an increase (and in many cases, a decrease) in the generated returns.

I do not profess to be an expert at any of this. A disclaimer that I consistently make is to consult professionals for financial advice, as I am a mere pediatric dentist that is trying to figure out his footing on the path to financial independence. I have tripped and stumbled countless times along the way, and fallen flat on my face (e.g. Celsius and the whole crypto fiasco) in many instances as well.

There is a lot that goes into investing that I really only know a small (more like minute) fraction about. Lots of economic indicators and trends to look at e.g. jobs reports and unemployment, consumer confidence indices (CCI), etc. Changes in interest rates, geopolitical events, and macroeconomic factors (e.g. inflation, recession) drive the markets performance. Savvy investors have all kinds of sophisticated software to give them real-time market data, research reports, and analytical tools. And for those people that have the time to commit, the advanced training and education, along with the temperament to endure the volatile nature of the stock market day-to-day; more power to them.

For anyone average like myself; who work for a living, limited hours in the day to commit to much else, just trying to set aside some kind of nest egg for the future – taking on uncompensated risk investments really can be quite a dangerous setback. The key is diversification in your portfolio of investments. I hope we all know by now never to put all your eggs in one basket. The one saving grace for me has been that all my ‘speculative’ investing has been limited to 5-10% of my overall portfolio. My crazy crypto experience with Celsius Network (where potentially I stand to lose everything), my uncertain venture into real estate syndications (which fortunately has partially and profitably paid out) – it’s all been a bit of a wash, but I cap it all within a small percentage of my total asset allocation.

“Invest in what you know…and nothing more.”
Warren Buffet

For those that have read my blog, one of my previous posts talks about my love for watching some late night comedy bits to start my day. There was an interview recently on The Daily Show where Hasan Minhaj debated Kevin O’Leary (from Shark Tank) and essentially called him out on being a (paid) spokesperson for the recently failed FTX crypto exchange. About midway through the interview, Minhaj makes the point (around the 17:45 min mark) that most retail investors would be better off investing in boring Vanguard S&P 500 index funds versus trying to time the market and chase the trends that influencers make us believe was their formula for success. It resonates with me on a personal level since I so foolishly followed the same preaching’s of a similar conman by the name of Alex Mashinsky of the Celsius Network. The other point being that social media nowadays has made it so (dangerously) easy for grifters giving the illusion that millions can be made effortlessly simply by doing as they do.

The performance of the U.S. stock market overall, dating back to the 1920s, has provided an annualized average return of around 11.88% since its 1957 inception (according to Investopedia). After factoring in inflation, it runs somewhere around the 8-9%. That’s pretty darn good. If we put money into any one stock its the equivalent of putting it all on black (my attempt at a roulette metaphor in case you missed it) – that is uncompensated risk. I am willing to designate a small piece of that to certain companies and real estate deals (preferably REITs) that I think may, in the long-term, be worthwhile; but a vast majority of my investing endeavors from here on out will be in the slow and steady S&P500 index funds.

Wishing you all the best in your journey! Thank you all for visiting this site and spending some time to read through this post!

Tax Loss Harvesting

investing, Lifestyle

First off, Happy New Year to you all! When I reflect over the past year, certainly the Celsius crypto scam I endured and a private equity company taking over the office I work at were both big ticket items. While both matters still strike a chord with me, time has helped me not feel quite so overwhelmed by them. In terms of the Celsius fiasco, the Chapter 11 bankruptcy is still underway; but what has helped me cope is giving up on any expectations of seeing any of that money returned to us. The feelings of betrayal, and ignorance, and outright stupidity I once felt for falling for such a con – that has slowly subsided. Since then, yet another big crypto company (FTX) has collapsed; and while I thankfully did not have any money tied up in that embezzlement, I certainly can empathize for those that did. In the new year, I am resolved to return to the traditional, tried and true, much more conservative means of investing.

On the dental practice front, I had explored several partnership and ownership opportunities but ultimately decided to stay put. I talked briefly in a previous post about why I have remained an associate for so long; and at the end of all my recent explorations to find my own office, I realized that the time with my family is more valuable to me then equity in a business. Truth be told, I am still a little nervous about what changes have yet to come. Will I have to clock-in now? Will they start to dictate what supplies we can and cannot order? How soon do they intend on selling our office to an even bigger DSO? As of this new year, they are officially my new employer – so time will tell how tumultuous this transition will truly be. Let’s hope it is not as chaotic as my mind makes it out to be.

This past week, we vacationed with my sister-in-law and her family in their new home in Tampa, Florida. Towards the end of the trip, a few days shy of the new year, I received a call from one of the managing partners of some investment property we did in Arizona a few years ago. To my surprise, she notified me that the property was expected to sell before the end of the year and they had sold for nearly 3x the original amount of our investment. Now there are management, legal and accounting fees that are withdrawn before investors like us are paid out in syndication deals such as these, but still, it was music to my ears to close out an otherwise rough investment year.

As fate would have it, I so happened to be in the house with a Certified Public Accountant (CPA) at the time I received this news. Now, I am a simple W2 employee, with a buy-and-hold investment strategy, who has never inherited any amount of money to where I would need to be concerned about the tax burden on it. However, the profits on this AZ syndication investment would stick me with a 20% long-term capital gains tax rate on that amount.

The concept of ‘tax loss harvesting’ is a tax-planning strategy where you can offset some capital gains with some losses you incurred in the same or other securities. It can be a complex, and fortunately I had a knowledgeable CPA available to me at the time to help walk me through many of the intricacies in implementing this. Since the S&P 500 finished down nearly 20% for the year (2022), and many of my hand-picked stocks (including TSLA, AAPL, NFLX just to name a few) did even worse – I had plenty of stocks to sell (and therefore ‘realize’ losses on) that could help counter my tax liability on the gains I am looking to make from the AZ property.

Even with this tax loss harvesting technique, it comes with rules to abide by so not to void its efficacy with the Internal Revenue Service (IRS). One such rule is called the ‘wash sale rule’. The gist of this rule states that an investor cannot buy a ‘substantially identical security’ within a 30-day period before OR after the sale. For example, I cannot buy any shares of TSLA within the next 30 days, otherwise this eliminates my ability to use that original sales losses for tax purposes.

If you have any interest in this topic whatsoever, please visit the White Coat Investors Tax Loss Harvesting Rules website. He goes into much greater detail and knows significantly more about this topic then I have gleamed within this mere past week.

The only real mistake is the one from which we learn nothing.
– Henry Ford

Another potential route I would love to have explored (if I had more time then just two days) is to consider selling my Celsius claims at a loss. I read an article in the Wall Street Journal that states some customers are selling their bankruptcy claims (at steep discounts) to a broker/buyer (Cherokee Acquisition and XClaim). I already expect to see pennies on the dollar by the time the Chapter 11 bankruptcy concludes, I would have loved to utilize the financial losses this year and just have emotional closure to that whole mess. With such little notice between hearing of the AZ property sale and the end of the year, this was not unfortunately an option I was able to execute.

I am not a financial expert, nor am I qualified to give financial advice. I simply write about my own experiences, and if my ventures into crypto and individual stock picking has taught me anything, it’s that I still have so much to learn about. Hopefully some of the stuff I talk about helps others avoid similar mistakes and come out ahead. Hope everyone is having a good start to their new year!

Lesson Learned

investing

On the evening of June 12th, 2022, I received an e-mail alert from the Celsius Network to the effect that withdrawals were being halted on account of ‘extreme market conditions.’ Which was true, the global cryptocurrency market was in the red, with practically all coins shedding 10% or more within a rapid 24 hours.

Fresh off of the downfall of Luna and TerraUSD, I initially thought that the move Celsius was doing (in freezing transactions) was genuinely in the best interest of its ‘community.’ Preventing a mass exodus of investments would give them time to stabilize their liquidity issues and protect the assets of the depositors (like myself).

In the last couple weeks, the company has been frustratingly silent about the current status of their operations and consequently, access to our funds. Many Tweets and news articles that have come out lately about the company all seem to suggest the company is moving towards bankruptcy filing – which, Alex Mashinsky (CEO of Celsius Network) and his company have given us little reason to think otherwise.

I had a generous amount of my families money invested with this company. I was drawn in by the impressive yield and a charismatic charlatan of a CEO. If you’ve read my previous post about the company, I (initially and foolishly) complimented the company for their ‘transparency.’

Only after being involuntarily locked out of access to my funds do I finally have some clarity as to how scammy this whole thing was. I trusted my families hard-earned money to a company solely based on reassurances of its salesman CEO; and what’s worse is I promoted it to others on this very blog. While I constantly caution my readers that I am not offering financial advice, and self-describe myself as an amateur investor at best; I falsely (and blindly) believed this company to be one of the good guys and truly saw it as a movement against the establishment.

It is through suffering that learning comes.
– Aeschylus

As of writing this post, nearly 3 weeks after the Celsius lock-out – I have come to terms with the real likelihood that I will never see those funds again. I am hoping for the best, but have mentally prepared myself for the worst. I have been a victim of a Ponzi scheme before; but this took me for significantly more money and left me feeling much more moronic then my past encounter. Rather than waste another minute more of anxiety or suffering on it, I am hoping this experience will teach me to be a better investor.

I am reminded of the news story about the young boy who committed suicide when the Robinhood trading app allowed him to over-leverage his investments and the kid accrued losses of over $730,000. (By the way – something a little eerie I just noticed was his suicide note was found by his parents on June 12th, 2020 – exactly two years to the day from my Celsuis email.) For me, especially as a father of two boys, this article was devastating to know that some child took their own precious life over financial problems.

Fortunately, first and foremost, I value how precious life is. Monetary loss, deep in debt, being broke – it sucks while you are in the thick of it, but everyone is capable of rebuilding and recovering from the worst financial situations. For me, that means learning the lesson of ‘if it seems too good to be true, it probably is.’

Honestly, I am not sure what my investing strategy looks like moving forward. I still continue to dollar-cost average into this tumultuous stock market. I most likely will shy away from crypto for a while. And probably get my real-estate exposure with REITs versus enrolling in more risky syndication deals. Really I just want to come out of this a lot wiser.

Hopefully none of you have had to endure being the victim of something like this, but feel free to share with me your story if you are so inclined! Thanks for taking the time to read this post!

The Terror of Terra

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This culture of ‘wokeness’ we’re all living in today is a fascinating one. Social media and hordes of people are getting together to drive companies to cancel celebrities (most notably Will Smith after his 2022 Oscar’s altercation with Chris Rock). Some issues, like the Supreme Court voting to overturn abortion rights, may not be so easy to influence. I know I personally favor companies that seem to have a moral compass. Headlines like “Costco’s iconic hot dog deal is still $1.50, despite record inflation rates raising prices everywhere else in the industry” just melt my heart – and I’m vegetarian and could care less about hot-dog prices. It is the principle of it, it gives you that warm fuzzy feeling that a big corporation is looking out for the common man. McDonald’s, Starbucks, and PepsiCo among many others promptly pledged to stop business operations in Russia after the invasion of Ukraine was ordered by Russian president Vladimir Putin.

This past week was particularly catastrophic in the crypto market. There was a collapse of Terra’s UST stablecoin and the native network token LUNA. I have talked briefly about stablecoin’s in the past here, but essentially these coins are supposed to minimize price volatility, offer a stable value, and many are supposed to be pegged to the US dollar. Several exist, including Tether (USDT), USDC (the one I use), Binance USD (BUSD), and many others. Terra created an ‘algorithmic stablecoin’ with UST that was supposed to hover closely around the $1 mark; but achieved this value using the other token in its ecosystem, LUNA.

The magic behind a system like this working has to do with a concept called ‘arbitrage’ trading. In the Terra ecosystem, a person could swap UST for a LUNA token (or vice versa) at a 1:1 ratio. The algorithm burns UST or mints LUNA to absorb volatility and balances the demand so that the overall price stays around its $1 level. This is in slight contrast to how USDC and USDT rely on a reserve of assets, fundamentally backed by state-issued fiat currency e.g. the U.S. dollar.

Stablecoins, to me at least, are seen as a shelter or a reasonably safe option in an otherwise frenzied crypto market. Algorithmic stablecoins do not technically have a solid collateral to back the price; in this case TerraUSD (UST) was using its governance token (LUNA) and minting and/or burning to help stabilize pricing. During major market stresses or shocks, in times like we have now where the Federal Reserve is substantially raising interest rates to combat record inflation, where stocks and bonds prices are falling together for the first time in decades, perhaps we shouldn’t be so surprised that a stablecoin becomes de-pegged.

The price of LUNA peaked close to $120 about a month ago, and is today worth fractions of a cent. I consider myself extremely fortunate that I was not invested in anything within the Terra ecosystem; but an event like this certainly does make me reconsider my risk tolerance in my crypto holdings – which currently sit at about 10% of my overall portfolio. Most of my crypto is in USDC gathering yield in the Celcius Network, with a bit of Bitcoin and Ethereum to add some excitement to the mix.

Speaking of the Celcius Network, I would say that my experience thus far has been wonderful with them. Granted, I have not attempted to withdraw any funds yet – especially in times of crisis (like with the recent rapid crash of LUNA and UST) – but I consistently collect interest (now, only available to accredited investors in the U.S.) every Monday like clockworks. Alex Mashinsky, the CEO of Celcius Network, came out within hours of this Terra catastrophe and spoke openly and transparently about how everyone (including himself) got pummeled, but this encounter may separate the ‘tourists’ from the true investors that believe in the decentralized finance (DeFi) movement. I think that makes for a good leader. Like Costco and the $1.50 hot-dog, I genuinely feel like Celcius has a mission to do good for the ‘common man’ (while of course, making millions of dollars for the corporation).

Everyone, none of this is meant to be financial advice. Truth be told, I have probably lost tons of money in my venture into the crypto space and especially in all this stock market, crypto crashing turmoil that has been happening lately. I recognize now more then ever that simple, straight-forward investing into low-cost, well-balanced index funds would’ve spared me the stress of all this volatility, would have saved me the high transfer fees, and provided me priceless peace of mind of just staying the course. I dodged a bullet this time with Terra; but suffered great declines in Netflix stock, SOFI, ARKK and many other hand-picked losers.

Thanks for taking the time to read my post. I was going to write about our recent family vacation, but this was the hot-topic of the week and my mind has been on our finances lately due to the craziness of the markets…so, there you have it. Good luck to you all, and please feel free to write me or post your own experiences!

Interest in the Celsius Network

investing

UPDATE: On July 13, 2022, Celsius and several of its affiliates commenced voluntary Chapter 11 bankruptcy proceedings. See my latest post on the matter at Lesson Learned.

I was never great at staying on track with new year’s resolutions. Sure, we all start out ambitious enough – try and exercise more, eat healthier, take up a new hobby, etc. – but my goals usually start to obscure within a few weeks from their nascence. Perhaps therein lies the problem – I need to be better about being goal oriented. I have read we should write goals down, being specific and keeping things measurable and attainable. For example, my goal is to write at least two blog posts a month this year. Okay 2022, let’s go!

In today’s post, I wanted to introduce a new investment vehicle I started to use last month. However, before I go any further, as always – I am but a mere amateur investor and rookie blogger, everything I suggest should be investigated further and probably presented to a financial professional.

At an ugly sweater Christmas party last month, I struck up a conversation with a friend about investing. As an introvert, I do not always like attending these events. Predominantly, however, I find I not only thoroughly end up enjoying myself but also learning quite a bit of useful information from other people’s ideas and experiences. As was the case here.

Now, terms like cryptocurrency, blockchain technology, non-fungible tokens (NFTs) – some of it still confuses and frankly scares me a little. Nonetheless, it does appear that it is here to stay. Therefore, (and perhaps another potential 2022 goal?) I have vowed to keep an open mind to it and slowly incorporate it into my overall investment portfolio.

Where was I? Oh yeah, at the social event I so courageously attended last Christmas, my friend turned me on to a company (and app) called Celsius. The hook for me was that he had been receiving a steady 10-12% interest on his money, WEEKLY! According to Bankrate.com, the national average interest rate on savings accounts as of last week was 0.06 percent. Another recent interesting statistic, consumer prices jumped 7% in 2021. When our savings do not grow at or above the same rate as inflation, essentially we are losing money because our purchasing power diminishes as time goes on.

Even though Celcius’s motto is to “unbank yourself” from the traditional financial systems, their service is basically a bank for digital currency. The Celcius Network is a platform that offers interest-bearing savings accounts and loan borrowing at remarkably low rates. No withdrawl, transfer, transaction, origination nor termination fees (for their services). They tout a mission statement that aims to act in the best interest of the community; in large part by giving back 80% of revenue to customers in the form of interest.

In exchange for storing your cryptocurrency funds within the Celcius wallet (which the company in turn loans out retail and institutional borrows), every week you receive an interest payment into your account. You can choose to receive payments in like-kind or in CEL (Celcius’s native tokens – an option only available to accredited investors if you live within the U.S.).

A particular class of cryptocurrency, referred to as stablecoins, is a non-volatile and price-stable asset. Essentially, with Bitcoin and Ethereum, the level of volatility may be thrilling for some investors but it hinders its benefit as a medium of exchange for many businesses. At least with stablecoins, the stable value means the coin can always be redeemed for an equivalent currency amount at any time.

After the Xmas party, per my friends instructions, I went home and downloaded Coinbase, CoinbasePro and the Celcius app. I created accounts for each, set up all the two-factor verification security stuff, and set up the payment method within Coinbase to acquire funds from my checking account. Within Coinbase, I “traded” (i.e. purchased) a certain dollar amount of USD Coin (USDC) stablecoin. Unfortunately, while the coins may be added to your Coinbase wallet immediately, they are unable to be transferred out for short while after. Eventually you will receive an email from Coinbase stating

The $xxx.xx buy you made on (e.g.) January 01, 2022 is now available to withdraw or send. Please login to view your total available balance.

After the funds are available to be traded out (usually about a week after the initial trade took place), I opened up CoinbasePro, navigated to Portfolio, and under Wallets would locate the Deposit option. Fortunately, there are no fee’s to transfer from Coinbase to CoinbasePro. From what I was told, a CoinbasePro transfer to Celcius take less of a fee than transfers from Coinbase directly. Also, Celcius lets you purchase USDC directly within the Celcius app but the fees (standard credit card processing fees, bank transfer fees) are higher still then if you are using Coinbase and CoinbasePro. Fees vary based on the amounts being transferred. After the funds are in your CoinbasePro account, you are immediately able to get them into Celcius. Within the Celcius app, you follow the Receive Coins link and (very importantly) make sure to choose the right asset from the drop-down.

Celcius will then alert you that the address is meant to receive only that specific token or digital asset, and anything else being sent over may result in permanent loss of funds. BE CAREFUL HERE!

I hit Copy on the address they provide (making a mental note of the last 3 or 4 digits of the long alphanumeric address), go back into CoinbasePro and then choose the Withdraw option under the Portfolio tab. I select USDC (or whatever asset you choose to trade with), and then select the Crypto Address option. I make ABSOLUTELY CERTAIN that when I paste the address, the last 4 digits matches the one Celcius Network gave me.

Here is the point you will encounter Network Fees, and the amount you send will have to account for those fees being available to be withdrawn.

On some final notes here, as with any investments, there is a possibility of loss of funds. Celcius Network is very established, is reviewed highly, and has an ever-growing following of Celcian users. However, they do not provide any insurance on our deposits, so if the company falls victim to a hack for instance, we may be screwed. Also, the Celcius interest rates vary weekly as well as from coin to coin. When my friend at the party started with them, it was 10-12%; I have consistently been getting 8.50% – which, in today’s market, is still nothing to sneeze at.

Lastly, the CEO – Alex Mashinsky – hosts a weekly broadcast called AMA – “Ask Mashinsky Anything.” I have tuned in to a few of these now, and have been loving the philosophy and transparency of the company, the leadership and support staff appear genuinely happy to work for company, and I get the sense they really do have a solid sense of community well-being.

Again, I am not a professional that you should be seeking any sort of financial advice from and cannot be held accountable if your cryptocurrency get lost in the blockchain metaverse. Please seek independent financial advice before dealing with digital assets. Within my own portfolio, Celcius Network is just another means to diversify a bit.

Thank you for reading this post! If I can help in anyway, with the understanding that I am a newb myself, I am most certainly happy to do so! Also, full disclosure, if you click on (and ultimately sign up for) the Celcius Network hyperlink I provided above (or use Referral ID 173697cff1) – we each receive their promotional reward. I have no other financial disclosures to report. Have a great day!