E113: How to Build Generational Wealth in Crazy GameStop Times

Nate: In this episode, we discuss what we can all learn about the right ways and the wrong ways to build sustainable wealth in light of this GameStop fiasco. She’s Holly and she helps people build financial freedom.

Holly: He’s Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right, well, we are shooting this episode, Holly, still in the middle of GameStop mania. Maybe we’re actually a little bit on the back end of it. For those of you who don’t know, we record episodes a little bit in advance. Just a little background for those of you who haven’t even heard of this GameStop mania. The GameStop stock price has been on a tear, going wild for the past couple of weeks, increasing in value by orders of magnitude. It was all based on a Reddit forum, essentially seeing that the Wall Street gurus were all shorting GameStop. They were shorting it because they thought that GameStop was going to lose a bunch of value and have a really difficult time navigating as a business because of this pandemic and because GameStop is a video game retail outlet that mainly lives in malls and malls are having a very hard time.

All that to say, they say, “Let’s stick it to these guys once and for all. Everybody, let’s team up. Let’s keep buying this stock. Let’s pump the price up so we can cost all of these Wall Street guys, billions of dollars in bad bets.” Holly and I are here to try to discuss what can we learn about building wealth, the right ways and the wrong ways to do it, in light of this high profile fiasco with GameStop

Holly: Really, Nate, the reason why we also want to do it is to help you guys understand that there are pros and cons to whether you are putting your money in something that is very sustainable and based on real value, I’m going to say, or real dollars, versed on a hypothetical or what people believe at the time is worth value. To help you understand the realities of, hey, maybe you got in with GameStop and you got in and it did well. But it’s also a reality of the fact that a forum, I mean, I was just blown away, Nate, that a forum can generate this type of mania, because that’s really what it is. Like, “Got to get in. Got to get in.” When you hadn’t really heard about GameStop at all, other than it was probably going to fail.

Nate: Exactly. I mean, it’s unbelievable. All of these people were martyrs, that’s what they almost felt they were. At the beginning it was kind of a fun idea. Then, when people were buying GameStop at prices that were outrageous, a valuation that was outrageous, they all felt themselves as martyrs. Like, “I know I’m probably going to lose money on this deal, but I’ve been really wanting to stick it to the Wall Street guys who’ve been playing the market and profiting off of these types of manipulations for forever. Well, how about we as the people revolt and we manipulate the market to destroy the profits of these professional money managers.”

I mean, you’re right, Holly, the fact that that can exist, it shines some light about the way that most common financial networks work and why we are so adamantly against those types of things. Because as you said, Holly, there’s a difference between real money and this fake market-value money. I think more and more people are realizing this, that the stock market itself is so manipulated that it’s almost like a casino. It’s not meant for the average guy to actually win, because they just don’t have enough power to control the asset prices, because things can rise and fall based on nothing, based on no reality. In other words, a company can decline, even if they’re a good stable company or it can increase, even if they’re not, just based on people coming together to think that they should buy it with insider trading and different types of things happening.

I think there’s some things we can definitely learn about building sustainable wealth. What is real, what’s real money, and what is a market value of an asset that is not correlated to anything in reality. Anytime you’re putting money in there, you just need to understand that it’s very likely you’re going to lose the money. You might make money, you might lose it all. Are you willing to be the martyr, like the GameStop crew? I’m certainly not.

Holly: Well, and I think even with GameStop, eventually you have to realize that you got into it and you’re the martyr, but eventually it’s not sustainable. That is one of the main things with this whole mania and it is it’s not sustainable. Because it is so asset-price focused, it’s a gamble. Like you said, you’re gambling every day with real money that you have potential to actually really lose, versus the asset price where it wasn’t, it was a momentary value based on what people projected or they thought. It really isn’t based on what the value of that company is anymore. That’s long gone.

Nate: You’re right. Well, and that brings us to a discussion of how is value created in the world. You mentioned we take our real money. Real money is created when value is produced. When we go out and we work, we earn a living in some fashion, we are receiving real money because we produce some sort of value. In other words, we helped a business make profit. That’s why they gave us a job, or that’s why you started a business, because you want to provide goods and services to people that produce profit and produce value in the world. Value is exchanged via money. We go out and we get a paycheck or we own a business and we work and we produce value, which produces profit. We then take that money and then we put it in things like the stock market, which does not really produce value. That’s notable by so many different companies like GameStop, who are essentially losing money, who get their prices skyrocketed.

It’s fake money. It’s not real. It’s just pretend value, as opposed to you can actually put that money that you created by producing value in other areas that actually produce value. In other words, and we’ve talked about this a little bit Holly, whenever we go out, let’s say with infinite banking concept, as an example, we go out and we put money into one of these policies. It is actually real money. It’s not an asset value that moves around based on whether or not someone else is willing to buy that stock. It’s actually real money. The insurance company is a real business that produces real profit. We receive real dividends in return, just like any other business would expect to receive. We’re receiving real money.

The same thing goes if you’re buying rental properties. You have a real property that has someone living in it and that someone values a home. So they pay you rent, thanking you that they get to live in a home. I mean, obviously the market value of the home may go up and down, but the business behind it, the actual transactions that are occurring is real money. The same thing even goes maybe if you want to talk about lending money to people, whether it’s in the form of bonds or whether that’s in the form of actual private loans. People take that money, they need it for whatever purpose and they’re willing to pay you interest, real money, in return for this. There’s certain things that you can build wealth on that I believe are more sustainable because they’re based on real money as real … producing value.

Anytime you invest money in things that are only hoping for market-value increase, obviously we’re gambling. It maybe an educated guess, but it’s a gamble nonetheless. It’s not actually based on value. We know that the stock market is not based on value because the price to earnings ratios are way out of whack, historically. There’s no reason for most of these companies to be valued as highly as they are, because their business is just not producing enough revenue to warrant that kind of valuation. Obviously that’s where bubbles are produced and that’s where bubbles pop and people lose a lot of money.

All I’m saying is, Holly, this GameStop mania is a microcosm of that. The bubble’s already popping as we’re shooting this podcast. Because of that, I don’t know when this launch is, what it’s going to be like, but yeah, the bubble is going to have popped and it’s going to have a problem. It’s just simply a microcosm of the market as a whole.

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Holly: Yes, it was the little guys wanting to stick it to the big guys with GameStop. But they actually, in my viewpoint, promoted a worthless stock to drive up the price market, to stick it to somebody else. But in the end, really it’s the little people that are hurting. We’re the ones that are typically going to lose. It’s not Wall Street. That’s going to lose when the stock falls with GameStop or another stock. It doesn’t really matter on that. We have to start asking ourselves, “Is this real money that provides real money in return when I’m putting it there?” Like you said, the real estate, is it? Yes. You own the property. There’s a real value there, but somebody is paying you the rent because they value living in the home. It’s real, versus I’m hoping that this Game stock-

Nate: GameStop stock.

Holly: -is going to grow, right?

Nate: Yeah.

Holly: It’s going to increase. Who knows when I got in? That’s the other thing. I mean, if they drove the stock up, when they initially bought it, the individuals on the Reddit forum that bought it and they got in early, they got it for a steal, if you want to say.

Nate: Yeah. They got in at the right time.

Holly: Versus as the stock went up, the other ones didn’t get it at a steal.

Nate: No, you’re right. You’re exactly right. There are certain people who won on this and there are certain people who lost. There was people who made a ton of money … and this is always the case with the market. The market creates winners and losers. It’s a zero sum game. In other words, if one person buys a stock at one price, another one had to sell it at that price. At the end of the day, it’s always about timing, when to get in, when to get out.

People lose sight of this and the financial advisors of the world lose sight of this too, where they say, “Well, if you have a long time horizon, let’s say you’re in your 30s. You’re not retired until your 60s. Let’s go ahead and invest all of our money we possibly can in mutual funds, that’s based on nothing, because mutual funds tend to rise over time, the stock market tends to rise over time, so you’ll probably average a decent return over a long time, even though there may be ups and downs.

What people don’t realize is at the end of the day, it doesn’t matter if you’re in the market for a short time, or if you’re in the market for a long time. The only thing that actually truly does matter is when did you get in and when did you get out? That’s all that matters. People seem to, “Well, if I got a long enough time period, it doesn’t matter.” No, it does. Ask all the people during the Dot Com bubble crash of 2000, 2001, where they lost about 40, 50% of their value. They could have had a great tear before that, and then half their money is gone. Once again, it doesn’t matter what your average rate of return was for the 30 years prior. You lost half your money. That kind of sucks.

Then the same thing could have happened in the 2008, 2009 crisis. You lost half your money. It doesn’t really matter how long you had it or what your average rate of return was. What mattered was when you got in and when you’re trying to get out. Same thing goes with the COVID-19 pandemic, though we did rebound really quickly, which most of us are flabbergasted about. Because once again, we don’t know why. The economy does not look as good as it did in February of last year, January of last year. Most companies are not doing better. I mean, there’s certain ones that are, like Amazon really took off. But beside that point, what we’re saying is it doesn’t really matter when you get in. It doesn’t really matter how long you’re in. Excuse me, it kind of really does matter, “What did I buy these stocks at and what am I going to have to sell them at at the end?” That’s what matters.

GameStop, as I mentioned and as you just mentioned, Holly, is kind of just a little microcosm of that. That’s what we learned. That’s with the stock market is. Stock market prices, you can buy it at one price. They can go up and they can crash in a matter of a month. Then suddenly you’re right back where you bought it from and you wasted all these years of growth or the vast majority of them.

Holly: I think that the reason Nate and I really are concerned is, we, as individuals, I don’t watch the stock market all that much. I have watched in fascination with the GameStop mania. But I’ve never wanted to buy in. My main reason is I might buy in at a great time. I don’t necessarily know if I’m going to know when to get out. Just because I bought in at a great time, doesn’t mean that I’m ever going to have any of that money back, or I might lose 50% of any growth I’ve made over the course of a year or 10 years, 15 years. Then I go to retire and I have nothing left. I’ve seen numerous individuals where that happened, where in ’01, like you’re talking about, but ’08, ’09, where they’re like, “If I would have put this in here and not in the stock market, I’d have something.”

But basically, they have to go back and reinvent themselves or start reinvesting in the stock market in the hope that they get a better return and that they know when to get out this next time over. To me, I don’t want to take that much risk with my money. I want to have a little bit of peace of mind that what I’m doing is providing real money in the future for real things.

Nate: This is why I’ve … becoming more and more clear that it’s dangerous to chase returns. We’ve said it before, but it’s becoming more solidified to me. It’s dangerous to chase a rate of return. It’s not that dangerous to chase things that produce value. That’s one thing I’ve really been honed in on lately, that if I’m going to put my money to work, I want to know the value proposition that this investment is trying to achieve.

There’s a lot of them out there. It’s not like they’re super hard to find, but you want to be able to put your money in places that produce real value, not in a place where you get tickled by somebody who is trying to proclaim that if you do this, you’re going to receive this great rate of return. Put your money in a business idea or a concept or an investment that says, “Here’s what we’re going to do to produce value.” That value is going to come back to you in the form of a return.

That’s Business 101. That’s what it should all be. The stock market is just far from that now. I mean, that may be why it was began, allowing the average Joe to invest in these companies easily and trade easily. I mean, that’s the idea behind the stock market. It is just gone so far away from that. It’s gone to a casino- style thing where the valuation of companies is not based on anything in reality anymore. It’s just based on market demand, supply and demand, which can change dramatically in matter of a month, as we’ve seen with GameStop.

Holly: When you think of it’s based on, like you said Nate, it’s random, uncorrelated values, based on nothing really, except for what people or Wall Street has said that, “You should buy this stock. You should invest in this.” But it’s not based on any real value. Most of us would never go and invest in something if we didn’t do our research and see it was worth the value of it. You don’t buy a home that’s overpriced just because, “Oh, well the owner thought it was worth this much.” You actually get a market value to determine if you should purchase the home and if it’s a good price. The same should be said of where are we putting our money? Are we actually taking the time to evaluate it and say, “Yes, it’s worth it to put this money in there. What does it yield?” Like Nate said, does it produce real value when you’re putting your money in there? If it doesn’t produce real value, why are you putting your money in there?

Nate: There’s people like Warren Buffet, by the way, they’re what’s called value-based investors, where they are actually trying to find companies that they believe are undervalued, that actually have a promising future, and that they’re going to take off and that they’re going to be really profitable in years to come. That’s always been his focus and it’s served them well for a long time. Do you know what? It’s not actually serving him well anymore. Warren Buffet is consistently losing to the overall market, which is new. It’s not what he started as. Why? It’s because of value-based investing almost doesn’t exist. What seems to make sense, “Okay, I’m going to buy the stock of this company because I believe they’ve got some great ideas. They’re going to take over the marketplace.” That used to be the thing. Now it’s just simply, “What do we think is going to go up in value regardless of if it makes sense?” And people just jumping on the bandwagon.

It’s true that Tesla may be the next best thing that we’ve ever seen. Could be the next Apple, the next Amazon. They could take over the world. They could produce more cars than anybody, make more money than anybody. It has to be seen that, honestly, Tesla is probably overvalued. It probably is. It’s probably not worth that right now. Some people who bought in at the top thinking that Tesla is going to go to the moon, maybe they’ll be wrong.

I could be wrong. I’m not a stock guy. I’m just simply saying that it seems like things can get out of whack really easily, that people like Warren Buffett should be able to beat the market because of how much time and focus they spend finding good value. But yet they’re not, which makes you assume that this market is being driven by just random intuitions, not actually based on anything. GameStop, as we keep on saying, is just a little microcosm of what’s actually going on in the market, where things are becoming less and less tied to business fundamentals, how much money the company actually makes.

Holly: Tesla might be the next big thing, might be. But ask yourself exactly how long have they been profitable for? Four quarters, to me-

Nate: Four or five quarters.

Holly: -doesn’t say it’s real, sustainable wealth that I should be putting my money in. I mean, Nate, I can jump in and say, “Look at Bitcoin. A month ago, you’re at an all-time high and you’ve dropped again. Got to get in on that Bitcoin craze because it’s going to hit 80 or 90,000.” I’m like, “It peaked and it dropped again.” But people were so, “Oh, got to get it now, because who knows what can happen?”

It was great for the individual that got in way earlier, but only if they sold it. That’s the key. If they held it and they didn’t sell it, then basically anything they earned, they lost again. Then they might have a little bit more than what they started with, but it’s a gamble every single day. For me, that’s so much stress on my life. I want peace of mind. My dollar is doing what it’s supposed to be doing, working for me and it can do more than one thing, versus let’s ride this wave out and see if it produces an excellent ride or if it just crashes and I burned.

Nate: Well, even with the idea of Tesla, I mean their business is becoming more efficient. They started becoming profitable, so their stock was on the up and up and it deserved to be, because the business was finally formulating in a way that it looked like it was sustainable. It wasn’t just going to keep losing money forever. Everyone was happy about that. Tesla starts to go up. But do you know what really caused the huge boom? It was actually nothing that Tesla did, per se. It was the fact that Tesla was about to be added to the S&P 500. It was about to be added into this index and all that these investors knew was that, “Okay, we better buy it now because once it gets added to the S&P 500, all of these index funds and ETFs and certain things that are tied to the S&P 500 are going to have to buy Tesla stock.”

Once again, that is just a fake thing. There’s nothing real about it. The rise of Tesla due to its operational foundation and profit, that’s great. I can get on board with that. But whenever you increase it by hundreds of dollars per stock in anticipation for an entrance to the S&P 500, it’s not based on value. It is a gamble now. It has no point in reality. People make money that way and other people lose money that way. It’s a timing mechanism. It’s kind of like playing roulette or something. Or it’s hoping we get into the right time and don’t get out at the wrong time.

But all that to say, Holly, we’ve seen with GameStop, it’s just encouraged me more, and I think it scares a lot of people more, to realize there needs to be a better way to build wealth. There needs to be a more sustainable way. What you and I have constantly preached is that that way should be in avenues that produce real value to the real world, not in some sort of market-timing focus.

If you are good at that, and you’re good at day trading and you find stocks and that’s a job to you, I’m not disparaging that. Go for it. I mean, that sounds great. I mean, it might be fun for you. I’m just saying for us who don’t really want to focus on that, there are other things that we could focus on that just produce value and we can be pretty sure are going to be sustainable. That’s actually what the wealthy do, by the way, for the most part, too. They’re the ones buying timber and they’re buying forests. They’re buying just real assets that produce real value in the real world, farm land, and certain things like that, because it’s sustainable. It’s always going to have a need. But with that, Holly, anything else before we close it down?

Holly: I think you summed it up really good. Real value and real assets that are sustainable, that’s the key to really not just creating wealth, but being able to have sustainable wealth.

Nate: Absolutely. Well, if you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e113

Announcer: Dollars and Nonsense podcast listeners, one more thing before you go. Ease your worry and start your journey towards security today. Visit livingwealth.com/secretbanking. You’ll gain instant free access to this special one-hour course Holly and Nate made for you. Again, that’s livingwealth.com/secretbanking.