Avoiding the FTXs of the Future

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You made it to Thursday!

Between the FTX meltdown, the ongoing Twitter saga, and news of more tech layoffs, there’s been plenty to make investors feel 😫 this week — and all that was even before a Ticketmaster crash sent Swifties (ok, that might include a few of us at FWIW) spiraling. We cover some of the investor takeaways from FTX’s crash down below. But a few other things caught our attention, too, like the Fed signaling that it could soon start slowing interest rate hikes. And the latest Producer Price Index, which measures prices paid by businesses, rose less than economists had expected in October, providing some hope that inflation is slowing.

Also, you might have heard that the earth passed a remarkable milestone this week: global population reached 8 billion — a growth of one billion people in just 12 years. According to the UN, one reason behind the huge jump is increasing human lifespans thanks to improvements in public health, nutrition, personal hygiene, and medicine. Go science! 🔬 🧪

But demographers also point out that much of the growth has been concentrated in the world’s poorest countries, where food security is already a concern and climate change continues to pose a looming threat. Taking care of our 8 billion-strong global family will require massive investments in sustainable agriculture, healthcare, climate tech, education, and other infrastructure. And that will open up new opportunities for values-aligned investors. For starters, our guide to cleantech investing offers a peek at several sectors essential to tackling the challenges of population growth, like food tech and water tech.

We’ll be taking off next week to stuff ourselves with turkey and pie as we celebrate Thanksgiving in the US, so look for us in your inboxes again on December 1. On that note, we give thanks to you, our FWIW community, for sticking with us each week to learn more about how you can align your investments with your values. Happy Thanksgiving!

News you can use

• Big utilities say that the Inflation Reduction Act (IRA) will help them transition to cleaner energy while giving customers a break on energy bills. Duke Energy, for one, said it will provide a $56 million refund to its Florida customers next year for solar production tax credits. In other IRA news, a Bloomberg survey found that investors see big potential in the battery storage market thanks to the Act’s passage and Macquarie Group says it boosted green hydrogen’s future as a major energy source.
  
• Americans want businesses to make paying a fair, living wage their top priority according to a new survey conducted by JUST Capital. The survey also found 81% believe that business can be a powerful force of societal change — if they would just talk less and act more. The insights from our friends at JUST Capital are pretty interesting and you may find the poll report worth a read.
  
• Renewable, but make it fashion! Researchers are exploring new materials to create more aesthetically-pleasing solar panels, which could make clean power more attractive to homeowners, reports the Wall Street Journal. While much of the new designs are currently coming from university researchers and private companies, some publicly traded companies like Tesla are commercializing solar roof shingles that appeal to style-conscious buyers.

Asking for a friend….

We know there is a lot to think about these days and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

• Some of our favorite inflation-fighting strategies (...and a few more here)
• FWIW’s Guide to Long-Term Investing
• Unpacking the ESG Alphabet Soup (including a link to our ever-growing glossary of common terms)
• FWIW Guide to Cleantech Investing: Sectors to Watch (covering a dozen innovative sectors to anchor your research on sustainable investing options)
• How to Practice Faith-Based Investing
• “Siri, What is a Recession”Largest ESG or Sustainable Funds (a great list of ETFs and Mutual Funds)

5 lessons from the FTX fiasco

The biggest business news story in a long, long time contains two abbreviations — FTX, or Futures Exchange, and SBF, or Sam Bankman-Fried. The 30-year old Stanford graduate, once hailed as a tech visionary, experienced a spectacular fall from grace last week when the cryptocurrency exchange he founded and ran filed for bankruptcy. We’re still finding out the details about what led to the collapse of a once $32 billion company, but what’s clear is FTX users and investors have lost billions of dollars they may never see again. Oh, also, in an extraordinary turn of events, FTX was promptly hacked and currency worth $288 million was stolen.

This is the latest in a series of crypto scandals this year blamed on the lack of regulatory oversight and due diligence in the industry. The size of losses also puts it in the same league as historic fraud and financial mismanagement cases that hurt regular investors, like the subprime mortgage crisis in 2008, Enron, and Bernie Madoff’s illegal schemes. News filtering out this week about exposure to FTX at other crypto exchanges could make the impact even larger. Events like these are disappointing and upsetting and we do not want to pile on criticisms of SBF, but the FTX news provides an opportunity to focus on lessons we can all use when investing.

Not feeling so bubbly any more

Recessions and times of economic hardship have historically exposed unsound and shaky businesses. As Warren Buffett famously, and not very subtly, put it, “Only when the tide goes out do you learn who has been swimming naked.” 👀

And it looks like after a heady few years of stock market records, tech expansions, and crypto gains, the tide is receding with the Fed raising interest rates and making borrowing money expensive again. In Wall Street jargon, the investing bubbles are bursting.

As a young, or new, investor it’s important not to be shaken by these screaming headlines and worry the sky is falling. Traditional financial markets are still stable and functioning. Recessions and stocks declining are a normal part of all economies and eventually growth should return. Complete wipeouts like FTX are a rarity when you consider the big picture and not a reason to hide all your money under a loose floorboard.

All investing has some risks, and you can’t always foresee a scam, fraud, or just plain corporate failure. Even the suits in corner offices with finance and biz degrees fail at detecting this stuff sometimes. But incidences like these are a good reminder of a few salient principles you can keep in mind to protect yourself.

1. It’s important to diversify

If you read about people losing their life savings in places like FTX or meme stocks, it’s often because they put all their faith in a few investments. With extremely risky investments especially, you want to be extra careful and not devote any money to it you can’t afford to lose. As for crypto — which is extremely volatile, poorly regulated, and comes with hacking and other risks — financial advisors say allocate no more than 5% of your portfolio.

2. Good corporate governance matters

The philosophy of ESG has taken a beating in the press lately, but FTX is a reminder of the importance of the “G” in the acronym. This stands for governance and focuses on company leadership, the independence of the board, internal controls, audits, and shareholder rights, etc. A well-governed company has an experienced group of capable leaders both at the board and management level who run it responsibly and ethically. FTX has obvious flaws in this area, like no CFO, but other recent examples that raised governance issues include WeWork and Uber. If you’re making a new investment, it’s good to learn about a company’s executive team and board, what qualifies them and what skills and experience they bring to the table.

3. If it’s too good to be true, it probably is.

As someone with funds to invest, you’re going to hear many sales pitches from people whose job it is to convince you to part with your money. Many of these will excite you for various reasons, but beware of promises of big money and zero risk. Earlier this year, crypto lending platform Celsius Network promised a stunning 18% return on deposits of virtual currency. By June it had frozen all accounts and a month later it declared bankruptcy and the CEO had resigned. Experts are investigating whether it may have been a Ponzi scheme.

4. Look for potential red flags

Any investor starter kit should come with a B.S. (or as grandmothers like to say, “hogwash”) detector. It’s not easy, but you should practice sniffing out charlatans. The place to start looking is accounting. A recent Bloomberg column listed some red flags: convoluted calculations, overstating revenue, understating liabilities, excessively high inventories, contradictions between the income and cash-flow statements, unexplained loans, excessive numbers of related-party transactions, etc.; and recommended reading Howard Schilit’s Financial Shenanigans.

If you don’t feel ready to dive into the numbers yourself, you can still follow reports from journalists, analysts and activist short sellers like the folks who exposed EV truck maker Nikola’s former CEO. In hindsight, apparently your spidey senses should also tingle in response to things like hype advertising (remember FTX’s Super Bowl ad?).

5. FOMO is the enemy

When it comes to managing money, herd behavior is so common there are whole studies documenting it. This investor tendency to unthinkingly copy the actions of others, especially during uncertain times, is known as a behavioral bias to economists. It’s understandably hard to resist when you hear someone else bragging about amazing returns, but until you understand an asset and its risks, it’s best to tread carefully. This also applies to not investing or getting out of the market.

Bonus: The safest place for your crypto is off the internet and in a “cold wallet.”

Before you go -

About one out of every five millennials and Gen Zers have gone into debt from dating. Maybe it’s time for more long (and free) strolls on moonlit beaches?

** FWIW team members own shares of Tesla.

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