How Technology Has Changed the Capital Markets, and a bit about Bitcoin

4:00 P.M. – February 15th, 2018
Meeting No. 1918

By Neal A. Waner
Assembly Room, A.K. Smiley Public Library


This paper discusses how technology has impacted the capital markets, specific companies and certain industries.  We’ll see how technology has virtually eliminated the incremental cost of an additional unit for certain industries and companies.  We’ll check valuations of some of these new tech companies to see if they are fairly valued or instead are inflating another stock market bubble similar to the dot com bust of post 1999.  We’ll also discuss currency, specifically the new fad of cryptocurrency and bitcoin.


To my parents, Al and JoAnne Waner,

for stimulating their son’s curiosity about investments when he was a little boy.


Introduction (SLIDE #1)

Where does one get inspiration for these papers? This is my fifth fortnightly paper and each time inspiration has come from a completely different source.  This time it actually came from a high school student. Seriously, a high school student.

For years I’ve done presentations for high school students, usually seniors, about personal finance. It’s not high finance it’s fundamentals like spending less than you make, the dangers of credit, the power of compound interest, and basic asset allocation.  This past June I’m at my alma mater giving this presentation to an AP Economics class on the last day of school.  AP stands for Advanced Placement, so these are bright kids who are excited that in a few hours they will graduate.  My presentation is a nice, light sendoff for them, hopefully with some simple and sound financial advice they will take with them into our Brave New World.

At the end of my presentation, a young man, who is the son of a client no less, raises his hand and asks, “Mr. Waner what do you think of investing in crypto currency?”  I paused, and in that second or so before I spoke I thought to myself, “You punk kid.  I’ve been investing money for other people for over 30 years.  I manage a quarter of a billion dollars for my clients.  I’m a trustee and Chair of the Investment Committee for the County’s nearly $10 billion pension plan.  A week ago you got a couple thousand dollar scholarship from the education foundation endowment I helped build.  I’m helping your parents pay for your college, and you have the audacity to ask me about crypto currency?  What the hell is crypto currency?”

Of course I didn’t say that out loud.  Instead I tilted my head, smiled, and asked, “Crypto currency?”  “Yes”, he replied, “crypto currency”.  I paused again.  He took pity on as he could see I didn’t know what he was asking about.  Politely he said, “You know, crypto currency.  Bitcoin”.  “Oh, bitcoin” I said.

I responded to his question, but driving home that afternoon I realized if some kid is asking about bitcoin, sooner or later clients are going to start asking about it, so I better do some research.  I did research on bitcoin and found it to be the most ridiculously confusing array of technology, computer programming, currency, banking and finance all rolled up together.  At the end of this paper we will discuss bitcoin, and I’ll share with you what I told the inquisitive young man that day based on my limited knowledge of it the time, as well as if I would have changed my response now that I’m more enlightened.

However, before we get to bitcoin, let’s take a walk together and explore how technology has changed certain industries, companies, and the capital markets.  Let’s see if these changes are good for the markets and good for society, or are they just making a few people billionaires.  Are these companies building our economy or inflating another stock market bubble?  Then we’ll get to bitcoin, just one more chapter we all get to learn about in this Brave New World.

Technology’s Impact on Companies and Industries

Technology has had a tremendous impact on companies and industries, but that topic is way too large to cover in this paper.  Instead let’s narrow the subject down to, how has technology changed the incremental cost of an additional unit? (SLIDE 1)  Changed the incremental cost of an additional unit? What economic mumbo jumbo is that?  Here, let’s make it simple. (SLIDE 2)

We all know that Frank Peele is an outstanding photographer. To master what Frank has mastered you have to good at both the science and art of photography. (SLIDE 3)  Let’s talk about the science part first.  Frank, 30 or 40 years ago how many types of film, did you have to purchase and use? How many cameras and lenses did you carry?  How many different ways could you develop or edit the photograph?  In summary, 30 or 40 years ago, how many different scientific variables did you manually have to take into consideration before you even looked through the lens and took a picture? After all that science that just came together for Frank, he looks through the camera and now the scientist has to become an artist.  The artist in him is what separates he as a photographer from most of the rest of us in the room.  He’s looking at lights and shades and images and faces or whatever the subject matter is, and if he’s blended science and art correctly and hits the shutter at just the right moment, he creates a truly magnificent photograph.

Most of us can never become the photographer Frank is because the artistic side of Frank was put there by God, then polished with years of training and practice.  However, I would propose technology has greatly leveled the playing field of the science of taking photographs. I may not be an artist but I can take some pretty nice photographs with this stupid thing (hold up I-phone) and it’s not even a camera.  Okay, there is a camera inside of it but it’s actually just a handheld computer that can take pictures, and this I-phone can take some pretty darn good ones, under water no less.  Imagine if I actually invested in a digital camera that had even more technology specific to photography. Now, put the digital camera with all its technology in the hands of someone like Frank and we’re really moving. But I need to get back to my point.

Frank, 30 to 40 years ago when you were taking photos did it ever cross your mind the cost every time you clicked the shutter?  Did you wait patiently to take that perfect photo because you didn’t want to waste money on film and processing?  Now that you have a digital camera do you ever have that thought of wasting money each time you take a photo?  Of course you don’t. Because the incremental cost of taking another photo is virtually zero.  Yes, at some point your camera wears out and you do have to store the photos digitally somewhere, but digital storage is virtually free.  So now you understand the concept of how technology changed the incremental cost of an additional unit, or photograph in this case.  Oh, by the way, how did this technology work out for Kodak? (SLIDE 4)

The Dow Jones Industrial Average is 132 years old.  It has 30 companies now, but started with just 12 in the late 1800’s.  Publically traded companies are included or removed from this index based on their importance and relevance to the US economy.  The index grew to 30 stocks for the first time in 1930, and one of those additions back in 1930 was Eastman Kodak.  Eastman Kodak stayed on the Dow Jones Industrial Average for 74 years until 2004 when it, AT&T an International Paper replaced by AIG (the world’s largest insurance company at the time), Verizon and Pfizer.  In the mid-1970s Kodak commanded 90% of film sales and 85% of US camera sales.  According to a 2005 case study by the Harvard business school, in 1988 Kodak employed over 145,000 workers worldwide.  By 1996 Kodak’s revenues reached nearly $16 billion and the stock exceed $90 a share.  The company’s market capitalization or value was $31 billion.  Today, Kodak trades for just $7 per share, has a market cap of $1.4 billion, and the 145,000 employees are down to just over 6,100.  Kodak didn’t adapt or plan well for the digital age of photography.

Now, let’s talk about something larger than images on paper.  Let’s talk buildings, bricks and mortar, lodging and hotels.  The largest domestic providers of lodging are Hilton Holdings and Marriott International. (SLIDE 5)  Hilton was founded in 1919, Marriott in 1927.  It’s taken them nearly 100 years, but today Hiltons 14 brands operate a combined 838,000 rooms.  Marriott has 30 brands and operates 1.2 million rooms, which is over 2 million rooms between the two of them.  Hilton employs 169,000 people, Marriott 226,000.  Remember how Kodak had a market cap at their peak of $31 billion?  Hilton Hotels has a market cap of $28 billion and Marriott International’s market cap is $53 billion.  On the screen is a comparison of this data.  (SLIDE 6)

Just for fun, I did something that you normally don’t see as a measurement of a company, and that is divided the market cap into the number of employees.  The market cap per employee of Hilton Holdings is $166,000 per employee and for Marriott it comes out to $236,000 per employee.  Said another way for every employee that works at Hilton or Marriott they create about $200,000 worth of value for the company based on their stock price.  Furthermore one can physically go touch the assets and walk the properties managed by these two companies.  It’s unfair to say every employee creates the same amount of value for the company because like any company employees run the spectrum from maids and parking attendants to the front desk clerks and on site managers to directors and senior management and even the CEO.  However one could argue that from the CEO all the way to the maids, everyone has a role in making Hilton and Marriott the fine companies they are, that took a century in the making, one property, one room at a time.

Where am I going with all this?  Stay with me but I do need to take another bird walk.  Remember in the introduction when it talked about the big weekend houses that were built next to the humble little house I was raised in?  What kind of homes do you think were built around my parents place once it became lakefront property?  Huge homes, and to my parents chagrin many of those homes can accommodate 10, 15 or even 20 people for a week or weekend.  Trust me, when you get 20 people in one house having a good time, the noise, and other undesirables, end up spilling over into my parent’s backyard, beach and driveway.  Further yet, my parents were mortified when a while ago, they looked on Airbnb to see how many homes in the neighborhood were listed as rental properties and about every other house along the lake was there on the website and available, for a price, to come and enjoy. (SLIDE 7)

Hopefully you’ve heard of Airbnb.  If not, it’s a similar site like VBRO where one can list their property for rent.  One can list a single room or separate rooms or the whole house for rent to anyone who would like to use it.  Airbnb gets a small cut and you get to stay at someone’s home virtually anywhere in the world because Airbnb operates in 191 countries.  Remember Hilton has 838,000 rooms and Marriott has 1.2 million rooms?  Airbnb has 4 million listings worldwide, more than twice the number or rooms of Hilton and Marriott combined.  On August 5, 2017 Airbnb had its biggest night to date with just over 2.5 million people staying at properties on the platform.  Oh yes, I didn’t say “in their properties” I said “at properties on the platform”.  Airbnb does not own or maintain properties like Hilton or Marriott, they are just a software provider that links people that have extra space to people that need space to stay.  As said before it took Hilton and Marriott a century to get here.  When was Airbnb founded?  2008.  Can you invest in Airbnb?  Not yet, it’s still privately held but someday it will be a public company.  Trust me, the founders want to cash out on this little venture of theirs and going public is the best way you do that.

Over the years Airbnb has fueled their growth by finding partners and investors that have infused cash such as venture capitalists, foreign countries, or even Google Capital.  The Wall Street Journal recently estimated value or market cap of Airbnb at $31 billion which is slightly more than Hilton.  Remember how Hilton employees 169,000 people and Marriott 226,000?  How many people work for Airbnb?  3,100. Divide the $31 billion market cap into the 3,100 per employee and you get a value of $10 million per employee. (SLIDE 8)  $10 million.  Not $200,000 like Marriott.  By the way, the vast majority of those employees at Airbnb are computer programmers and I would propose most of those programmers have little knowledge of lodging or real estate.  Now you see another example of how technology changed the incremental cost of adding an additional unit to virtually zero.  How many more employees does it take Hilton or Marriott to add a new hotel?  A bunch.  How much more employees does it take Airbnb to add one more listing to their platform?  Probably none.  When Airbnb goes public there will be more than a few billionaires and multimillionaires created

Let’s look at one more example of this.  Taxi service.  When I use the phrase “hail a taxi” you probably have an image of standing in on a busy street in New York, LA or Chicago trying to get a yellow taxi to pick you up and get you somewhere.  How 20th century is that?  Today, you can load an app on your smart phone and an Uber driver shows up. (SLIDE 9)  Of course, the driver may be a college kid, or retiree, or someone just moonlighting at a second job and the car will probably be anything but yellow because it’s their own private automobile, however because of the app you’ll know who’s coming to get you.  If you request a ride when the demand is low the price is less, however if you and a lot of other people are trying to get home from say a professional sporting event or concert, you’re going to pay more because the demand is high.  Yes, Uber is a taxi service but it doesn’t own a fleet of cars.  Like Airbnb who connects people with extra space to people who need space, Uber is a software company that has a platform that connects those that want a ride to those willing to drive them.

Like Airbnb, Uber his fueled its growth from different financing sources.  The Wall Street Journal recently gave them a valuation of $68 billion which is more than Marriott.  How many employees does Uber have? 11,000 mostly computer programmers, which means each programmer has a per employee market cap of $6.2 million. (SLIDE 10)  Drivers don’t benefit from this, drivers get a low wage with tips.  $6 million of value for each Uber employee that does not drive a car.  Kind of like Airbnb, if you rent your home you get some income, but don’t think for a minute you’re going to benefit on the wealth created by these companies when they go public.  Like Airbnb, when Uber goes public, another set of billionaires and multimillionaires get added to the Forbes 400.  By the way, when was Uber founded?  2009.

Where is all this technology headed?  Driverless cars and trucks frankly, and before you say that’s a bad idea because of all the lost jobs of taxi and truck drivers, consider a few thoughts.  Thankfully automobile crashes are no longer in the top ten causes of death in the United States.  Traffic fatalities rank 11th according to the US Department of Transportation.  However for children age 8 to young adults age 34, it still is the leading cause of death.  Sadly, 94% of traffic fatalities are driver error.  About 40,000 people lose their life each year on US highways.  What if driver error went from 94% to 20%?  We just saved 30,000 lives annually.

Here’s another benefit. One of the challenges seniors face is giving up their independence; where they live and their ability to get around.  With Uber or Lyft and soon enough self-driving taxis like I saw in Tempe Arizona last month, you can summon a car on your phone, it shows up and takes you take you wherever you want to go.  You still have your independence and you still have your freedom to travel.  Oh sure, there’s a cost to get you to your destination, but how much money do you spend to insure, maintain, drive and store your car which spends more than 95% of the time turned off and in the garage?  If we could more efficiently use automobiles when they are needed instead of having them parked most of the time, think of the parking lots and parking structures we could re purpose.  These are all examples of technologies impact on certain companies and industries.

New Tech Companies Stock Valuations; Are they Real or Inflating a Bubble?

Let’s change course here and take a look at this phenomenon from a different angle, specifically the perspective of the stock these new tech companies.  As these companies go public a few fortunate individuals will have instant massive wealth, but how does it impact the rest of us?  In fact, can the rest of us even participate financially with these high growth tech companies, and is that even a good idea?  Also, as these companies become huge, how does that impact the stock markets and stock indexes?  Are these companies good for the capital markets and investors or are we just re inflating a bubble just like we did in the late 1990’s?  (SLIDE #11)  To understand this discussion we have to talk a little bit about how stocks work for publicly traded companies.

Publically traded companies have three kinds of stock; authorized, issued, and outstanding. (SLIDE 12)

Authorized shares are set in place when the company is formed by their articles of incorporation which authorize a fixed number of shares of stock in the company, usually a very high number, as in millions of shares.  The stock is assigned a “par” value that is quite low, such as 10 cents or a dollar per share, however there is no correlation between the par value of a stock and its market value.  Think of this as paper on the shelf you can value later and sell later or as needed or wanted.

Next comes issued shares and a company typically issues only a fraction of the number of shares that were authorized at the time they were created.  Think of issued shares as taken off the shelf, valued, and ready to sell to the stock market.

Lastly are outstanding shares, which are the shares actually trading in the market. The number of outstanding shares is set by the investment bank that implements a company’s initial public offering (IPO), or after the IPO if more capital is needed.  Flood the market with too many shares and the stock is diluted and falls in price.

Okay, so now let’s make you the founder of this wonderful tech company about to go public.  Let’s use round numbers with less zeros at the end to make the math easy.  You have 10 million shares authorized and to raise money for your IPO you issue and sell into the market 1 million of those shares, at say $25 per share.  Outstanding shares are 1 million out there in the market, you just raised $25 million for your company and you still have 9 million shares on the shelf to use later.  So what happens to the other 9 million shares? They sit on the shelf so that theoretically when your corporation needs more capital you can sell them in to the market.  Remember, sell too many too fast and you will depress the price of your own stock, however done at in in the correct amounts at the right pace, you have the ability to get a lot of money from the capital (stock) markets to help your company.

However, didn’t we just say you are the founder of the company?  As the founder of the company, half of those 9 million shares on the shelf are yours.  You can decide when you want to take them off the shelf and sell them.  One more important thing, when you sell your shares, these proceeds go to you, not your company.  Kind of like printing money isn’t it?  Yes, you have to find that delicate balance of selling company shares into the market to raise capital for your company versus selling your own shares to increase your own net worth, but what a nice problem to have.

Which leads us to the Super Bowl game played in January 2000.  Does anybody else remember that Super Bowl game?  I don’t remember who played in it, but I vividly remember the commercials.  This game was played right at the peak of the tech bubble in late 1999.  What shocked me was the vast number of companies that were paying more than $2 million for a 30 second advertisement (back then, it is $5 million now) and most of those companies I had never heard of.  Who were these startup companies and where did they get the money to pay for those high-priced ads? Well most of them had gone public in the heat of the tech market run-up, so they were able to print money and buy advertising.  Well, we all remember how well that ended as most of those companies flamed out as did their stocks during the dot com bust.  Many of these companies were in the tech heavy NASDAQ index, which took a beating.

Not to open old wounds, but here is a chart of the NASDAQ market again from 1995 to 2002. (SLIDE 13)  Notice that it was 1995 when the NASDAQ index crossed the 1,000 level for first time.  How long did it take to get to 2,000?  Three years later in mid-1998.  How long did it take to go from 2000 to 3000? About a year, in late 1999, but notice how few months it took to get from 3000 to 4000 and then just a couple months later it hit 5000.  Look at the slope of the growth of the NASDAQ from or 1995 to 1998.  That’s nice consistent growth from 1995 to 1998.  Notice how the nice straight line become somewhat parabolic in its rise after 1998 until early 2000? In my trade we call that a melt up.  Are these new tech companies doing another melt up to the NASDAQ?

To answer that question we need to compare the NASDAQ to some other stock indexes and understand what makes a stock go up in price.  So what makes a stock go up? (SLIDE 14)  It’s really pretty simple, just two words in fact; expected earnings or said another way, tomorrow’s profits.  Not tomorrow’s sales, tomorrow’s profits.  Sell all you want, but if you don’t make a profit, at some point your company has little to no value.  You have to earn a profit.  The stock market is always looking into the future trying to predict how much profit a company will make.  Let me reiterate, there can be a big difference between sales and profits, and lots of these top tech companies have tremendous growth in their sales but still haven’t shown a profit.  At some point they have to show a profit or likely they’re going to be added to the list of dot com busts.

How does one measure the profit of a company relative to its stock price?  That’s easy, it’s called the price earnings ratio or PE ratio, which one gets by dividing the stock price into the earnings or profits per share for the year.  You can do this looking back using true earnings, or forward using projected earnings.

Okay, so let’s make this simple and give you a couple data points to anchor on.  The stock market generally trades at a PE ratio around the high teens, let’s call it 16, to the low 20’s, let call it 24, times earnings, or 16 to 24 times earnings.  16 to 24 on the PE ratio.  At its peak prior to the dot com bust of 2000, the S&P 500 traded at 28 times earnings.  The PE has been higher historically speaking, but that’s when the E or earnings are low as in a recession.  In “normal” times, let’s use 16 to 24 as a normal range.  This means if the market is trading at a PE of 16 or 16 times earnings or lower, stocks are probably out of favor, markets are probably down and the economy is struggling.  Conversely if the markets trading at say 24 times earnings then stocks are a bit rich and likely there has been a run up to get us to that valuation.  As you are going to see right now we’re trading about 22 to 23 times earnings, so we’re not excessively overvalued but we’re definitely on the upper end of the historical range.

So let’s take a look at three US stock indexes; the Dow Jones Industrial Average, the S&P 500 and the NASDAQ and let’s see if these tech stocks in the NASDAQ are doing what they did back in the late 1990’s.  First let’s take a look at the Dow Jones industrial average or the DOW. (SLIDE 15) Up on the screen is the Morningstar report of an ETF or exchange traded fund that owns the 30 stocks that make up the Dow Jones Industrial Average.  Note that the 30 stocks are not equally weighted in the DOW.  This is because they use a Dow Divisor and also a price weighted index calculation, so a $1 change on a smaller priced stock has a greater change on the index then that of a higher priced stock.  The take away is that all 30 stocks are not equally weighted in the index.  Right now the greatest weight goes to Boeing, at nearly 9% of the index, not 3% if they were all equal weighted.  Now notice that the PE ratio presently is 22.3 across all 30 stocks in the index.  A little high historically speaking, yes, but not too far out of line.  Also, the top five holdings account for 34% of the weighting, not 16% if they were equally weighted.

A more popular and widely used index is the S&P 500 and as the name implies it owns about 500 stocks, actually 505 to be exact. (SLIDE 16).  Now on the screen is the same Morningstar report on the ETF that represents the stocks in the S&P 500.  Note, like the DOW, this also is not an equally weighted index or all 500 stocks would carry a weight of .2% each.  It does use a more modern and some would argue more fair weighting method call market capitalization index.  This gives more weighting to the “bigger” companies, which usually are associated with high stock prices.    See Apple there at the top of the list?  It accounts for 3.7% of the weight of the index.  In fact, if you take the top five holdings; Apple Microsoft, Amazon, Facebook and Berkshire Hathaway, those five stocks represent 12% of the index.  Just five companies, or 1% of the index drives 12% of the return of that index. All five of those companies are profitable by the way.  What’s the average price earnings ratio of the S&P 500?  Its 23, slightly higher than 22.3 of the DOW but not excessive.  Why is it higher?  Just look at the four tech stocks in the top five that drive 12% of the index return.

Now that you’ve got the hang of this, let’s go compare the NASDAQ do the other two indexes.  Remember the NASDAQ is where most of these tech companies land.  (SLIDE 17).  Note that the NASDAQ has 104 stocks in its index, so if all of them were equally weighted each stock would represent about 1% of the index.  Like the others the NASDAQ is also not equally weighted but is capital waited so the bigger stocks have more impact on the index.  In fact, take a look at the top five holdings in the NASDAQ.  Apple alone accounts for 11.49% of the index and the top five holdings which are Apple, Microsoft, Amazon, Facebook, and Google (or Alphabet) control 44% of the index. That’s right, just 5 companies drive 44% of the return of that index.  This isn’t an index, this is five tech stocks that drive half an index.

Is that a problem? It can be if those companies are not profitable, or have low profits which give inflated PE ratios to the index.  Just before the dot com bust the NASDAQ was trading at 200 times earnings which shows how ridiculous the tech bubble had become.  Are we headed down that same path?

To answer that, let’s look at the PE ratios of those five companies that drive almost half the return of the NASDAQ.  I’m going to flash through those top five holdings showing you the Morningstar reports so you know I’m not making this stuff up. (SLIDES 18 – 22) Apples PE ratio is 18.4.   Microsoft is 30.2.  Amazon is 294.1.  Facebook is 34.2 and Alphabet (Google) is 35.  What is the average of those five stocks that drive 44% if the NASDAQ?  82.4.  Okay, take out the outlier of Amazon and its PE ratio of 294, you have the other four at 29.5, call that 30.  This “adjusted” PE of 30 for the NASDAQ is almost 50% higher than the PE of the DOW at 22.

Nervous?  Let me show you a chart of the NASDAQ the last few years, but first let’s look at 1995 to 2000 once again (SLIDE 24).  See the angle of the slope there on the far right?  Parabolic, right?  Now let’s look at the NASDAQ the last couple years. (SLIDE #25)  Is that slope recently on the far right a nice straight line or are we going parabolic again.  Are we in the beginning or getting close to the end of the melt up?  I wish I knew that.  What happened after the market peaked in early 2000? (SLIDE #26)  There it is, a 78% decline, and that’s for the entire index, 104 companies, not one company.

Am I saying don’t invest in the NASDAQ due to these tech companies of these valuations? No, but am I saying exercise caution if you want to own those companies directly, or in a concentrated ETF, or an index driven by them.  How do you do that?  Stop losses, either at a set price or percentage trailing stop.  If you don’t know what a trailing stop is, you shouldn’t be playing with these companies.  However since we’re here, let’s have some fun and try to participate with the tech companies of the future.

A whole sector revolutionized by tech is health care, which I didn’t touch on in this paper but has some amazing stories and companies.  Let’s talk biotech.  Can one buy a basket of these biotech stocks?  (SLIDE #27) Of course, and my favorite to do this is with symbol IBB which is the iShares NASDAQ biotechnology ETF.  It has 197 biotech companies and note that the PE ratio is 19.8, actually better than the general indexes.  It’s had a great run for several years so if you’re buying it now I would encourage using stops to protect the downside.  Or do what a few of my client’s do which is every time IBB goes through a big dip, just buy more of it.  If you exercised that discipline and bought shares through the correction of 2000 to 2002, and again in 2007 to 2009, you’ve done quite well.

Another more recent ETF that is interesting to me as it owns companies in alignment with principals discussed in this paper, trades under the symbol ROBO. (SLIDE #28)  This is the ROBO Global Robotics and Automation ETF.  It owns 88 different companies and interestingly enough sixty percent are based outside the US.  The average PE ratio of the holdings is 29.  Yes, that’s a high P/E but it got here because it has appreciated 51% in the past 12 months.  Like IBB, if you buy this, use stops to protect your downside.

Bitcoin (SLIDE #29)

We finally have made it to our discussion of bitcoin. After doing quite a bit of reading and watching YouTube videos on bitcoin, I realized I wasn’t going to do the topic justice and I would probably spend more time confusing than informing you.  So instead I’m offering what I found was the best YouTube clip as an introduction to bitcoin. It’s about five minutes long and then you can draw your own conclusions if this is the currency of the future, or just a fad.

Run clip

Okay, are you more informed?  Enlightened?  Still confused?  So how did I answer the student who asked about this, and would I answer him different today?

I told him that I would be very cautious because I’m not comfortable with the underlying value of the investment.

I went on to explain that every true investment has some value behind it whether real or implied and let me explain that difference.

Real value is something you can touch like real estate or a barrel of oil or gold.  Commodities are that way.  Some investment are a promise, meaning just like you can lend five dollars to a friend you can lend your money to the federal government, or local agency, or corporation and they will pay you interest until they give you back what you loaned them.  That’s a bond.  Is stock just a piece of paper?  No, it’s part ownership of the company, and more specifically its future profits to be paid in dividends or price appreciation as profits grow.  The furthest leap of faith is US currency, which used to be backed by gold, but now is backed by the full faith and credit of the United States.  Our currency has printed upon it, In God We Trust, and while the faith based side of me likes that, it’s more important to me the holder of that currency believes in that full faith and credit of the United States, despite what God they pray to, because our government printed that money and back it, not God.

The point is every true asset has some value backing it whether real or implied. I offered to the young man that day because I wasn’t comfortable with what actually backs bitcoin, I would be very cautious of it now.

After what I’ve learned about bitcoin, would I give him the same answer today?  Yes, I would.


I appreciate you taking this journey with me today as we touched on technology impact on certain companies, industries, capital markets and even stock indexes.  If you are the investing type, hopefully you got some ideas with the caveat of protecting yourself.  As for bitcoin, time may prove me wrong, but it sure smells to me like the tulip bulb mania in the Netherlands in the 1600’s.

By the way if you didn’t like my paper I’m the one that wrote it and delivered it so you can talk to me afterwards.  However if you liked this consider letting the young man know who inspired it.  The challenge is, he’s 18.  Most 18 year olds don’t have or use a physical mailing address, and your email will go to spam because he doesn’t know you.  I can give you his cell phone number, same as email, with caller ID likely he won’t take your call.  But you can text him.

(SLIDE #30)  Welcome to the Brave New World.

Neal A. Waner

Born in Inglewood California in 1962, at age two months Neal’s family moved to Big Bear Lake.  At age five the family built a small home on a meadow just east of the water line.  When the snow melted from the great winter of 1969, there was now a lake where once there was a meadow.  Soon after the meadow turned into lake, the houses that sprung up around the modest Waner homestead were mostly massive homes for weekenders.  At a young age Neal asked his mom why these people had such big houses and he never saw them working. She responded, “They live off their investments”.  “What are investments?” Neal asked.  “Well”, she responded, “it’s like a big pile of money so large it makes money all by itself, and that’s what they live off of”.  That idea of money making its own money was fascinating to that little boy.  So that’s what the boy studied, initially for fun, later in college, and now over 30 years as a career.

Neal graduated with a degree in finance (emphasis in Financial Services) from San Diego State University in 1985.  He went on to receive his CFP (Certified Financial Planner) designation from the College of Financial Planning in Denver Colorado in 1987 and his MBA from the University of LaVerne in 1995.  With 32 years in practice he has received eight licenses or designations.  He is a partner with the financial planning firm of Stout Payne Waner located in Redlands.  Neal’s niches include endowments, foundations, small company retirement plans and Trusts.

An avid community volunteer, back in his hometown of Big Bear Lake, in 1998 Neal established the Steven G. Mihaylo Big Bear High School Education Foundation and has chaired it since inception.  The SGM BBHS foundation presently distributes just over $130,000 annually in scholarships and mini grants from earnings from its $2.5 million endowment.  Back in Redlands Neal has served as board member and past president of the YMCA of the East Valley and the Redlands Rotary Club.  He served as board member and treasurer of the Redlands Community Foundation.  He has helped a number of nonprofits in fundraising efforts including the AK Smiley Library, the Redlands Symphony, Fellowship of Cristian Athletes, the Redlands Ladder Truck Campaign, the Grayback District of Boy Scouts, and Youth Hope to name a few.  Neal’s latest boards to join are Children’s Fund, where he currently serves as Board Chair, and Redlands Community Hospital, where he serves on the board, as well as the Finance, Investment, and Governance Committees.  Neal is Moderator of the 1st Congregational Church of Redlands.

In public office, Neal served as a Trustee for the Redlands Unified school district for 13 year from 2003 to 2016, while serving as President of the Board three times; 2006, 2010, and 2015.  In 2010 he was appointed by the San Bernardino County Board of Supervisors to serve as trustee for SBcera, the $9.8 billion defined benefit retirement plan that serves just over 32,000 members in San Bernardino County.  For the past two years Neal has served as the Chair of the Investment Committee.

Neal and his wife Joyce live in Redlands with their three children, kind of.  Jocelyn is at home but for only a few more months until she is married this coming June.  She is a reading intervention teacher at Franklin Elementary school.  Tyler is finishing his junior year at University of Arizona in Tucson studying Economics and Finance.  After graduation, he plans on joining dad’s firm.  Emily in in her freshman year Colorado Mesa University in Grand Junction.

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CNBC article 3-9-17 (Lauren Thomas)