MSR in the Media | Lily Taft of Main Street Research: “Be able to stomach volatility”

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Over the past few years, the Cryptocurrency industry has been making headlines nearly every week. Many people have gotten very wealthy investing or leading the cryptocurrency industry. At the same time, many people have lost a lot investing in the industry. In addition, more people have been scrutinizing the ecological impact of crypto mining, as well as its potential facilitation of illegal activity. What is being done and what can be done to address these concerns?

In this interview series called “5 Things You Need To Understand In Order To Successfully Invest In Cryptocurrency” we are talking to leaders in the cryptocurrency industry, as well as successful investors, who share insights from their experience about how to successfully invest in Cryptocurrency.

As a part of this series, I had the pleasure of interviewing Lily Taft.

As a Portfolio Manager at Main Street Research Wealth Management, Lily adds depth to her team’s research process across both the investment management and trading teams. Lily serves on the Investment Policy Committee, analyzing client’s specific asset allocations, tactical sector exposures and individual security selections. Lily also leads Main Street’s ESG (Environmental, Sustainable, and Governance) and cryptocurrency research efforts.

Thank you so much for doing this with us! Before we dig in, our readers would like to get to know you a bit. Can you tell us a little about your backstory and how you grew up?

I grew up in Marin County, always spending time in nature. I was fortunate enough to spend time in the Headlands, Lake Tahoe and Mount Tamalpias. California is truly an extraordinary place to grow up — not only was I surrounded by beauty but I was also surrounded by the best of the human engineering efforts in Silicon Valley. My father also works in asset management and inspired my passion for investing. I love analyzing new innovations, start-ups, stocks and crypto through my environmentally sensitive lens.

Is there a particular book, film, or podcast that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

The new documentary, Savvy, resonated deeply with me — it’s all about women and investing. Everyone is talking about the gender pay gap, but nobody is talking about the gender investing gap! We need to get young women into the stock market. They can never keep up with their male counterparts without taking comparable levels of risk.

Is there a particular story that inspired you to pursue your particular career path? We’d love to hear it.

My father took an incredible risk buying Bank of America stock in December, 2008 — essentially the bottom of the financial crisis. That risk ended up paying for my college education and I could not be more thankful.

Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?

I think it was probably my first month working in Wealth Management and I spelled a clients name wrong! Luckily it was an unusual Greek name so she was used to the mistake, but I could not have been more embarrassed! Attention to detail is essential in everything from trading and model construction to client communication.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

My colleague Benjamin Armellini helped me accelerate my career immensely. Ben pushed me to be better. He never told me my ideas were wrong, but he asked tough questions and made me think critically about my processes and communication style. He went so far as to edit my emails for me! It’s amazing how subtle differences in language can make such a large difference. I never focus on what I am saying, only on what others are hearing. You can easily read a room to tell if people are understanding complex topics. If they aren’t, you need to immediately adapt.

Are you working on any exciting new projects now? How do you think that will help people?

I’m working on a huge “Next Gen” campaign. It’s focused on engaging younger investors and getting them interested in the stock market. The most powerful force in investing in any asset class is time. Young people have the most time, which allows for the most growth. Even marginal improvements in the quantity and quality of investing for young people can have huge impacts on their ability to retire sooner, travel, give to charity, or meet any financial goal.

Ok super. Thank you for all that. Let’s now shift to the main focus of our interview. The cryptocurrency industry seems extremely dynamic right now. What are the 3 things in particular that most excite you about the industry? If you can, please share a story or example for each.

First things first, crypto is powered by blockchain technology, although blockchain can have many uses. The distinction between crypto is important yet subtle. I am excited about the application of blockchain technology by current business as they continue to innovate and improve their services. For example, pharma company Eli Lilly is using blockchain to track prescription drugs and better halt the flow of counterfeit medicines. Live Nation Entertainment, the parent company of Ticketmaster, envisions a future where fans buy Non-Fungible Tokens (powered by the blockchain) as mementos from concerts. These “real life” applications of blockchain technology are extremely valuable.

I am also excited about decentralized finance, or DeFi. Traditional financial institutions, mainly banks and brokerages, have historically made money by connecting buyers and sellers and taking a small spread in between — even if that spread is a fraction of a penny. DeFi uses technology to cut out the middleman. I envision a future where buyers and sellers connect directly. People are already comfortable interacting directly with strangers in online platforms such as Facebook marketplace, Uber, and Airbnb. Finance is one of the “last frontiers” to be revolutionized in this way.

Third, contrary to most, I am excited about regulation surrounding cryptocurrency. Lack of clarity from a regulatory standpoint is holding many people back from getting involved in the space. Railroads were a mess before anticompetitive regulation, and the internet as well. When done right, regulation can help an industry mature and gain more traction.

What are the 3 things that concern you about the industry? Can you explain? What can be done to address those concerns?

There is general confusion related to cryptocurrency and how blockchain technology works. The technology is so complex that you need a college degree in computer science to fully understand it! I think people felt the same way about the internet when it was first emerging, though, and I believe society’s general understanding will improve with time. I do think we need to seriously increase the amount of time spent on computer science in public schools, even at the middle and high school level.

Second, even though I am excited about regulation, I am also concerned that we could seriously hamper the industry’s growth if the regulation is not done right. We don’t want to kill the industry; we just want to tame it with policies. Again, education for our elected officials can remedy misinformation and help them appropriately regulate crypto.

Lastly, abnormally high price volatility is impeding adoption rates. The average investor is emotional and does not want to see such high fluctuations in their earnings day-to-day. More institutional adoption by large pension funds, endowments, foundations, and even sovereign wealth funds should help the asset class mature, increase liquidity, and smooth volatility. I believe we will see this in our lifetimes.

What are the “myths” that you would like to dispel about cryptocurrency? Can you explain what you mean?

Every so often clients are very concerned about a massive existential change in our monetary system. They ask me, “Is the US Dollar going away?!” I have to calm them down and explain how crypto fits into our modern society. Crypto is gaining traction at amazing rates, but we are nowhere near a complete overhaul of our current money, because our current system is still functioning relatively well. Yes, we have historic levels of debt, the labor market is not healthy, and inflation is coming back, but we are still nowhere near a complete system collapse or crypto overhaul.

How do you think cryptocurrency has the potential to help society in the future?

To be completely honest, I think we are too early in crypto to fully understand how it will help society in the future. In 1999, nobody knew the full potential of the internet, let alone smart phones. Back then people could see transformative technology, but it was so hard to say what the possible benefits were. Some say that cryptocurrency will allow for less reliance on global central banks and “cut the fat out” of our financial system. I’m not so sure. I think entrepreneurs will discover possibilities we haven’t even pondered yet.

Recently, more people have been scrutinizing the ecological impact of crypto mining. From your perspective, can you explain to our readers why the cryptocurrency industry is creating an environmental challenge?

Yes, it takes an incredible amount of energy to power the computers that process the code that cryptocurrency relies on. Any modern business that uses computers, cloud networks, or electric vehicles requires power. An interesting report showed the approximate terawatt hours used by bitcoin versus the entire banking system. If you add up all the power required for ATMs, credit card networks, financial data centers, and offices, the banking system actually uses much more energy than cryptocurrency. I think the ecological problems our society is experiencing is much bigger than crypto — we must make sure the power we are using is renewable, no matter what the power is being used for. If you’re mining for bitcoin using solar, you aren’t doing any damage. There’s also a lack of data about the sources of energy — but the one thing we do know is that eventually we need to transition banking, crypto, and our entire society to renewables.

From your perspective what can be done to address or correct these concerns?

The problem is that nobody is going to get rich by solving the global warming problem. We need massive government subsidies, much more than we currently have, to push society in the right direction.

Recently, more people have been scrutinizing cryptocurrency’s impact on illegal activity. From your perspective, can you explain to our readers why cryptocurrency, more than fiat currency, is seen as an attractive choice for criminals?

Yes, historically crypto has been attractive to criminals because they can move crypto across borders from their laptop instead of having to transport physical cash. But in recent years, crypto crime has plummeted. The blockchain that powers crypto is like a type of online public ledger of transactions, which is very bad for criminals who are trying to hide these transactions. The justice department was even able to recover 2.3 million dollars in bitcoin extorted from the colonial pipeline. More people are leaning about blockchain technology, and it is making it very hard for criminals to hide.

From your perspective what can be done to address or correct these concerns?

The crypto world is very democratic. Everyone can see the code, everyone can see the transactions. I have faith in the longevity of crypto, despite illicit concerns in the near term. If massive amounts of people get involved crypto, the better “self-regulating” it will be. Kind of like in software development how “given enough eyeballs, all bugs are shallow.”

Ok, fantastic. Here is the main question of our interview. What are “The 5 Things You Need To Understand In Order To Successfully Invest In Cryptocurrency?” (Please share a story or example for each.)

  1. Be able to stomach volatility — most of it is normal. A healthy price movement in bitcoin can be up to 22%, up or down. Most investors aren’t used to such a wide trading range and easily get spooked. Selling into weakness is a very common mistake, but “hanging on to the roller coaster ride” is part of the crypto journey.
  2. Know the difference between a centralized and decentralized exchange. There are a couple different ways for individuals to access crypto, but there are huge differences between exchanges. For example, Coinbase is a centralized exchange that relies on private infrastructure to match buyers and sellers on their own servers. In contrast, decentralized exchanges such as Uniswap bring buyers and sellers directly. Transactions are carried out with open smart contracts and users maintain full control over their cryptocurrencies throughout the trading process. There are pros and cons to both, but knowing why type of exchange you are trading on is important.
  3. Understand that crypto trades 24/7, 365. I once went to bed and woke up the next day with a Coinbase account balance that was about half of what it was previously. I was like, “wait, what happened?!” Turned out China banned bitcoin mining when I was asleep. You have to be prepared for that kind of thing!
  4. Anyone with a computing power and the right knowledge can create their own cryptocurrencies. There are not the same barriers to entry as the stock market. Investors need to complete due diligence on any new, niche coins they are investing in. For example, Dogecoin was a recent coin of interest, although if you look beneath the hood, Dogecoin’s underlying technology hardly makes a viable case for serious investment.
  5. It might not be suitable for you. I know certain clients of mine would not want to endure the volatility, and simply don’t need to. There are plenty of other great investment opportunities in the good, old fashioned stock market! The road ahead of crypto also might be a long and bumpy one — older investors or investors that are barely meeting their financial goals may not have the flexibility and time horizons required for an investment in crypto.

What are the most common mistakes you have seen people make when they enter the industry? What can be done to avoid that?

Every new investor makes the mistake of buying at an all-time high at some point. It’s tempting to think, “it just keeps going up, I better buy now before it’s too late!” But patience has served many wealthy professionals well. I try to remember the rhyme, “buy low, sell high, take your piece of the pie!” Few professionals will tell you to buy high and sell higher. I think wall street’s age-old mantra applies to crypto too. If you do end up buying high, try to stay the course and hold on tight!

Do you have a particular type of cryptocurrency that you are excited about? We’d love to hear why.

I’m a traditionalist; I like Bitcoin and Ethereum. There’s probably value in smaller coins too, but the risk return dynamic isn’t as attractive to me. If any coins are going to gain institutional adoption, it is going to be Bitcoin and/or Ethereum. Those types of capital inflows will significantly move prices.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. 🙂

I would inspire an immediate halt to all carbon emission and shift towards renewables. I think climate change is the biggest problem facing our generation. The UN’s recent climate report sounded “code red” and hardly any changes have been made since. The “new normal” is flooding, fires, and pandemics. We must put an end to the use of fossil fuels as soon as possible.

We are very blessed that very prominent leaders read this column. Is there a person in the world, or in the US with whom you would like to have a private breakfast or lunch, and why? He or she might just see this if we tag them 🙂

I’d love to get to talk to Whitney Wolfe Herd, CEO of Bumble, or Katrina Lake, CEO of Stitch Fix. They are the two youngest women to ever take companies public. As a young woman myself, it is so inspiring to watch them celebrate their successes and continually work hard at something they are so passionate about.