Watch out for the bubble

“A nation that forgets its past has no future”

These were the words on a 20-foot-long banner that “Mr. Slick, my high school history teacher, was carefully pinned across the width of the classroom all four years I had lessons with him.

“That doesn’t make sense at all,” I thought when I first read it at fifteen. “The past is just a soft black-and-white era with large raw steam-powered factories and tragic wars with brutal low-tech weapons. The future it is a land of ever more brilliant technology and a peaceful society than the one I sit in today. ”

It was only gradually over the next thirty years that I realized what Mr. Slick’s banner was really aimed at. And now I see that wisdom was really worth 20 meters of classroom space, and its consequences are huge both on your own bank account and on our entire world. For the banner really says this:

The good news is that you can use this lesson right away because we are currently going through one of these moments. I can say because of the number of people asking such questions:

“Hey, MMM, I know you’re an investor in index funds, but what do you think of Gamestop? In Crypto? I see these things shooting into the sky and I’m afraid they’ll let me go! Should I invest? “

Meanwhile, financial news that I should being a boring place for board appointments and dividend adjustments, it began to sound like a thriller written by an aspiring novelist who is still in high school. Recent stories include:

A bunch of kids on Reddit formed a gang called “Bet on Wall Street”To manipulate stock prices in a permanent set of draw and dump schemes. Like the golden age of financial gangster activity in the 1920s that helped cause the Great Depression!

The last time this happened, we learned from our mistakes. In 1934, the Securities and Exchange Commission was established to help regulate stock exchanges, making things like price manipulation and insider trading illegal.

But this apparent contradiction with previously enacted laws was unusually absent in most financial reports. The SEC is out of fashion now, and it is popular among some crowds to belittle it – perhaps in part because of the example of a particular role model.

Instead, we get positively designed interviews with the boy’s CEO of the Robinhood stock trading app, who tells us that this behavior good, because it comes from little boy.

That’s right – we can finally fight the crunchy elite on Wall Street and play stock speculation (and manipulation) plays on equal terms!

Similarly, pieces of computer data known as “cryptocurrencies” continue to receive widespread enthusiasm and faith from similar fans, along with anger foaming into the mouths of anyone who disagrees with the idea of ​​placing speculative bets on their future prices (including with me). ). For Crypto fans, you’re either with them or you “don’t understand”.

They ignore the obvious and most important third option, the absolutely critical perspective that any expert in any field, including investment, has in abundance: “I may be completely wrong about that.”

A true expert learns the big picture, explores all sides of the argument, and takes a humble perspective. Experts invest their energy in further learning and living by example, instead of participating in battles on Twitter.

Real investment does not bring exciting news

To people who have no view of history, this current fly seems exciting and perhaps like a “new normality”. Simply open a stock trading account and grab a crypto wallet, then quickly enrich yourself with wild bets on recent fashion flies and double your money every month.

The people who play this game are called investors, but in reality, the whole situation is just an ancient game of stock speculation based on price triggers – which is just another form of gambling.

Stock speculation is a more shitty version of actual long-term investing that we’ll cover in a minute: with speculation, you get big ups and incredible downs. In the end, you can become a millionaire or bankrupt, and the main dividing line between the two is your happiness.

When you combine the results of all the participants in the exchange and calculate them on average, you get an approximate performance index. But speculators will pay higher taxes and transaction costs, allowing index fund investors to make progress.

If the dangers increase, people who are the happy side of this hesitation (for example, people who have all their wealth in Tesla shares or cryptocurrency or NFT day) will attribute their success to skills that lead them to become more confident and double. without being aware of the pointless risks.

They blow their success into the world, while those who have lost money remain less vocal. When the tide inevitably passes, the “winners” get stuck naked in the mud and lose much of their profits because they have failed to diversify and lock them up.

Because of all of this, a series of giant, silly bubbles are currently forming in the financial world that seem to be none other than the elderly. brave enough to wonder. And it leads to the next round of natural human behaviors, into which everyone falls – unless we are lucky, those who have already seen it all.

Bubble Hype Cycle

1. Someone decides to think that the price of something should go up. They share their story of why this should be.
2. This story catches on and gains influence, so people start buying the item and the price really goes up.
3. Other people notice “excellent performance” and also accumulate. They believe and reinforce the story of the origin from # 1 above.
4. The more this happens, the more it happens. The stakes have become very high for people who have pettiness now, so they reinforce their beliefs with religious zeal (and personally attack anyone who disagrees with their thesis.)
5. Newspapers document this circus without skepticism, which gives it credibility. That leads even more people to accumulate for fear of delay.
6. As previous expectations are exceeded, experts are inventing new, plausible reasons why this new price is justified, instead of just admitting that it is a bubble.
7. Eventually, the cycle ends and everything crashes back to the ground. Whoever was smart enough to sell works well, everyone else loses.
8. The most important thing is: pure effect all of this bubble behavior was mostly just a redistribution of money from later customers to previous customers.

So what is the alternative?

There is an alternative to speculation and bubble riding investment. And while I was discussing the difference with my son on a walk today, he came up with a really nice analogy:

A stock speculator is like someone who notices that the weather is warming up in March and that the trend is continuing and even accelerating in April and May. By August, they had already sold their winter coats and boots and were stocking up on bikinis and flip-flops and shouting at everyone to you haven’t seen anything yet, this trend is just beginning!

The investor is someone more spicy. These are all year after year, decade after decade and so they know what comes after summer. Therefore, the investor chooses a portfolio of clothing that serve a purpose. Some of these clothes provide warmth in winter, others are great for the beach, and all with timeless style and durability.

In other words: a investments is something that brings you value (and possibly does something good in the world as well) and produces products, services, and potential dividends that would be worth keeping for a lifetime even if it should never be sold.

And as a side note, a crypto speculator is someone who says the whole idea of ​​“fiat clothing” is outdated and we should collect shiny plastic frisbees instead. Therefore, they dedicate all their salary to accumulating them, and they completely neglect their clothes. When a fly gets caught and shiny plastic frisbees become more expensive, they take this as a confirmation of their “investment” theory.

They then go on Twitter and demand that Mr. Money Mustache apologize to his followers for telling them that speculating on future Frisbee prices is not a good idea.

Just stay calm and keep investing

Despite all this noise and all the penny in stock prices, the real investor’s plan can remain stable throughout the seasons. I know there will be an accident over time, but as mentioned in my pretending prediction of The impending recession, I also have no idea when it will be.

And even when an accident happens, you never know how long it will take. A year ago, world stock markets collapsed in a great panic from the Covid era. I ran a Twitter poll to see how long people thought it would take. As many as 75% of us thought it would be at least two years before stock prices returned. Being an incurable optimist, I also guessed for a year, and the correct answer was even quicker: five months.

But again, I could also be completely wrong.

You can never predict exactly which direction the wind will blow, when the bubbles will burst, or even which companies that are currently overpriced will eventually grow into their valuation. The only thing you can be sure of is that financial history runs in cycles, just like the seasons, and you will do well if you have your closet full of reasonable clothes and go there and enjoy them on a daily basis.

Further reading:

Last month, NPR shared a nicely argued view of betting mania, as they often do when the rest of the world goes crazy: Gamestop Mania is unlikely to happen again. Here’s how to invest wisely.