Bubbles, bubbles, Toil, and Troubles. Another Rewrite
I’ve rewritten this essay three times now since the beginning of January. I started out hoping to write something cogent about all that we’d been through during 2020. But then 2020’s insanity began to bleed over into January, and I wanted to consider the newest absurdity. So I’m going to try and hustle to get this one done fast, before I have to rewrite it again.
We are in such a forehead-slapping moment of our nation’s history. Millions of people believe preposterous things and social media helps deliver their delusions. Didn’t we used to say: “Don’t believe what you read on the internet”? Well, so much for that truism in today’s world of facts-aren’t-facts so long as they are your facts and not mine. We could argue for days about the sociopolitical implications of all that is going on right now. But I’ll speak here only about the implications for investors. During unsettling times, I try to take a step back and reconsider my fundamental beliefs. And it is from this foundation that I try to make sense of what’s happening and what, if anything, needs to be done.
I have a book on the shelf in my office that chronicles some of the major speculative bubbles going back to the sixteenth century. There’s something very human about this process. Each time, the circumstances are new and different; and each time the circumstances are the same. There’s a new way that is much better and savvier than the old. Stories abound of dramatic and easy wealth. Those who are in the know have a period of glee and sanctimony about their prescience and wit. And then comes the pop. The narrative turns to those who’ve been ruined after becoming seduced by the prospect of easy money. Many who made it big, lose it all. Others only lose.
So are we in a bubble today?
In some areas, it sure seems like it. In other areas, not so much. The areas that seem too good to be true, probably are. Of course, I might be wrong. But here are some of the things that seem to me like signs of caution rather than good opportunities: tech IPOs that go ever higher in the hours and days after the offering; the dark unregulated world of cryptocurrencies; stocks in failing or flailing companies that suddenly gather the loosely (or not so loosely) coordinated and fervent attention of small (and not so small) buyers.
In other areas, I’d say not yet. Though some sectors of the economy did well throughout 2020, there are many other areas that are still in recession. For sure, some of the larger tech stocks, the ones that support the “stay at home” economy, seem overvalued. But stocks in many other areas of the economy, such as leisure, travel, retail, entertainment, industrials, corporate real estate, and more have their recoveries still ahead of them.
With the likelihood of government stimulus and an accommodative Fed, I think it’s likely that we see performance even out across sectors. This seems like normal market rotation and fluctuation. It doesn’t seem like a broad-based bubble about to deflate. At least that’s what I think.
What else do I think
At least, what do I think I still know? My main context is that we are living in a period of transformation. Society is evolving. With so much change, what stays the same?
- Bubbles Pop. There have been a lot of people who’ve claimed new paradigms to justify unrealistic valuations. Overvalued is one thing, absurd valuations are another. When everyone is giddy at the prospect of fast riches, I get nervous.
- History Rhymes. Stock exchanges have been around for centuries. Whatever is happening today is new in some ways, but is also the same as what happened before. Looking to history can offer context. Some are claiming that the Biden policies will usher in a period like the Roaring 20s. I find this unlikely. I’m thinking the 1960s might be a better reference.
- Human Nature. Why does history rhyme? Because the constant throughout it all is human nature. At the end of the day, fear and greed are at the core of speculation. Short-term swings are expressions of this, and long-term investors should just stay away.
- Investment vs Speculation. Speaking of investors, never confuse which one you are. Speculators take on a lot of risk in the hope of making big gains, fast. Speculation is like gambling and can have addiction-like impact. Some people make big money doing this, but many lose more than they can afford to. Investors, on the other hand, make careful choices about where to deploy their precious capital, and then wait for years or decades to let things play out.
- Trends. Over the long-term, the big trends are usually what drive investment returns. For example, technological innovation, migration patterns, income disparity, climate change, health outcomes, resource abundance versus scarcity, and so on. If you want to make money the old-fashioned way, try to figure out what might happen in twenty or thirty years from now.
Other Rants
I never post on social media, or get in anonymous fights in online forums, or troll people I think are deplorable. But if I did, here are some of the topics I’d rant about:
- The earth isn’t flat (partisans of this delusion are as adamant as believers in _____ fill in the blank).
- Not everything is up for debate (some things are true, even if your side would prefer another outcome).
- There isn’t necessarily a kernel of truth in every conspiracy (people can be endlessly gullible).
- Beliefs aren’t facts (just because you really want something to be true, doesn’t mean it’s in fact true).
- The simplest explanation is usually the right one (Occam’s razor, from the 13th century means that we humans have been susceptible to delusion for centuries)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including loss of principal.