> "The willingness to believe crazy things increases when it feels like the world is dangerous and falling apart."
People often overlook the socio-economic context of Tulip Mania, for example - Europe was being devastated by the Thirty Years War (60% of some populations killed), there was another outbreak of bubonic plague (people stopped showing up to the bulb auctions in Haarlem), etc. With death so close to so many, there was a sense of there being little to lose by fatalistic risk-taking.
The disruptions we're facing now, while they pale into insignificance, are still arguably the biggest since the Second World War.
But what is particularly concerning now, is the growing group of people who would rather put their trust in shady cartels and oligarchs than their governments, and the increasing numbers of people who think they have a have a vested (financial) interest in seeing their governments fail.
Desperate times call for desperate measures. Most of that growing group of people see their lives getting materially worse over time. It makes sense that they’d be desperate and incurious enough to hitch their wagon to a strongman figure who says the things they desperately want to hear. The governments of the western world have done a pretty bad job on the whole with making the lives of the people better. Reversing that trend would do a lot to help solve the problem (few people want to overthrow governments when they are safe and content).
Oh please. I watched some Dutch historical TV footage over the last week. The years after WWII were atrocious, there was shortage of housing, clothing, etc.
The 70s and 80s were not without problems either ( I vividly remember the 80s ). Existential threat, bad economy, high unemployment.
>few people want to overthrow governments when they are safe and content
People who are safe and content don't make good consumers. It's in the best interest of capitalism to keep us tired and afraid so "the market" can sell us solutions:
Reminds me of the infamous quote from Deleuze & Guattari’s Anti-Oedipus:
“The death of a social machine has never been heralded by a disharmony or a dysfunction; on the contrary, social machines make a habit of feeding on the contradictions they give rise to, on the crises they provoke, on the anxieties they engender, and on the infernal operations they regenerate. Capitalism has learned this, and has ceased doubting itself, while even socialists have abandoned belief in the possibility of capitalism's natural death by attrition. No one has ever died from contradictions. And the more it breaks down, the more it schizophrenizes, the better it works, the American way.”
>the growing group of people who would rather put their trust in shady cartels and oligarchs than their governments
The 40+ years of Conservatives constantly vilifying government as a concept was designed to lead to exactly this situation, because they're the oligarchs that run the cartels and they're benefiting tremendously.
> Not enough speculation is as bad as too much speculation.
When every author of a blog is a genius, and spews such amazing pearls of non-wisdom.
While some degree of risk is required, undershooting gains is never as bad as losing everything, because you can continue to bet.
Author is plain mathematically wrong about how martingales work.
Optimism is never the "right" mindset. Better find some other way to be happy instead of believing untrue things.
Game theoretical and mathematically optimal strategies may exist, as well as ones robust to missing information.
I interpreted the author’s discussion of the “right” long-term mindset to mean that, in the absence of evidence to the contrary, it makes more sense to be optimistic than pessimistic about the future.
Personally, based on the past performance of humanity, I expect the long-term future of the globe to be better than the past. It’s based on informed speculation: Hans Rosling’s Factfulness is relevant here. Sure, we might obliterate ourselves with nukes or destroy the world with greenhouse gas emissions, but I’m not going to operate under the assumption that we won’t figure things out and that WILL happen.
As an investor, I share Buffett’s optimism about the future of America. Yes, we have many many fundamental challenges. Yes, it’s possible that, if you put all your money in a broad US market index today, your returns might be negative until a decade or two later. But I’ll continue to bet on America’s continued existence and success (albeit by picking assets I think are undervalued rather than the current price of the stock market).
In other words, I think it’s rational to optimistically speculate that (1) America will continue to be an economic powerhouse and (2) price will eventually converge to value for most assets.
>When every author of a blog is a genius, and spews such amazing pearls of non-wisdom.
When it comes to blanket advice on complex and nuanced subjects I vastly prefer the "do just the right amount of X" blogspam type non-wisdom to the "always do X, never do Y" internet comment section (Reddit is a prime offender here) brand of non-wisdom. Even if they're both unhelpful at least the former is technically correct more often.
I would bet, although it's very difficult to identify, that not a single long term successful investor is a pessimist. Much like startups you need to be very optimistic to succeed like Elon.
I put all my 401k into treasury bonds about a year and a half ago, for one simple reason: the market was no longer offering me rational prices for stocks. The market is trying to sell me a Ford Fiesta for 100k, and I’m not buying it. You can stand there and say, the value of a Ford Fiesta has gone up 10% a year for ten years, or whatever, and I’m glad that makes you happy but I don’t care. I’m still not buying a Ford Fiesta for 100k because if I’m not pulling my money out for 30 years, it doesn’t matter much what the year to year fluctuations in value are. I’m not speculating on market movements. I just want to get fair value for my money, and if nobody’s going to give it to me then I’m happy to put my money on a pile and sit on it. Eventually the market will turn and someone will offer me a fair deal, I don’t care how long it takes. I’ll take a nap and wait.
I know there’s a quote out there that says “the market can stay irrational longer than you can stay solvent” but that doesn’t apply in this case. I don’t need this money. It’s for later. I can stay solvent indefinitely. The market can go suck eggs. If it stays at this inflated level forever, I still haven’t really lost anything. If the cost of a Ford Fiesta goes to a million, well c’est la vie. But everyone knows that it isn’t actually worth that much so it seems like a dumb assumption to make that that will happen. Why would you just assume there’s always going to be a bigger idiot? You eventually run out of idiots and someone will come to me hat in hand and say, “...what about 15k?” and then I’ll get off my pile of money.
There’s value in the optionality of cash! I know there’s good reason to dollar-cost average (for someone who squirrels money away primarily into index funds) since it’s difficult or impossible to time the market... and the market tends to go up over long periods. But I don’t think it’s unreasonable for an indexer to carry more cash now. I’m not as extreme as you are (I just stop adding to my indexes rather than liquidating them), but the worst case is that I lose wealth to inflation. Best case is that, if market prices decline well past fair value, I can deploy capital. And, since I’m not solely an indexer, if I happen to see a particular undervalued asset while the market remains high, I can purchase it.
I wish there was some way I could just put money into a weighted bucket of every international currency in case one or a few of them inflate to nothing. That’s the only thing that worries me.
In my humble opinion, that might overcomplicate things without providing much in the way of risk reduction. Owning a basket of currencies might make sense in a world where, globally, only some central banks had loose money policies. But, at least right now, central banks are all printing money. If you’re a US investor like me, you might have inflation concerns, but if inflation occurs globally, I might do worse owning a basket of currencies than owning USD.
What would I do if I were concerned about inflation but wanted cash? I suppose this doesn’t help anyone who’s solely into indexing, and I know this locks up cash, but I’d look for unlikely-to-fail dividend-paying companies that are relatively protected against inflation and that are trading at relatively fair values. Essentially, you’d be saying “I don’t care if I can’t sell this stock for 10 years so long as the 4%+ current dividend yield ratchets up at or above inflation.”
Yeah, I’m not really interested in dip buying, because a dip only has meaning relative to some other peak, and I’m not interested in comparing prices with other prices, I’m comparing prices with real value. And I still felt like the market price of stocks was above what they were really worth. Needed to go down another 30 or 40 percent I think, to reach neutral pricing.
To use my Ford Fiesta analogy, if you come to me and say “this Ford Fiesta is only 60k! That’s 40 percent off! I would say you’re using a sleazy sales tactic on me, because it’s not worth 60k either. Comparing it with some other, even more outrageous price and then claiming that it’s therefore cheap is not something I’m going to fall for.
Ok, enjoy your treasuries, I’ll stick with dollar-cost averaging S&P 500. I’m sure your valuation models are better than Wall Street.
Hope the treasury yields moving up don’t wreck you, if yields move N%, then bond values move (N*years remaining)% down. Disregard if you buy individual bonds and hold until redemption.
That’s great and all. S&P 500 is a great passive investment. Just keep buying every month whatever the price for long enough and you will most likely hit 10% a year on average.
The problem is that you could lose money for 10 years. 1970-80.
Mindless buying S&P 500 is great but you might want to do better. Most people will do worse if they try to beat the index but some people will do 20% a year for as long as they keep buying good businesses at good prices.
I don’t think that’s true. For one, that dip lasted a very short time, which is atypical. Second, it wasn’t clear that the market fell below its value. Maybe the value of the market was 40% below its earlier highs.
“Buying the dip” is a bad strategy if it’s not paired with understanding value. Dips are sometimes temporary overreactions or part of a continued decline. Enron had a big “dip” soon after reaching its high. I suppose if you bought the dip then sold very quickly after, you’d make money, but you’d have to choose the right dip.
Oh, I didn't mean to suggest they're the same, just explaining why buying the dip isn't a good principal on its own. Something like VTI has the advantage that it's not going to ever be totally worthless unlike any one particular stock.
"Buying the dip" as a strategy only makes sense in hindsight. Say it's late 2007 and you have some cash. On Sep 28 of that year, the VTI was at $75.60. By April 2008, it had fallen over 12% to around $66. But it would still go down even more. Same thing as in early 2020: the market falls 5%... do you buy then? Once it fell around 30%, could you identify that as the "bottom" given the information you had at the time?
Have you considered the possibility of a crash up in asset prices (currency devaluation, negative interest rates). Cash wouldn't be so good in that scenario. I feel similarly about current market valuations and mostly hold cash-equivalents, however I've also bought a significant amount of otm call leaps on agriculture/metals funds to hedge a crash up scenario.
I feel like any model that is based on earnings during the covid era is going to have a few issues. When earnings fall simultaneously, combined with large stimulus, things will get pretty interesting.
I'm not saying it isn't overvalued, just that there needs to be more detai here than just "the P/E is historically high".
Of course the market can remain like this for years to come. Improbable but totally possible.
But imagine you are a rational individual and you look at an US centric index that tracks the total market and see that you have been in a 11 year bull market where it rose 300%.
Now you look at the ratio between the total market cap and the GDP (also know as the buffet indicator) and see that it's at historical highs and last time it was at this value was just before the last recession.
Sure... the craziness could go on fuelled by irrational optimism, negative interest rates and the feds printing money like crazy. It could and probably will for a while but is it irrational to be prepared for the potential crash?
> It could and probably will for a while but is it irrational to be prepared for the potential crash?
Depends how you are preparing for it. The governments are clearly ready to print as much money as needed to hold up asset prices. They have to, all their pension debt is riding on it, not to mention the politicians political popularity since many voters have large portions of their wealth tied up in these assets.
So when you say prepare for a potential crash, I can only assume that means the dissolution of the government, to the point where the currency is going to be useless. In that scenario, your preparation would be to have a network of resourceful individuals and guns and water and food and fuel.
But I don’t see how cash or treasury bills will prepare anyone.
One could buy leap otm put options. If there is a crash, they become very valuable. And if they are deep otm, they are not so expensive
On the other hand, I have started doing the opposite: selling short term otm put options. It is the wrong thing to do if there is a big crash, but if it only crashes a little, my options are not affected . Not sure if I should keep doing this.
I don't think this is right; you're thinking of buying a put. When you write (sell) a put option you are giving somebody else the right to force you to buy the underlying security at a given price floor. Should the equity fall below that price, you (the seller) are then obligated to spend the extra money over and above the market price to purchase the stock. Otherwise, the buyer won't exercise the option and you keep the fee.
Now I am no options trader, so if I've missed something (very likely) please correct me.
I talked about both ways. Either buy the shares and buy an option as insurance, or only sell an option for the "pennies"
In the first case, you can have unlimited profit if the stock goes up, a slight lose if it trades sideways, limited downside no matter how much it drops (or possibly profit, if you have a lot of options)
In the second case, the steamroller is not so bad. If I am forced to buy above the market price when the option gets exercised, that is still below the marker price at the time I sold the option. Thus it is better than the alternative -- buying shares rather than selling the options. Then there is limited upside, limited downside, and a profit if it trades sideways
With "very low chance at a high payout" bets you have to be very careful at various institutional and counterparty risks, as they often are correlated with those "very low chance" events. You may be left holding a winning lottery ticket that lottery organizer can't or won't cover.
> I can only assume that means the dissolution of the government
If I look at historic chart of the market, it goes back to around 1970, because that is the last time that the monetary system failed and needed to be reset.
While I am certainly on board with the idea that the dissolution of governments is possible; there are a wide range of possibilities if the US sacrifices the dollar. Currency collapses happens regularly in the grand scheme of things - but the same can be said about brutal wars.
> If I look at historic chart of the market, it goes back to around 1970, because that is the last time that the monetary system failed and needed to be reset.
What does it mean that the historic chart of the “market” only goes back to 1970?
PS: Warren has 140 billion sitting in cash right now. He just bought his own stocks because there weren't many opportunities left. The man has been around for 90 years and investing for 80 years.
I know we live in a time where youth is glorified and "old people don't understand the world" but I'm pretty sure he learned a thing or two.
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
If you own the entire company it's easier to weather market downturns. BRK prefers to own the entire company so they can allocate capital to the sectors than need it.
Yes but all those 76% where bought at what he believes were great / reasonable prices. So it's not like he spent 76% of the money at the peak and now has 34% waiting for the bottom.
I see it more like. "here I am with all this cash and there is nothing fairly priced to buy now but soon I might be getting great companies at discount prices".
I think he actually has less opportunities than smaller investors. He complains about that a lot.
He is managing a lot of money so he can only buy large cap companies. He frequently claims it's much easier to get a higher returns when you can buy all kinds of companies (big, med and small cap).
> How he got his initial money is not a particularly nice story of success...
Buffett has talked about looking for "elephant" sized acquisitions. Berkshire is so large that it becomes difficult to find good investments of a sufficient size to move the needle. As a smaller investor, I can buy portions of a few $1B market cap companies and make a difference in my portfolio. Buffett, even if he bought such companies outright at a 20% premium, would need to find about 100 of them.
> How he got his initial money is not a particularly nice story of success...
The actual purchase of the failing Berkshire Hathaway textile company perhaps (unless this is about Buffett doing something allegedly unethical)? The textile operation ultimately failed in the mid 1980s, but Buffett was able to, in the meantime, reallocate its cash flows to more promising ventures.
The buffet indicator doesn't hold true with zero interest rates. Even he said at one interview "if thee is unlimited money printing, stocks are extremely cheap right now". People are confused because they input one or two variables in their mindset instead of the true N variables in this complicated system. More of them think "oh, market cycles every ten years and now we have 12 bull? OK so time for dip". No, apparently it doesn't work that way.
I like the article. It describes my observations from previous BTC bubbles.
A point the author makes is that within a bubble, markets can turn irrational. And additionally that they can sustain this irrationality for some time.
I don't like this saying. People also say this about things they end up being wrong about, such as Tesla in 2013. Hell, given that economists predict 15 out of the last 3 recessions, people who say this are probably flat-out wrong more often than not.
So unless the saying comes with the interpretation "the market can remain seemingly irrational long enough to be right", it just reduces to "I disagree with what the market is doing right now, maybe it's a bubble, who knows".
I don't think the saying is really tied to any particular prediction. Surely there are times when you felt the market was behaving irrationally? The saying is a warning about taking action in such times. Because even if you are ultimately right, you may still end up a big loser.
I.e. the whole point of the saying is that it's not just about whether there's actually a bubble or not. You're also taking risk with how high it will go/how long it will last before popping. So a consumer investor may just buy stocks they think will eventually go up, and won't encounter major problems with that, but shorting just because they think something will eventually go down is a whole different beast.
That's fair enough. Prefacing it, as "even if you're right, the market can remain irrational longer than you can remain solvent" gets that point across better; that there's a dual risk in betting on the downside scenario.
When I hear people saying this, the subtext is usually that there is obviously an actual bubble that will pop someday. Rather than a warning, the statement is more of a joke about how stupid the market is.
Diversify your speculation, I think that's the best advice, and make sure you stay grounded, ie. have a base which won't really move much relative to potential hyper-inflation.
Can someone explain to me how the title is related to the content?
At first I thought it was an allusion to the mythical rational markets, but the content is so staccato, cryptic and Buddhist Koan-like that I was not able to make the connection...
I think my attempt at understanding it is tainted by what I expected it to be. I would be greatful for clarification.
The other guy's point is that even though it's true that everything is transitory it's not an argument against enjoying it, i.e. attaching value to it.
If a bubble can last "years and years", what's to stop it lasting 50 years or 100 years? If it lasts over 50 years then is it even worthwhile to make the distinction? The speculation surely will outlive you. It could become an intergenerational scheme like fiat currencies...
There is a point where the economy is no longer serving regular people, it's all focused on rich people. When that happens, speculation becomes the main purpose of the economy. Everyone is forced to participate in what is essentially a game for rich people... Kind of like Westworld.
And there is a point when the speculation is more than that. It's a scheme, it's a hack... Participants find ways to constantly bring new money into this scheme. Recruit new generations. Like a cult.
With a constant stream of new money entering the economy via bank loans and government spending, the economy we have today is already a centrally planned speculative scheme (having many of the bureaucratic characteristics of communism). People are either not smart enough to understand it or they have too much skin in the game to acknowledge it and it seems that the next generation won't be any different.
I'm surprised that people don't get it. I guess it's easy to think that the system is fair if you're on the receiving end of VC funding.
My experience of approaching VCs for funding is that they always say no. No matter how hard you persist, no matter how good the tech is, how good the team is or how much traction the product has or how big the opportunity is. It doesn't matter if you've accomplished the impossible. It's been easier for me to convince really talented engineers to work on my project for free for over 1 year than to convince a VC to invest even $10K in my project... That's how bad it is.
They will not only not fund me, they will fund my competitors (who will fail of course and be acqui-hired). The only things that matter at all are social connections; who you are, who your family is, where you are born. Success is a lottery and skill has nothing to do with it. It's just like if you're born in communism, you need to be friends with prominent communist party members if you want any chance of success. Nothing else matters at all. Skill is meaningless in a communist society.
People often overlook the socio-economic context of Tulip Mania, for example - Europe was being devastated by the Thirty Years War (60% of some populations killed), there was another outbreak of bubonic plague (people stopped showing up to the bulb auctions in Haarlem), etc. With death so close to so many, there was a sense of there being little to lose by fatalistic risk-taking.
The disruptions we're facing now, while they pale into insignificance, are still arguably the biggest since the Second World War.
But what is particularly concerning now, is the growing group of people who would rather put their trust in shady cartels and oligarchs than their governments, and the increasing numbers of people who think they have a have a vested (financial) interest in seeing their governments fail.