Beware of the Bubble
[ad_1] “A Nation Which Forgets Its Past Has No Future” Those were the words on a 20-foot-long banner that “Mr. Slick”, my high school history teacher, kept carefully pinned across the width of his classroom for the entire four years I had classes with him. “That makes no sense at all”, I thought to myself when I first read it at age fifteen. “The past is just a fuzzy black-and-white era, with big crude steam-powered factories and tragic wars with brutal low-tech weapons. The future is a land of ever-glossier technology and a peaceful society like the one I’m sitting in today.” It was only gradually over the next thirty years that I have come to realize what Mr. Slick’s banner was really getting at. And now I can see that the wisdom really was worth 20 feet of classroom space, and its implications are big on both your own bank account and our entire world at large. Because what the banner really says is this: “Don’t be an Ass: Learn from the Past.” Human nature never changes, so we are bound to repeat our past mistakes. Unless we are smart enough to see the seeds of these same mistakes in our present – and not repeat them. Read the big books (and podcasts) that cover the longer arc of history. Or at least learn from our elders who are still around to teach us right now.” The good news is that you can put this lesson to work immediately, because we are living through one of these moments right now. I can tell because of the number of people asking questions like this: “Hey MMM, I know you’re an index fund investor, but what do you think about Gamestop? And Crypto? I see these things shooting sky high and I’m afraid of being left out! Should I invest?” Meanwhile, the financial news, which should be a boring place of board appointments and dividend adjustments, has started sounding like a thriller written by a budding novelist who is still in high school. Among the recent stories: A bunch of kids on Reddit have formed a gang called “Wall Street Bets” to manipulate stock prices in an ongoing series of pump-and-dump schemes. Just like the golden era of financial gangster activity of the 1920s that helped cause the Great Depression! Last time this happened, we learned from our mistakes. And in 1934, the Securities and Exchange Commission was created to help regulate stock markets, making things like price manipulation and insider trading illegal. But this obvious clash with previously accepted laws has been strangely absent from most of the financial reporting. The SEC is out of style now, and it’s popular among certain crowds to disparage it – perhaps in part because of an example from a certain role model. Instead, we get positively framed interviews with the boyish CEO of the Robinhood stock trading app, telling us that this behavior is good, because it’s coming from the little guy. “We stand in support of you, our customers,” Robinhood co-founder Vlad Tenev tweeted. “Democratizing finance for all means giving more people access, not less.” Right – finally, we can fight back against the crusty Wall Street Elite and play the stock speculation (and manipulation) game on a level playing field! Similarly, the chunks of computer data known as “cryptocurrencies” continue to receive widespread hype and religion-like devotion from their fans, coupled with mouth-foaming anger towards anyone who disagrees with the idea of placing speculative bets on their future prices (myself included). To Crypto fans, you are either with them, or you “don’t get it.” They neglect the obvious and most important third option, an absolutely critical piece of perspective that any expert in any field, including investment, has in abundance: “I might be completely wrong on this.” A true expert learns the big picture, researches all sides of an argument, and adopts a humble perspective. Experts put their energy into further learning and living by example, rather than participating in Twitter battles. Real Investment Doesn’t Make Exciting News Headlines To people who lack the perspective of history, this current fad seems exciting and perhaps like the “new normal”. You simply open a stock trading account and grab a crypto wallet and then just quickly get yourself rich by placing wild bets on recent fads and doubling your money every month. The people playing this game are calling themselves investors, but in reality this whole situation is just the age-old game of stock speculation based on price momentum – which is in turn just another form of gambling. Stock speculation is a shittier version of actual long-term investing, which we’ll cover in a minute: with speculation, you get massive highs and crushing lows. You can end up a millionaire or bankrupt, and the main separator between these two is your luck. When you combine the results of all stock market participants and average them out, you get roughly the index performance. But speculators will tend to pay higher tax and transaction costs, allowing index fund investors to pull ahead. Further compounding the hazards, the people who are the lucky side of this teeter totter (for example, people currently holding all their wealth in Tesla stock or the cryptocurrency or NFT of the day) will tend to attribute their success to skill, which leads them to become ever more confident and double down without realizing the preposterous risks involved. Congratulations Jason! As someone who retired 16 years ago at age 30, I’d suggest some diversification. Why bet everything on such a volatile rocket ship, when you’re already set for life many times over? They trumpet their success to the world, while those who have lost money tend to remain less vocal. When the tide inevitably goes out, the “winners” are stuck standing naked in the mud, and they lose a large portion of the gains because they failed to diversify and lock them in. Because of all this, there are currently a series
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