When Everyone’s a Genius: A Few Thoughts on Speculation
collaborativefund.com
collaborativefund.com
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.
The 70s and 80s were not without problems either ( I vividly remember the 80s ). Existential threat, bad economy, high unemployment.
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:
“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 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.
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.
FOMO is a major downfall of many an investor.
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 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 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.
“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.
"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?
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.
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.
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.
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.”
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".
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?
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
How he got his initial money is not a particularly nice story of success...
> How he got his initial money is not a particularly nice story of success...
Could you expand on this? I'm genuinely curious
> 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.
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".
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.
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.
What does it mean that the historic chart of the “market” only goes back to 1970?
https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
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.
Collecting pennies in front of a steamroller is a very high chance at a very low payout (with a small chance of a big loss).
Now I am no options trader, so if I've missed something (very likely) please correct me.
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
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.
The market can remain irrational longer than you can remain solvent.
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.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.
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.
The recent move of mainstream companies into bitcoin suggests to me that it might last a while though
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.
You, me, companies, whatever else you enjoy, including but not limited to the sun.
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.
"Kind of like Westworld"
"Like a cult"
"having many of the bureaucratic characteristics of communism"
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.