A Frustration with Punctuation
They can be so frustrating, right?
You read a whole sentence, and the punctuation doesn’t tell you until the very end that your tone, facial expressions, and posture should have been reflecting excitement or emphasis.
I took two years of Spanish in high school.
I took four years of Spanish in college.
Now, I don’t speak Spanish, but I can tell you this, the Spanish language solved for this exclamation mark issue. The Spanish grammar forefathers got this right. In Spanish, you get an exclamation point at the start and the end of the sentence. Like an excitement sandwich, helping the reader to assure they express the appropriate amount of enthusiasm.
It is… ¡PERFECTO!
Unfortunately, stock market bubbles are a lot like exclamation points, much more like the English version as opposed to the Spanish. The defining quality of a bubble is that it eventually bursts, which is only realized in hindsight. The exclamation point is what lets you know that the bubble has burst!
Imagine if it was more like Spanish grammar, and you knew that a bubble was forming in the beginning. This would be… ¡AMAZING! Why? Because when bubbles form, an interesting thing happens, expensive things get more expensive.
In the world of investing, we like to call this phenomenon (expensive things getting more expensive) momentum. There is plenty of academic research and empirical evidence to support that momentum investing is a viable strategy. Newton’s Law of Inertia applied to investing – an object in motion will stay in motion.
Newton’s Law of Gravity also teaches us that what goes up must come down. For me, this is what is tough about being a “momentum investor” (1) just as aggressive the force is on the upside, it is equally violent on the downside – momentum strategies can have deep drawdowns with long recovery period, (2) the entire strategy is divorced from business fundamentals and just focuses on the price action of the stock, and (3) having a buy discipline (knowing when to buy) is not the challenge, it is crafting a sell discipline that is the tricky part.
For me, I like to own quality businesses; I like to view myself as a micro owner of the corporation (because I am), and as an owner, I appreciate companies that return some of their profits to me as the shareholder in the form of a dividend. This investing style – owning high-quality companies that pay a growing dividend – has been overshadowed in the last few years by momentum style investing and other trend seeking strategies.
The success and popularity of these strategies have brought out a new generation of investors that think investing is easy. And the hubris is plenty.
One particular TikTok video has gone viral. In this 58-second clip, you have a young husband and wife providing the answer to how they make money from home. The young man, in an Ohio State Buckeye hoodie, explains,
“I know trading sounds intimidating, but here’s my strategy in a nutshell. I see a stock going up and I buy it, I just watch it until it stops going up, and then I sell it and I do that over and over. It pays for our whole lifestyle.”
His bride goes on to say, “And honestly, my favorite part about this isn’t even the amount of money that you make, but just the fact that we don’t have to go to a 9-5 job.”
Let me make this really clear – investing is not easy. The diligence to identify high-quality businesses to own for the long run and the emotional fortitude to stick to a strategy and plan is difficult. It is very difficult.
BUT the illusion of a shortcut or simplicity or easy-money has its allure, and that’s what scares me. People I care about, intelligent people that I know and love, are “dabbling.” I get social sound bites about how they are investing and how they are recalibrating their strategies and tactics based on how the markets “now” work.
One word. ¡Yikes!
According to Mark Twain, “History Doesn’t Repeat Itself, but It Often Rhymes.”
This is true in life, and this is absolutely true in investing.
This isn’t the first time that a population of investors has become arrogant about risk. In the ’60s and ’70s, the Nifty Fifty were all the craze. In the late 90’s you were missing out if you weren’t enjoying the riches of the Internet boom. In 2006 you were told that real estate only goes up. Now, here we are in 2021, and I just saw a video from Lindsay Lohan explaining her sky-high price forecasts on a few cryptocurrencies.
When you invite in a new generation of investors that don’t have the investing battle scars of experience of the generation past, you begin to see the rhyming of history play out—the cyclicality of ignorance.
Have you ever played musical chairs? An exciting game, full of anxiety and anticipation, as you are left wondering if you will be left without a seat in the end.
When the music stops, that is when the exclamation mark is written, that is when the calamity begins.
Just to provide clarity, I’d like to answer two questions for our readers (1) Do I believe there are pockets of “bubblicious” investments in the markets today? Yes. (2) Do I believe that there are investments at attractive bargain prices today? Yes. We have a very valuation polarizing market and all the more reason to be selective and diligent about what you own.
So, is it possible to know when some of these bubbles will burst and when the music will stop? I believe Sir John Templeton provides some great insight on these matters,
“Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA.”
The aroma of euphoria is strong, my friends. Proceed with caution.