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I think Verdad does some good and unique research - they have some thoughts on the current climate:

 

Investing in a Bubble

Spotting Bubbles is Easier than Investing through Them

 

By: Ahmed Elbakari, Tom Macky, and Igor Vasilachi

 

The S&P 500 index soared 38% in 1995. This sharp increase, following four years of steady gains, made some of the smartest investors on Wall Street begin to grow wary of a bubble in the making.

 

Over the past few months, we studied what today’s most famous investors were saying during the years leading up to the dot-com bubble. We referred to investors’ letters to shareholders, online databases such as LexisNexis, and business books to collect their quotes, building a database of every piece of macro commentary we could find. We found that the investors we studied almost all perceived the market to be in a bubble, but almost all of them were too early in making the call. It’s easier to predict what will happen, it turns out, than when it will happen.

 

“I think we're approaching a blow-off phase of the U.S. stock market,” Ray Dalio told Pension & Investments in 1995. “Price acceleration on the upside is preceding a significant correction—20% beginning over the next 18 months.” Peter Lynch echoed Dalio’s concerns in an article in Worth Magazine in 1995, warning that “not enough investors are worried.”

 

It didn’t take long for more of the world’s top investors to start worrying along with Dalio and Lynch. In 1996, the S&P 500 soared another 23%, defying Dalio’s predictions of a quick correction. Describing the frenzied stock trading in 1996, Howard Marks wrote, “Every cocktail party guest and cab driver just wants to talk about hot stocks and funds.” And in his end-of-year letter, Seth Klarman expressed his concern with the public obsession with owning mutual funds and internet stocks: “We know the current mania will end badly; we do not know when.”

 

But US stocks continued their upward trajectory, with the NASDAQ rising 22% and the S&P 500 rising a whopping 33% in 1997. George Soros had seen enough, persuaded by the same fact pattern Lynch, Dalio, Marks, and Klarman had all observed. He decided to put on a significant short trade against US technology stocks.

 

By the end of 1998, Soros had lost $700m betting against internet firms, the fledgling titans of the new industrial revolution. Quantum, the flagship fund of the world's biggest hedge fund investment group, was suffering its worst ever year after a wrong call that the "internet bubble" was about to burst. Instead, companies such as Amazon.com and Yahoo! rose to all-time highs in April. Shawn Pattison, a group spokesman of Soros’s fund, said: "We called the bursting of the internet bubble too early."

 

In the five years from 1994 to 1999, the NASDAQ returned about 40% per year. The type of value investing practiced by greats like Howard Marks and Seth Klarman had been left in the dust, with annualized returns for the large-cap value index of only 24%. Warren Buffett’s Berkshire Hathaway had lagged the NASDAQ by 15% per year since 1994, forcing Buffett to explain why he didn’t hold AOL, Yahoo!, or any of the other hot technology names. He told CNN in 1999 that he “can't 'see' what technology businesses will look like in 10 years or who the market leaders will be.”

 

The broader public didn’t share Buffett’s concerns. In 1999 and 2000, there were 819 IPOs, day trading became a hot activity, and the NASDAQ rose 86% in 1999 and another 15% in the first months of 2000.

 

But in March 2000, five years after Dalio and Lynch first warned of a bubble, the NASDAQ turned a corner. What started with an announcement of rising interest rates by then Fed chairman Alan Greenspan—raising serious questions about the dot-com darlings' valuations and ability to repay debt—trickled into a market selloff, scandals of bad accounting practices, and major bankruptcies. By October 2002, the NASDAQ had fallen 75% from its peak, giving up all of its gains in the bubble and returning the index to 1996 levels.

 

Dalio, Lynch, Marks, Klarman, Soros, and Buffett had all spotted the bubble and warned investors of the dangers. But their foresight came too early. From 1995 until the peak in 2000, investors who favored international stocks, value stocks, bonds, or commodities had all lagged the NASDAQ by more than 20% per year. The below table shows the annualized returns of major stock indices, value indices, bond indices, and commodities from the first warnings of a bubble to the market’s peak in 2000.

 

Figure 1: Annualized Returns from First Bubble Warning (1995) to Peak (2000)

Source: Bloomberg, FRED, Ken French Data Library, Verdad

 

But by October 2002, two years from when the bubble burst, the picture looked dramatically different. Value emerged as the winner after the bubble, as a result of investors’ flight to safety to more traditional businesses, while 10Y US Treasuries ended up outperforming the once-raging growth equities. The table below shows annualized returns from the first bubble warning to the market’s 2002 trough.

 

Figure 2: Annualized Total Period Return and Drawdowns from First Bubble Warning (1995) to Trough (2002)

Source: Bloomberg, FRED, Ken French Data Library, Verdad

 

Value investing turned out to be the best strategy over this full period, according to our research. The bursting of the tech bubble restored the reputations of the great investors we studied, who generally outperformed the broader index by large margins from 1999 to 2002. But it took courage—and the ability to stick to a strategy despite lagging the market by wide margins for years—to achieve these outcomes.

 

That persistence and conviction might have been one of the key reasons for those investors’ long-term records and famous reputations today. But tolerating years of underperformance and missing out on big mark-to-market gains in a hot sector can be very painful. “Fear of missing out” is as powerful a force among investors as it is among social media influencers. In such environments, money managers face two critical hurdles. On one hand, a manager has a hard time convincingly denouncing an upcoming bubble when investors only see a market that is continuously creeping up. On the other hand, predicting a bust too early could result in adverse effects if the money manager is too wary. Investors do not want to pay fees to get their money parked for years while retail investors are riding the market and generating superior returns, even if the bubble is bound to burst at some point.

 

So what are investors that face these pressures to do? Would there have been a way to profit from the 1990s tech bubble but also get out before the market turned? Trend following offers one possible quantitative answer to the question. The idea of trend following is simple: own the asset as long as it’s going up, but sell and go into cash or bonds the minute the price falls below the 200-day moving average. Then buy the asset back again when the price moves above its 200-day moving average. The chart below compares the annualized returns from the first bubble warnings in 1995 to the peak in 2000 and to the trough in 2002, as well as max drawdowns, for the NASDAQ, S&P 500, small value, trend-followed NASDAQ, trend-followed S&P 500, and a 50%/50% combination small value and trend-followed S&P 500 and NASDAQ.

 

Figure 3: Annualized Total Period Return and Drawdowns from First Bubble Warnings (1995) to Peak (2000) and Trough (2002)

 

Source: Bloomberg, FRED, Ken French Data Library, Verdad

 

Trend following the major indices produced returns in line with small-cap value and significantly reduced the underperformance and drawdowns. Blending trend-followed indices with small-cap value produced similar results. Trend following worked effectively to follow the bubble up and get investors out before the full impact of the crisis was felt. Blending trend-followed indices with small-cap value produced an even smoother ride.

 

What are the lessons for investors today? It might seem that everything is different this time around. Warren Buffett now owns Amazon shares, and Howard Marks has referred to the bull market of the past decade, and growth stocks in particular, as “the new normal.” However, history shows that, much like gravity, market cycles are constant and can bend even the most resilient bull runs. With a stock market that has been growing unhindered since the aftermath of the global financial crisis, chances are high that the cycle might soon end, and investors should prepare. Some are voicing their concerns already. Bill Gross, who retired from active investing in 2019, is one of them: “An investor, not day trading on Robinhood, should begin to play defense,” he said in his investment outlook letter. He is joined by Jeremy Grantham, who stated in a recent interview with CNBC that he is more convinced than ever of a bubble in the stock market, adding that “the more spectacular the rise and the longer it goes, the more certainty one can have that you're in the 'Real McCoy' bubble.”

 

We don’t know who will end up being right, but we know that the markets are overvalued, and the conditions are present for a large selloff. In his letter to investors in 2018, Jeremy Grantham said, “We can be as certain as we ever get in stock market analysis that the current price of the market is exceptionally high. However, classic examples of the great bubbles of the past are not just characterized by higher-than-average prices. Price alone seems to me now to be by no means a sufficient sign of an impending bubble break.”

 

This ratio of growth to value valuations has already reached 1999 levels and is trending towards dot-com bubble levels. While this is not a definitive sign that we are in a bubble that is about to burst, it is yet another in a growing number of red flags. And while we believe value will prevail in the full sweep of history, those who want to participate in the bubble’s upside might want to consider implementing trend-following rules that might help cushion the fall if the large-cap technology market turns.

 

Acknowledgments: Ahmed Elbakari and Tom Macky interned with Verdad this fall. Ahmed is in his 2nd year at Stanford GSB and is looking to go into public market investing after graduation. Tom is a rising junior at Harvard studying economics.  Igor has been working with Verdad since graduating from Stanford GSB in June, prior to which he worked at McKinsey & Co.

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I've long said that betting against the "exceptions to the rule" has been almost fool proof, especially right after the exception just occurred. I can name on probably 405 sheets of loose leaf paper the number of folks I know who have missed great investments because they were scared of "MSFT was a bad investment if you bought at the top in 1999".

 

That said, this isnt really an endorsement of the markets. I think "the market" is a stupid and lazy term. A better approach is just really to use common sense. When you see a gazillion no/low revenue spac deals representing BILLIONS going up the way it has, you would be wise to use caution. Garbage companies with no path to profitability are not sustainable regardless of what market we are in. A clever story stock with a long runway? Well, thats a different story. A clever story stock thats already valued at $800B? A robust and durable cash cow trading at 15x? I mean sometimes the market is really simple. I think bubble is definitely accurate in terms of some areas. Being honest with yourself about what makes sense and what doesnt is key to it. How many stupidly academic smart guys over the years shorted things because "30x sales" while ignoring "new tech", "300M market cap", "respected founding partners/investors", "low rates", etc. Its really easy not to become someone who blows themselves up when the bubble bursts, and its also really easy not to become someone who generates dogshit returns because you're scared of the bubble. Just use your head and stay within your confidence zones.

 

This.

 

Be open-minded.  Too many people get fixed on a limited narrative i.e. It's 1999 again OR It's not 1999 again.  Life is not binary or a spreadsheet.  It's nuanced.

 

It's a shame that the 'history repeats itself' line is so entrenched, when 'history rhymes' is so much more appropriate.

 

If you remember 1999, then it may help you now psychologically.  We hate seeing other people make more money than us, so it can be an emotional (or career) struggle if you don't own Tesla, Bitcoin etc. 

 

One of my favourite lessons from 1999 (which you don't need to have been there for) is Druckenmiller freely admitting he screwed up going back in to Tech at the top, knowing he shouldn't - he just couldn't help himself.  If Druckenmiller did that, then the rest of us should watch ourselves.

 

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Investing in a Bubble:

https://mailchi.mp/verdadcap/investing-in-a-bubble

 

The S&P 500 index soared 38% in 1995. This sharp increase, following four years of steady gains, made some of the smartest investors on Wall Street begin to grow wary of a bubble in the making.

 

In the five years from 1994 to 1999, the NASDAQ returned about 40% per year. The type of value investing practiced by greats like Howard Marks and Seth Klarman had been left in the dust, with annualized returns for the large-cap value index of only 24%. Warren Buffett’s Berkshire Hathaway had lagged the NASDAQ by 15% per year since 1994, forcing Buffett to explain why he didn’t hold AOL, Yahoo!, or any of the other hot technology names.

 

Value investing turned out to be the best strategy over this full period, according to our research. The bursting of the tech bubble restored the reputations of the great investors we studied, who generally outperformed the broader index by large margins from 1999 to 2002. But it took courage—and the ability to stick to a strategy despite lagging the market by wide margins for years—to achieve these outcomes.

 

This ratio of growth to value valuations has already reached 1999 levels and is trending towards dot-com bubble levels. While this is not a definitive sign that we are in a bubble that is about to burst, it is yet another in a growing number of red flags. And while we believe value will prevail in the full sweep of history, those who want to participate in the bubble’s upside might want to consider implementing trend-following rules that might help cushion the fall if the large-cap technology market turns.
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The biggest difference between the late 90s and today is the monetary environment in terms of what ends the 'bubble'. 

 

And by monetary environment, I mean the supply of federal government liabilities to the private sector that provide "moneyness" (i.e., currency in circulation + bank reserves + US Treasury debt held by the public - US Treasury debt held by the Fed).

 

from late 1997 til 2001, the US ran a surplus that peaked in early-mid 2001.  The effect of this was to put deflationary pressures on the US private sector.  You can see this in a FRED chart I built for that period. [click on image for full-screen viewing]

 

Fed-obligations-98-01.png

 

You can see that the effect was to reduce the private sector's total Federal govt money liabilities by 15.5%.  This effect is mirrored by pulling up charts of the USD vs commodities and currencies during this same time period.  Dollars were getting scarce. 

Here's gold vs the USD:

gold-97-01.png

Here's the Euro vs the USD

Euro-USD-97-01.png

Here's the Canadian Dollar vs the USD (this graph goes the other way, as USD gets stronger, CAD weaker means rising trend line):

CAD-v-USD-97-01.png

 

This was like a blanket descending on equities slowly smothering them.  Add in US Treasury yields over 6% (which is an inverse P/E comparison for a DCF calculation) and equities collapsed in Q1, 2000 and didn't hit bottom until Q4, 2002.

 

Today the monetary environment couldn't be more favorable.  Here is the chart of Federal government liabilities since 2018 (currency + reserves + Tsy debt held by the public ex amounts held by the Fed).  One can see the taking-it-to-11 growth (+22%) in 2021 since the pandemic.  And the incoming administration wants more based on their recent pronouncements.

 

Fed-obligations-18-20.png

 

And of course, unlike 1999, the yield on the 30-year US Treasury bond is 1.8% today vs 6%-ish back then in terms of the anchor for DCFs.

 

I wonder if most people are going to get caught underestimating the length and strength of this bubble/rally/pick-your-descriptor.  At the very least, there aren't the obvious headwinds of 1999 forming against equities today. 

 

The only things that I think could emerge as headwinds would be if long-term 30-year yields break out above 4% AND if tax rates on investments/business enterprise go up (both personal capital gains tax rates as well as Federal corporate tax rates).  In 1997, personal cap gains tax rates were cut (and later cut again in the early aughts).

 

Just some things to think about in terms of structural issues that affect stock prices.

 

wabuffo

 

   

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My strategy is to stay 80% invested and attempt to buy qarp/garp stocks. I think there are a lot of stocks out there that are still ballpark reasonable priced.  Yes you might lose 50% temporarily in a crash but you should do fine if you can wait 5 years. Still safer than a huge cash allocation when interest rates are below 2%.

 

I started investing in 2000.  My first experience was buying a tech stock that had fizzled and was down 75%.  I watched it drop 90% further from my purchase price. It was a company with real revenue and earnings and a near monopoly business, not an idea stock. It actually eventually came back but it took 15 years. Many of the other stocks never recovered.  I probably have some kind of risk aversion  as a result of the whole thing, maybe gregmal and Xerxes are right but Ipersonally know people who gave up much of their equity in that crash.

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The SPACS and the Teslsa* that Gremal mentioned are like the "sponges" in the market; they are there to soak-up excess liquidity that is there and will be there for some years. When you own a nice property on a street, prices go up, then that price appreciation spills into the next street and then the next. At some point even garbage goes up because of the multiplier effect on that excess liquidity. Until that changes either through QT and/or higher interest rate environment sponges will remain sponges and I agree with wabuffo about the 'anchor' role of the cost of capital.

 

As far as the 1999 bias i mentioned, i am not saying that we should ignore it and not learn from it. Bear markets are painful. But it is our choice to turn the 1999 lesson either into an asset or a liability/handicap, because we chose to draw to close of parallels. There is a strong case for a pivot to value/cyclical in 2021, and rightly so, but that does not mean that the "sponges" that i had alluded to earlier will go up in smoke and get knee-capped. There would be a relative decline not an absolute decline.

 

The classical 1999-2000 value investor narrative is that "Thou (tech) shall crash & burn, from it ashes value shall rise like phoenixes and thus prophecy fulfilled"

 

I myself, got impacted on my own biases. I felt in March that the best investment was Berkshire, Brookfield and Fairfax and bought only those in Q2. Because i saw that as they will have their moment kind of moment. That was my 2008-09 bias impacting me in 2020. Thank god, I had a very healthy dosage of technology companies in the portfolio to correct my bias. The truth is, each case is very unique and i should have been more thoughtful.

 

It is also truth that the new generation that heavily bought the dip in 2020 as their first investment ever will also have bias. That of Fed put and buy the dip. There might be a point, where the bond market may no longer play ball with US central bank' printing press (i.e. yield going up significantly), and its ramification will be felt in the stock market.

 

One last example that relates to my own industry (aerospace). In Feb 2020, even as Covid 19 was hitting shores of Northern Italy, the industry was complete oblivious to a global pandemic. The only data point they had (i.e. the only bias they had) was the 2003 SARS, and we collectively chose that data point and handicap ourselves in terms of thinking how far things could go wrong. It was SARS 10X on steroids.

 

One final final point involving geo-politics. I finished reading Niall Ferguson's Ascent of Money this Christmas. There is a chapter in which he explains how the world (developed economies anyways) was so globalized in the immediate 30 years leading to the First World War. Globalized in terms of trade in between the powers and the colonies and each other. That tailwind of economic boom and the fact that the economies that were so integrated made it felt that at the time, that it would be impossible for a Great Power to engage in any major military conflict anymore as the cost would be shared by all. He showed references in the years right before 1914, with analysts making those points. Yet in hindsight the whole thing was sitting on a time bomb and the good Archduke was just the trigger. Germany had to have its place in the sun and there was to be a collision with the incumbent. In a different book that I read few years ago, i recall reading that either a German (Krupp?) or UK company was a supplier of the fuse for the bombs that the other government were using against each other (to show how integrated the economies were), until the government put a stop to it.

 

Fast forward to 21st century, there could be a non-nuclear military conflict with the People' Republic and that would knee cap the market, just because the market absolutely does not have that on its radar and its probability distribution curve. The market has a bias that military conflict are much less likely in the age of globalization. The market doesn't not remember 1914, but remembers every wars since as ideological conflict or a cold war with USSR that was not integrated into the global economy.

 

-------------------------------------------------------------

*Tesla:  i have been thinking about this; the only way i can explain it is that through the massive demand destruction that the oil and gas industry suffered in 2020, and the fact that they had to cut CAPEX so much, that caused the "green energy" to move to the forefront, given that capital markets wont be supplying any more incremental capital into an old industry. That accelerated the "green energy", EVs, wind turbine makers, BEP.UNs of the world with their share price appreciating it.

 

I could not have foreseen that in March-April, looking back the pandemic changed the pecking order of investment capital dollars in the energy industry. Yes, O&G industry will enjoy one last hurrah on the back of higher commodity prices coming out of the lockdown, but that higher dollar price will not be rewarded by more investment dollars for more moonshots project in the Arctic, instead the capital market will supply even more dollars to the "green energy" industries.

 

Pre-pandemic, Tesla was a car company that had a minor solar business. Market is pricing an energy giant that has a auto-business on the side.

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My strategy is to stay 80% invested and attempt to buy qarp/garp stocks. I think there are a lot of stocks out there that are still ballpark reasonable priced.  Yes you might lose 50% temporarily in a crash but you should do fine if you can wait 5 years. Still safer than a huge cash allocation when interest rates are below 2%.

 

I started investing in 2000.  My first experience was buying a tech stock that had fizzled and was down 75%.  I watched it drop 90% further from my purchase price. It was a company with real revenue and earnings and a near monopoly business, not an idea stock. It actually eventually came back but it took 15 years. Many of the other stocks never recovered.  I probably have some kind of risk aversion  as a result of the whole thing, maybe gregmal and Xerxes are right but Ipersonally know people who gave up much of their equity in that crash.

 

I know quite a few people who’s retirement got destroyed in the 2001 crash and things did not come back. other were left with huge phantom gains on company stock that they never realized but still had to pay taxes on. One gal I knew who got rich for 6 month from Cisco stock lost her house this way.

 

History’s almost never repeats itself , but it can rhyme. Besides the monetary there are things that can happen that nobody’s does foresee - like the epidemic this year. Well, we turned out to be fine, but could have been quite different. And true to that, it’s the truck that you don’t see coming that runs you over.

 

Another thing to consider is that adjustment happen quicker than they used to. The trading is partly to blame although we did have a swift crash in 1987 before daydreaming became a thing as well.

 

One thing that I try to do is look at everything I own through the eyes of reflexivity and path dependency. I want to own things that don’t depend on capital markets working well for example. Perhaps the Fed now has backstopped everything, but I don’t think it will last forever.

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...

History’s almost never repeats itself , but it can rhyme. Besides the monetary there are things that can happen that nobody’s does foresee - like the epidemic this year. Well, we turned out to be fine, but could have been quite different. And true to that, it’s the truck that you don’t see coming that runs you over.

One thing that I try to do is look at everything I own through the eyes of reflexivity and path dependency. I want to own things that don’t depend on capital markets working well for example. Perhaps the Fed now has backstopped everything, but I don’t think it will last forever.

The following is anecdotal, so of limited value.

i've recently peripherally participated in online discussion pockets (university 'friends' of my children) related to investments (the students sound bright in general but are not studying and have limited fundamental knowledge about investments). The last discussion centered on how 'cheap' stocks tended to do well and the discussion helped surface the real definition of a cheap stock: a cheap stock. And there's even recent evidence to show for it (!):

 

-1x-1.png

 

Our job is to fundamentally discount future cash flows. How does one reflexively discount marginal participation?

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...

History’s almost never repeats itself , but it can rhyme. Besides the monetary there are things that can happen that nobody’s does foresee - like the epidemic this year. Well, we turned out to be fine, but could have been quite different. And true to that, it’s the truck that you don’t see coming that runs you over.

One thing that I try to do is look at everything I own through the eyes of reflexivity and path dependency. I want to own things that don’t depend on capital markets working well for example. Perhaps the Fed now has backstopped everything, but I don’t think it will last forever.

The following is anecdotal, so of limited value.

i've recently peripherally participated in online discussion pockets (university 'friends' of my children) related to investments (the students sound bright in general but are not studying and have limited fundamental knowledge about investments). The last discussion centered on how 'cheap' stocks tended to do well and the discussion helped surface the real definition of a cheap stock: a cheap stock. And there's even recent evidence to show for it (!):

 

-1x-1.png

 

Our job is to fundamentally discount future cash flows. How does one reflexively discount marginal participation?

 

Agreed. Have had this conversation with a family member recently who targets shares under $10 because they're "cheaper" than others. Doesn't even matter that fractional trading has made this fundamental limitation non-existent, the preference and misunderstanding persists.

 

I don't know how to reflexively take advantage of this - these things rally until they bust and several have already busted (HTZ, NKLA, etc). I think it's just something to realize could be happening which will leave pockets of cheapness in higher priced issues. Though, funnily enough, none of this seems to apply to the traditional basked of higher-priced securities like AMZN, GOOGL, TSLA, etc.

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It's getting to the point that if I get a phone call from someone I haven't heard from in a while and they are not a professional investor, I am just going to have assume they are calling me to ask one of two things:

 

1. How much of their investments should they liquidate so that they can buy ARK funds instead?

2. How much should they borrow so that they can buy options on Tesla on margin? As a follow up question, is it a problem that they don't understand what an option is?

 

After I have done my best chicken little/Debbie downer impression regarding their proposals they frequently follow up with some feelers regarding whether they could give me money to manage. Of course questions number 1 and 2 would play heavily in to my feelings regarding the third question.

 

This is NOT normal.

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It's getting to the point that if I get a phone call from someone I haven't heard from in a while and they are not a professional investor, I am just going to have assume they are calling me to ask one of two things:

 

1. How much of their investments should they liquidate so that they can buy ARK funds instead?

2. How much should they borrow so that they can buy options on Tesla on margin? As a follow up question, is it a problem that they don't understand what an option is?

 

After I have done my best chicken little/Debbie downer impression regarding their proposals they frequently follow up with some feelers regarding whether they could give me money to manage. Of course questions number 1 and 2 would play heavily in to my feelings regarding the third question.

 

This is NOT normal.

 

There are some parallels to 1999. But this is also sounds eerily similar to the Go Go Years of the 60s. A new generation of gunslingers...

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It's getting to the point that if I get a phone call from someone I haven't heard from in a while and they are not a professional investor, I am just going to have assume they are calling me to ask one of two things:

 

1. How much of their investments should they liquidate so that they can buy ARK funds instead?

2. How much should they borrow so that they can buy options on Tesla on margin? As a follow up question, is it a problem that they don't understand what an option is?

 

After I have done my best chicken little/Debbie downer impression regarding their proposals they frequently follow up with some feelers regarding whether they could give me money to manage. Of course questions number 1 and 2 would play heavily in to my feelings regarding the third question.

 

This is NOT normal.

 

There are some parallels to 1999. But this is also sounds eerily similar to the Go Go Years of the 60s. A new generation of gunslingers...

 

Really good point. This story in some ways is more similar to the 60s although maybe social media has has replaced cocktail parties as the influence to concentrate in a new version of the Nifty Fifty.

 

The regular Joe's and Jane's that I've spoken to who want to quit their jobs and become day traders, that rhymes more with the 1990's.

 

At least it's an easy call to take. I can pretty quickly say that I can't help them with learning how to day trade. The fact that they don't even understand why I would be ill equipped to help them underlines the fact that they have no business being active in the markets.

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A common strategy in the options world is the 'long straddle'. A long call, and a long put at the same strike; profit on both the downside and the upside - as long as there is significant disruption. A strategy that would have paid off on almost every market top in the last 25+ years.

 

Buy the things that will do well in a collapse, buy the things that will do better if the madness continues, and keep some powder available for opportunities as they present. Lemmings will do what they do, no matter what they are told; we don't know when the madness ends - but Lenny .. when it does, we get very, very rich  8)

 

SD

 

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Some things never date...

 

 

“My boy,” said the Great Winfield over the phone. “Our trouble is that we are too old for this market. The best players in this kind of a market have not passed their twenty-ninth birthdays. Come on over and I will show you my solution.”

 

So Adam Smith goes over and finds three new faces in the Great Winfield’s office.

 

My solution to the current market,” the Great Winfield said. “Kids. This is a kids’ market. This is Billy the Kid, Johnny the Kid, and Sheldon the Kid.” The three Kids stood up without taking their eyes from the moving tape, shook hands, and called me “sir” respectfully.

 

“Aren’t they cute?” the Great Winfield asked. “Aren’t they fuzzy? Look at them, like teddy bears. It’s their market. I have taken them on for the duration.”

 

Winfield then describes how much money Billy the Kid is making in computer leasing stocks like Leasco Data Processing and Randolph Computer that he has heavily leveraged with bank borrowing....

 

“The strength of my kids is that they are too young to remember anything bad, and they are making so much money they feel invincible,” said the Great Winfield.

 

“Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes us. All of these kids but one will be broke, and that one will be the multi-millionaire, the Arthur Rock of the new generation. There is always one, and maybe we will find him.”...

 

 

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Some things never date...

 

 

“My boy,” said the Great Winfield over the phone. “Our trouble is that we are too old for this market. The best players in this kind of a market have not passed their twenty-ninth birthdays. Come on over and I will show you my solution.”

 

So Adam Smith goes over and finds three new faces in the Great Winfield’s office.

 

My solution to the current market,” the Great Winfield said. “Kids. This is a kids’ market. This is Billy the Kid, Johnny the Kid, and Sheldon the Kid.” The three Kids stood up without taking their eyes from the moving tape, shook hands, and called me “sir” respectfully.

 

“Aren’t they cute?” the Great Winfield asked. “Aren’t they fuzzy? Look at them, like teddy bears. It’s their market. I have taken them on for the duration.”

 

Winfield then describes how much money Billy the Kid is making in computer leasing stocks like Leasco Data Processing and Randolph Computer that he has heavily leveraged with bank borrowing....

 

“The strength of my kids is that they are too young to remember anything bad, and they are making so much money they feel invincible,” said the Great Winfield.

 

“Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes us. All of these kids but one will be broke, and that one will be the multi-millionaire, the Arthur Rock of the new generation. There is always one, and maybe we will find him.”...

 

Noice  ;D

 

Is this where that came from?

 

www.amazon.com/Money-Game-Adam-Smith/dp/0394721039/ref=cm_cr_arp_d_product_top?ie=UTF8

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I think it was Peter Thiel who wittily replied to the question about "Is it 1999 again?" if it refers the beginning of 1999 or the end? Smart reply, because the Nasdaq index went up ~85% in 1999. The problem with bubbles is timing, since nobody knows how big they can become and when they will pop.

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Saying you dont know is bullshit. You know in the sense that you can tell there are unsustainable things going on, you dont know if tomorrow is the day that it ends. Its the same in theory as how you know you need flood insurance when buying a waterfront home in Florida, know you need wind/hail coverage in Oklahoma, and know you are better off without insurance on the crapshack country home in upstate NY. Sometimes more caution is warranted than others. The more data you haver to support more caution, the more refined your insurance can be.

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Some things never date...

...

Noice  ;D

Is this where that came from?

www.amazon.com/Money-Game-Adam-Smith/dp/0394721039/ref=cm_cr_arp_d_product_top?ie=UTF8

The question is for thowed but i enjoyed that book a lot.

Also, when one doesn't want to play the game, it's probably best to shut up.

Despite the above and despite the humility required, here are a few comments.

-----

The quote comes from chapter 17. Losers and Winners: Poor Grenville, Charley, and the Kids. The book was released in 1967, at a time when an investor dear to our hearts was also wondering about the Game. It deals about many topics (mostly temperamental), including the gunslinger attitude. Billy the Kid figured out that the older generations had "trouble figuring out the New Math, the New Economics, and the New Market."

There are some who can figure it out but at times "the market does not follow logic, it follows some mysterious tides of mass psychology." Is 2021 a repeat of previous 'episodes', including 1999 and the go-go years? Who knows? The easiest way to deal with this is to ignore it and focus on individual names (and shut up about wider implications). There are many independent indicators that suggest that today's market levels are elevated (levitated?) and it appears to me low interest rates is an insufficient and perhaps a contrarian indicator. The other aspect (as Spekulatius and others mention) is that bubbles can only be identified in retrospect and catalysts are only defined afterwards.

Also, what we don't know is what's in store. The chapter also has a small part on this aspect, describing how earnings projections are lagging indicators. That's why the 1930s was such a rough episode as markets started relatively elevated and had to adjust to very poor fundamentals and "the insecurity of anarchy." Below are two graphs showing how dependent we are about future developments and how projections can sometimes meet the pavement:

 

Image_9_20201218_TFTF.png

 

The author concludes the chapter with a "final indicator" which does not need to be included here and is best summarized by part of the last sentence of the chapter:"emotions are universal and there is no stopping the flow of seasons."

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Saying you dont know is bullshit.

 

Even Buffett admitted last year that the market may be cheap if interest rates stay low.  We just don't know.

 

https://www.cnbc.com/2019/05/06/warren-buffett-says-stocks-are-ridiculously-cheap-if-interest-rates-stay-at-these-levels.html

 

The market means different things to different people. Berkshire Hathaway for instance, is 99% confidence NOT in the bubble. MSFT is possible, but not likely. ZM, most likely is. One can start there, and plan their allocations for the next 3-5 years rather than the next 3-5 months. 80% BRK, 30% MSFT, and short 15% ZM probably works whether the bubble bursts or not. The names and allocations are just examples, so if you disagree, dont get too hung up on them. The one big thing with euphoric markets is that there are too many participants involved that shouldn't be. Their money is there for our taking.

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