The damage that so regularly is done in the investing world, we often do to ourselves as…
People are gullible. Humans can be duped by liars and conned by frauds; manipulated by rhetoric and beguiled by self-regard; browbeaten, cajoled, seduced, intimidated, flattered, wheedled, inveigled, and ensnared. In this respect, humans are unique in the animal kingdom.
Not only can people be led astray, most people are… When so many groups disagree, the majority must be mistaken. And if the majority is misguided on just one topic, then almost everyone must be mistaken on some issues of great importance. This is a hard lesson to learn, because it is paradoxical to accept one’s own folly. You cannot at the same time believe something and recognize that you are a mug to believe it… A sucker may be born every minute, but somehow that sucker is never oneself. – Tim Maudlin
In preparing to write this, I decided to do something that I always hear referenced, but I have never actually done. Having wondered what people were searching for when they searched “investing,” I Googled, “how do I know what’s trending on Google?”
I discovered, confirming my general sense, that the popular investing psyche is quantifiably off the rails.
“Investing”-related searches for dogecoin are up over 1,300%; cryptocurrency generally is up almost 500%; SPACs are up almost 500%. “NFTs,” “best app for crypto,” and “dogecoin” are all breaking out on Google search.
Focus in with me and you will begin to see how the noise infects us. As the decibel level increases, the infection worsens. You can read about our biases HERE. Ask yourself… how are availability bias, confirmation bias, overconfidence, and bias-blindness affecting my thinking today? How am I being duped, conned, manipulated, beguiled, and seduced?
Our search trends suggest that we do it to ourselves. When something is being talked about, we want to be part of the conversation. We want to be in the know. We search for information and then, to prove we are in the know, we share our thoughts with our friends. Then they share our thoughts with their friends and we share their thoughts with our friends. Thus manifests the echo-chamber.
Thoughtful, methodical “investing” is being drowned out by noise.
This is NOT investing at all. This is Speculation.
Mistaking speculation for investing is one of the significant mistakes long-term investors make. Sir John Templeton’s statement suggests how this happens so frequently:
“The four most dangerous words in investing are: ‘it’s different this time.’”
Put simply… product manufacturers and the media forever point to the difference in this moment, though in the grand scheme — this time is never different.
The history we are making in the investment world today is an echo of previous market history. In my career, I have witnessed dot.com stocks, oil, gold, real estate, meme stocks, cryptocurrencies, SPACs, and NFTs. As we zoom out, we begin to see the similarities.
Human nature drives market behaviors and human nature doesn’t change.
Humans are always reacting to and judging the current environment. “Liking” has momentum.
As the echo chamber brings us to, “I like that,” it echoes the herd traffic that inflates bubbles and inevitably precedes declines. As more of us are “liking” and as we get more and more enthusiastic, we urge ourselves closer to the brink of the inevitable turn downwards.
The inverse might also be true but is not the fruit of blind momentum. Skepticism leads to questions and then to, “I don’t like that.” Enough skepticism brings a return to value and opportunity, often preceding recovery.
Human nature moves us to make choices we think will bring us more of stuff we like; skepticism combats this tendency.
Human nature encourages speculation.
Speculation is the market equivalent of the Siren’s song from Homer’s Odyssey. Like the Siren’s song, the “noise” in markets is intentionally attractive. Descriptions caress us with their get-rich-quick allure, designed to appeal to our impulsive appetites. They are selling us something. They are manipulating, ensnaring, seducing, intimidating, and flattering us into action.
The stories are contagious, a virus infecting our sister, uncle, colleague, or neighbor as they buy into the noise, jump overboard and swim towards their demise. We are left to wonder… What do they know that I do not?
Dogecoin was birthed as a joke. A small effort of investigation into the structure of a SPAC will reveal why sponsors were lining up to siphon funds from the general public. The SEC made a few more comments about Bitcoin just last week – HERE.
It all seems so reasonable in the moment – 30+ P/E ratio during dot.com; Gold at $1800 with the Fed printing money in 2012; 125% loan-to-value mortgages; Gamestop at $300; dare I say it, Dogecoin (literally the joke crypto) has a market value over $75 Billion. What could go wrong?
Profit-seekers of all kinds feed short-term market fads. These are all legal ponzi schemes. If you are early (enough) or if the bubble inflates further, you may make a killing… if not, you may be killed.
Ulysses knew the Siren’s song was beautiful – and deadly. He ordered his crew to lash him tightly to the mast and ignore his pleas for freedom, while they had to fill their ears with wax to protect themselves and the ship from the sinister song.
How do we protect ourselves from our own gullibility? How do we avoid the huckster’s snare?
There are two (2) simple investing practices that, if followed, will largely protect you from tilting towards speculation.
Diversification, as Nick Murray has said, is a deal we make with heaven. We agree to never seek to make a killing in exchange for which we are blessed with never being killed.
In 1999, no one wanted diversification beyond the U.S. Tech sector because Large U.S. Growth was out-performing and became all that mattered. In 2000 value took off as U.S. Growth experienced one of its worst decades ever. Time will tell, but we may have just experienced a similar turn in the transition from 2020 to 2021. Again, you don’t (read: can’t) know when the turn will come. But the pressure is always building.
You stay diversified at all times and then…
Rebalancing simply put means having a target allocation and then periodically selling what has done well and buying more of what has not. In every environment and market scenario, something does well, and something does poorly. You do not have to (read: can’t) predict what will happen next… you only have to recognize that you are out of balance. By then rebalancing back to target, you are selling high and buying low. Sounds wise, does it not. But, as Shakespeare said, it is “more honored in the breach than the observance.”
The simple practice of diversification and rebalancing allows you to remain agnostic in the face of the market’s continuous popularity contest. You don’t have to know (btw – you can’t know) what will outperform next. You don’t have to time the market, you just have to re-balance.
Stop Predicting. Start Planning. Stay Mindful.
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