Bubbles and crises are part and parcel of investing in financial markets. Over the last 40 years, we have seen the following bubbles and crises (well that is the more famous ones):
1. The Japan property and stock market bubble (1989)
2. The Asian Financial Crisis (1997)
3. The Dotcom bubble (2000)
4. China and the Commodity Super Cycle (2005)
5. The Global Financial Crisis (2008)
6. The Pandemic Crisis and now the Pandemic Bubble (2021)
These are times when a lot of money is made and lost. Well, for most people, it's money lost. That is the nature of bubbles. It sucks up a lot of money taken from a lot of people and benefits a few. Bubbles does not create value and since that is the case, more people will lose money than make money.
It took me a while to understand this.
It is not easy to make money in a bubble. We think it's easy. In this internet era, we see people publishing how much money they made in a matter of days. We think we can do it too. Well, it doesn't work that way. It's mostly just luck, like winning the lottery. It is not a repeatable process.
So this is the guy who has made more than twenty million in a matter of days because he bought and held Gamestop. He goes by many names, rollingkitty, deepfuckingvalue or DFV and also Keith Gill. He did it. We think we can be like him. Just follow him. Buy Gamestop. It is going to the moon, Mars or Jupiter. Buy the whole stock market now.
This is greed at its best. Greed is the force that creates bubbles and make them bigger. They become so big they are mesmerizing. We just want to be part of it! When we see our neighbour, friend, classmate or simply a random guy on the internet get rich, we think we can do it too. This is not like Olympics, or running a marathon, we just click a button to buy right?
As an adult, I have lived through the dotcom bubble and the rise of China and the commodity super cycle. Back then, I did not have the experience nor the funds to make it big. I have been hoping that the next bubble will come and I can then make a ton of money. Well it has arrived. I made some right bets, but overall, it's nothing to shout about. The greed-at-its-best moment is upon me too!
I wished I had more of those multibaggers shown here. But as a student of value investing, their valuations just didn't make sense. This bubble is also complicated by QE Infinity. Traditional valuations no longer work. Stocks with negative earnings and cashflow can go up 700% because money is so cheap. Buyers are also powered by social media idolizing false gods. It can still go bigger, but we simply cannot buy now. We will lose our shirts!
The right thing to do is to continue to practice value investing and to look for value. Buy when price is significantly less than value. The party will come to an end and things will crash. The time to buy is when things overshoot on the downside. It will be a difficult call. Longer term, QE Infinity will cause inflation and asset prices to rise again. So we have to buy at some point. Just not now.
The saving grace is that I do have enough of the old economy names that have done okay (some of the Dow names above). I will be looking to trim because this party will end. We are dancing near midnight at Cinderella's party but the clock has no hands. It is best to leave early before everything turns into mice and pumpkins.
Meanwhile stay safe!