Manias and Myths

There’s nothing more mythical than a booming market.

With cryptos now re-entering Earth’s orbit, where are the ‘bitcoin to $1 million (and beyond)’ headlines?

All but gone.

Optimism knows no bounds when easy money is being made.

Statements of stupidity are given a gravitas that leaves those of us who never left Earth shaking our heads in amazement.

It is only with hindsight, in the clear light of day when the damage is on display for all to see, that the collective comes to its senses and mutters ‘people actually believed that s**t.’

Yep. They sure did.

The only reason I can say this with such conviction is that, in a financial-planning career spanning more than 30 years, I’ve seen far too many of these mythical rocket ships.

This time is different…yeah right!

How is this easy-money era different from the others?

During the 1987 entrepreneurial boom, the newly minted rich-listers flashed their cash on boats, cars, planes, mansions and lavish parties. The extravagance of this era was captured in the movie Wall Street.

What about The Wolf of Wall Street? A ‘pump and dump’ scheme flogged by salespeople with egos that dwarfed their IQs. Outrageous (make that obscene) parties and absolute decadence.

Then we had The Big Short. Remember the ‘wet behind the ears’ mortgage brokers? Cocaine. Hookers. Party time.

This is from Bloomberg on 1 February 2018:

The North American Bitcoin Conference wrapped up 10 hours of speeches by inviting 5,000 attendees to what it called a networking party. “It’s been a long day,” read the description. “Join us at E11even for some networking and R&R. Or dancing.”

The agenda didn’t mention that the networking event would be held in a 20,000-square-foot Miami strip club…

“We’re a bunch of dudes with a lot of money in our 20s. We like naked girls,” said Jeff Scott, a cryptocurrency trader from New York. He got a table for 12 with a hedge fund analyst and the heads of two startups, and said the evening wasn’t much different than his typical night in a strip club. “If you don’t like it, that’s fine, but you’re not going to expect us to change.”

The more things change, the more they stay the same.

The only thing different about the current mania is the cast. The plot is still the same…easy come, easy go.

But this mania is so intoxicating it has made smart people say dumb things.

Ray Dalio is an icon. He founded Bridgewater Associates — one of the world’s largest hedge funds. Dalio’s estimated net worth is US$17 billion. He is seriously smart.

However, his comments at the recent Davos talkfest made me do a double take. Surely he has been misquoted? Surely?

This is from CNBC…

Bridgewater Associates founder Ray Dalio said the tax cut could lead to some big gains for the U.S. stock market.

“We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws,” Dalio told CNBC on Tuesday from the World Economic Forum in Davos, Switzerland.

The investor said we’re in the late part of the cycle and predicts we will see “a market blowoff” rally, fueled by cash from banks, corporations and investors.

“There is a lot of cash on the sidelines… We’re going to be inundated with cash,” he said. “If you’re holding cash, you’re going to feel pretty stupid.”

I’ve dealt with the ‘Goldilocks’ myth before; you can catch up here.

But it wasn’t the Goldilocks reference that made me shake my head.

It was the old ‘cash on the sidelines’ myth.

It conjures up images of investors emptying their bank accounts and pouring the contents into shares (or whatever asset class that’s captured the public’s imagination)…flooding the markets with cash.

Let’s apply just a tiny bit of logic to this ‘one-sided’ image. 

Markets function on the basis of ‘a willing buyer and seller’.

Granted, some are less willing than others, but you get my drift…for a transaction to occur, you need both a buyer and seller.

Let’s say that I have $20,000 in the bank (sidelined in cash) and you have $20,000 worth of shares.

You, as a willing SELLER, decide to put your $20,000 worth of shares on the market and I, as a willing BUYER (who doesn’t want to ‘feel pretty stupid’), decide to buy them from you.

What’s happened in this transaction between a willing buyer and seller?

Owner Before the transaction After the transaction
You $20,000 SHARES $20,000 CASH
Me $20,000 CASH $20,000 SHARES

 

The cash remains on the ‘sidelines’…it’s just that it’s in your bank account and not mine.

Cash is ALWAYS on the sidelines.

Which is why when you buy or sell shares with an online broker, they ALWAYS need to know your bank account details…how else can they facilitate the transaction?

But this is what ALWAYS happens in a boom…logic is abandoned.

There seems to be an inverse relationship between markets and critical thinking.

The higher a market goes, the lower the collective intelligence levels become.

While all sorts of myths abound in the heat of a booming market, there’s one truism that stands scrutiny in the cold light of day: Buy in haste and repent in leisure.

It’s probably a little early for the ‘I told you so’ obituaries on cryptos (and, in due course, shares and property), because I think the ‘buy the dip’ mentality is still strong enough to see prices gain a second (and final) wind.

In due course, though, those who’ve moved cash from the sidelines to participate in something they knew precious little about will have plenty of time to rue their hasty and ill-thought-out decisions.

As ALWAYS (and I keep emphasising ‘always’ because things never change), the losses will vary depending upon degrees of stupidity.

How’s this for sheer lunacy — from Fortune Magazine, 13 January 2018 (emphasis is mine):

A recent poll shows that nearly one-fifth of all Bitcoin buyers are using credit cards to fund their investments, likely paying hefty fees for the privilege. A large portion of those buyers then carry the balance instead of paying their cards off, implying that they’re highly leveraged — but confident that their investments will grow in value.

People are using ‘sidelined’ credit to — and this is my favourite bit — fund their investment.

In my mind, an investment is an asset that has the potential for long-term appreciation…provided it’s acquired after a thorough risk/reward analysis.

How many of these people conducted a ‘thorough analysis’ of bitcoin before whipping out the plastic?

Zero. None. Diddly.

This is impulse buying at its worst.

But what about the people who sold bitcoin to the ‘plastic-wielding investors’?

Wanna bet they have the cash in the bank?

Too right.

I’m holding cash and am very happy to be considered ‘stupid’ for not buying into these myths and manias.

In due course, there’ll be an opportunity to be an eager, enthusiastic and very willing BUYER of the assets being sold by morose, dejected, poorer and somewhat unwilling SELLERS.

When that day comes, we’ll know the full story on which one of us was stupid.

To avoid falling for the myths that accompany the manias, please go here.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter


Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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