This is a bad time to invest, doesn’t it? At least, it feels like it. The S&P 500 has fallen 23% in the past year, while the Nasdaq has dropped 32%. Housing prices have plummeted, interest rates are rising, and both the British pound (£) and euro (EUR) seem to be heading to zero.
The “real” assets. The “safe” assets.
What about the fun stuffs? What about the explosives? What was going to make waves in 2020 or 2021? What was it that made new millionaires every day? Stocks that are booming. Cryptocurrencies. NFTs. SPACs.
It was fun for a while, wasn’t? Andy Bernard, theof The Office, once said: “I wish that there was a method to know if you are in good old times before you leave them.”
We didn’t realize how lucky we were.
Everybody was making money by buying anything and everything. Self-proclaimed “growth stocks” investors were writing newsletters on the same 50 “innovative tech companies” while conveniently ignoring valuation concerns. After all, there was no price too high for game changing tech! Covid didn’t care if the company would never make a profit or if its revenue growth was accelerated by Covid.
Carvana Zoom and Roku would continue to grow by 300% each year.
Web3 startups have raised hundreds of million of dollars, while they are still looking for “usecases.”
Back then, this process of brainstorming “use cases” was called a search.
Dave Portnoy livestreamed himself day trading. A guy whose Reddit username is “DeepF*ckingValue”, made $50M in bets on GameStop. Matt Damon said that we could reach the same level of human achievement of the Wright Brothers, Apollo 11 and those who hiked Mt. Everest is a good place to purchase Dogecoin.
This picture of some Times New Roman font sold for $800,000.
“Divine Robe of Fox”. lol, lmao. NFTs can be wild.
We didn’t realize how fortunate we were.
The good times are gone. The stock market is no longer fun. It’s dangerous. Perilous, even. Inflation, war and an imminent recession are all on the horizon. There are thousands of companies laying off workers, countries around the globe are experiencing energy shortages, and things will only get worse.
Now is not the time to invest
It’s a feeling that I can attest to.
It’s funny how risk can be. Risk was not a concern when we printed trillions of dollars in stimulus, while the entire world remained stalled for two years. When interest rates dropped to near zero, no one was concerned about the risk. We normalized the “price-to-sales” ratio for valuations and decided that 50x sales for a tech company was perfectly acceptable.
Early 2021, no one was worried about the risk, even though we were at the end of a 12-year bull run, in the midst of a pandemic and with easy money flowing everywhere.
When the S&P 500 reached its highest level of earnings in 11 years, at 38x, no one was worried about risk.
Nobody stopped to ask, “What will happen next?”
The lines kept moving up and everyone was getting richer. If you didn’t join in, you would be left behind. The music continued to play, and the party went on.
The paradox of risk is that it can be high or low. Risk is at its highest when we don’t even know it exists and is at its lowest when all we think about is it.
When everything feels happy and good and you just know that you are the next Buffett/Druckenmiller/Burry because all of your stock picks are home runs, risk is high.
Risk is high when you and your friends get rich overnight, but veterans who have been in the market for 30 years urge caution.
Risk is high when people tweet “HAVE FUN STAYING POVERTY” because they “invested” in something 2x in a week.
When you’re busy tweeting “HAVE FUN STAYING POVERTY”, and you and your friends are all making money, you don’t even think about the risk. You only think about the next $1.
This is when things start to get dangerous.
Risk happens quickly when people have become so used to the idea of long lines that they completely forget about it.
Interest rates get hiked. Growth stocks tank. Currencies collapse. Earnings shrink. As investors step back and take stock of their collective euphoria, they realize that it is better to keep their money in tangible assets.
On October 4, 2022, we will be at the same place as today.
Only after the collapse of markets do markets feel dangerous. The risk has already been taken. The risk has already been taken.
It is no longer possible to make money by playing hot potato on a worthless investment.
18 months ago the markets were a ticking bomb. It was inevitable that a mean reversion would happen sooner or later. At the height of the market, no one is thinking about mean reversions.
Everyone thinks that the pain will only get worse once the mean-reversion has cut deep.
We act in the present on the risk that has happened in the past. We say, “With all the bad news that has happened in the past 12 months, it is not a good time to be investing money in the stock market“. But we should really think “Now that the worst is over, this is the perfect time to increase your investment in the stock market.”
Yeah, pullbacks suck. Bear markets are a pain. Stock market play comes with a price. The real danger is not what’s happening now. Real risk was being caught up in FOMO for 2020 and 2021. The real risk was buying into trends that only had hype behind them.
The time to buy was not then when FOMO peaked and everything made sense. Now is the time to buy, as valuations are reasonable and most of the risk is already over.
Risk doesn’t feel like that. Easy money feels euphoric, and bear markets hurt.
