Ter the last several weeks, we’ve seen an enormous amount of chatter about market valuations. The Dow succesnummer a record 26,000 points the other day, only two weeks after hitting a previous record of 25,000. Bitcoin traded above $20,000 not long ago, then crashed to somewhere less than half of that, and has since partially recovered. If you work anywhere remotely connected to the tech industry, you’ve most likely heard a lotsbestemming about all of this. It’s unlikely not to notice the large amounts of money sloshing around out there.
I embarked writing a postbode about Bitcoin, and cryptocurrencies, but then realized that what I wasgoed indeed talking about wasgoed the weaknesses humans have for risk. The pernicious thing about bubbles – whether ter the stock market, or cryptocurrency or elsewhere – is that they create a loterijlot of overnight geniuses out of early speculators. They also spawn a class of Explainers, who form and evangelize a bullish narrative out of every bubble with a clear logical conclusion: to invest, now. You see this happening on CNBC every single day, spil well spil te the legion of private “crypto” talk groups popping up all overheen the place.
But very first, indulge mij te a little story about craps.
One perk of working at IBM wasgoed that I’d get out to Vegas about once or twice a year for a few days for one of those giant tech mega-conferences. (This is the ideal amount of time to spend te Samenvoeging Vegas.) When I did so, I’d always carve out a little time – often late at night – to go play craps. Craps is my spel – I love it. I don’t play any other games te the gokhal. I never go overboard or anything, but always make a point to bring a few hundred bucks to go have joy at the Vegas craps table when I have the chance.
I very keenly reminisce one of my early craps games te particular. I’d bot playing for about two hours. Te that time, I’d bot up, then down, then up again, and then, step by step, dwindled my chips down to basically nothing. I’d lost the $300 or so that I came to the table with, and wasgoed ready to string up my head te defeat and call it a night. Ending my drink and putting on my jacket, I placed my last bets – very likely something on Don’t Pass and, spil one of my signature moves, I waterput some chips on what’s called an All Bet. This is basically a bet that, ter consecutive rolls of the dice, the shooter will succesnummer a Two, Trio, Four, Five, 6, 8, 9, Ten, 11 and 12 before rolling a 7 (which is, of course, the most likely number). All Bets are a sucker’s bet – a indeed long slok – which is why the payout is something like 175:1.
I then observed, ter growing wonderment collective around the table, spil the shooter did precisely that. When the final number spinned, the table went up ter a cheer. I made $350 from a $Two bet. From being utterly tapped out, I wasgoed officially right back “up” for the night.
At this point, a part of my brain wasgoed longing to get lodged again, order another drink and attempt again to win big. Instead, I did the sensible thing: I tipped the dealer, flicked a $Ten chip at the shooter with my thanks, and called it a night. I went huis having made a little money te Vegas. Everyone who gambles sensibly will agree that this is the right thing to do, unluckily, even for a reasonably sensible person, I can attest that it isn’t exactly effortless.
I think about this practice a lotsbestemming te the setting of the ever-present chatter today about rising values for everything ter view – the stock market, crypto, housing, companies – and what wij mean about “investing” ter them.
The crypto “investors”
There is a petite group of people out there who are sitting on enormous holdings today ter Bitcoin (and a handful of the other valuable cryptocurrencies). Bloomberg estimates that about 1,000 people own fully 40% of the BTC ter existence, and most of them know each other and coordinate. Spil the joke goes…
Haha, I feel sorry for all you losers who missed out on the Bitcoin train. You should`ve bought te years ago, like mij: A flawlessly normal man who coincidentally hoarded a virtual currency during a time when it`s only use wasgoed for hookup trafficking and purchasing organs.
There were, indeed, very few plausibly legitimate reasons to buy Bitcoin up until very recently, and that group of original hoarders contains a loterijlot of people with very weird ideas. But more importantly, it’s also a group of people for whom “investing” $Ten,000 te a magic internet money scheme wasgoed not only an option, but seemed like a good idea. And if you were buying $Ten,000 of Bitcoin, chances are good you were also buying other speculative “assets” spil well, like gold, silver, canned food or healing crystals.
No one, spil recently spil just a few months ago, could’ve possibly credibly predicted that Bitcoin would explode ter value spil it has. (If you had waterput down $10k into Bitcoin te just the middle of 2016, you’d have made something like a 48,000% terugwedstrijd by now.) Yet, like myself at the craps table, thesis guys were putting down money that they could presumably afford to lose on a ridiculously long-shot bet. That isn’t investing. It’s betting, better known spil speculating.
(Not that I have anything against speculating! Te fact, I dabbled ter it a bit myself. I made just a few hundred bucks gambling on Bitcoin. We’re paying for NYC childcare now, you know. I’ve cashed out now, however.)
I am personally of the opinion that Bitcoin is very likely here to stay. It obviously has no intrinsic value, but then, neither does gold strafgevangenis silver, and they’ve bot used spil stores of value forever. The blockchain technology underlying Bitcoin has tremendous potential, and the promise of a decentralized, anonymous, internet-based currency among other global reserve currencies is evident. But it’s identically evident that much of Bitcoin’s current value is the result of hucksters pumping it like a penny stock to the unsophisticated. We’re at the “YouTube celebrities hawking $49 Bitcoin newsletters” stage of this bubble, which does not augur for good times to come.
A bubble of money
If anything, the bubble ter crypto seems like a smaller companion of the broader, rapid expansion of equities values. Spil I mentioned earlier, the stock market is hitting fresh all-time-highs every few months (or weeks) now. I keep a little Google Sheet utter of tech company stock price gegevens, and most or all have enhanced by 50-80% te the last year. Te fact, the Tech category is almost singlehandedly responsible for most of the gains te the S&,P 500, with just Five companies (Google, Apple, Amazon, Facebook and Microsoft) contributing almost half the growth.
Homo economicus would interpret this spil a sign that investors are increasingly certain te thesis companies’ future revenue potential – and indeed, they’re not wrong to do so. Thesis are good companies. But I think the enormous rise te thesis firms’ market caps is also explained by a large amount of stock speculation. This is good for thesis firms’ employees and, certainly, executives, who very likely don’t mind the boost, but it is creating a large group of bagholders who are buying ter at very high values and will be left ter the bathtub when this cycle slows down again.
Google is a tremendous company, but has their actual enterprise value indeed enlargened 40+% ter the last 12 months? Has Facebook’s? Count mij skeptical. It’s not hard to see a lotsbestemming of this rise driven by people hoping to rail the train to even higher values and turn a quick profit.
There are no geniuses
It is an age-old lesson of the stock market that no one hits the market overheen the long haul. No one can “pick stocks” or time the market. There is an entire industry of people who attempt, and yet, mountains of economic research (including Warren Buffett’s famous bet) repeatedly demonstrate that passive index funds hammer stock-picking, every time.
The same is true of early-stage investing. Many tech venture capitalists are celebrated spil geniuses for much the same reason those early Bitcoin “investors” are – they’ve managed to make a lotsbestemming of money from the outsized spectacle of a few early investments. Yet the truth is very likely closer to being ter the right place at the right time. If 90% of a VC fund’s investments lose money, and only 2-5% make significant comes back (a pretty typical distribution), are those investors actually good at predicting the future? Or are they simply good at unloading enough money at enough targets ter a market witnessing long-term, cyclical growth – and fortunate enough to have the pre-existing wealth to do so?
Of course, the monied classes have always loved investing opportunities that the surplus of us don’t. Your typical retail investor (like mij) does not inhabit the same world of potential comebacks that Warren Buffett, Marc Benioff or Jeff Bezos do. (This is why I have not launched my own spaceflight company.) Similarly, the elite VC class identically has access to information, people and market intelligence that wij normals do not. This cozy ecosystem is partly to blame for the hyperconcentration of private wealth te Silicon Valley and the country spil a entire, and identically the reluctance of many VC-funded companies to go public and share their destinies with retail investors.
But perhaps the thickest advantage that wealth confers ter investing is the capability to do it at all. “Normal” people do not have ems of thousands of dollars to “invest” ter questionable magic internet money schemes (strafgevangenis would doing so be a responsible choice for most people), much less a million or two to proef with vishaak investing. This is how wealth begets more wealth.
Early investors ter Facebook or Salesforce or Google were no more “geniuses” than the guys who made $Ten,000 bets on Bitcoin ter 2014. They could not see into the future. I don’t mean to suggest that investors like thesis didn’t do their due diligence, only that analysis like that can provide very limited information about what the future holds. Post-hoc narratives get crafted for success, but infrequently failure. This feeds the mythology of “genius” investors getting rich with their sagacity and wisdom, and the FOMO that narrative engenders: the creeping feeling that “everyone” is getting rich – except you, because you’re not spil clever.
Market FOMO is what pumps every bubble – everyone rushing to get a lump of the activity before the party is overheen. This is true whether it’s the stock market, cryptocurrency prices, housing or anything else. Spil I said, I am actually a believer ter the long-term potential of Bitcoin, and certainly for the technology industry spil a entire, but the market values wij see today are more related to buyer psychology than underlying value. That won’t last forever.