Stock Market Bubble: Happy New Year, Genius

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The stock market bubble unsurprisingly appears in 2020. Thanks to COVID-19 pandemics. Quoting Bloomberg Businessweek 23rd November 2020 edition, “This Market is for Noobs. Professional money managers aren’t beating the market1, The novice trader next door might be”. With smartphones in their hand, everyone is a stock market genius right now.

The heart of value investing is buying assets below their intrinsic valuation. When you plan to buy AMAZON (NASDAQ: AMZN), you know the hidden gem that most people ignored and buy when the market gives a bargain price. The year 2020 is an anti-theory of that approach. The trader buys assets merely by future assumption. People buy Tesla (TSLA) as if Electric Vehicle will be mandatory for the next few years globally or buy Moderna (MRNA) just as their COVID-19 vaccine patent never expired.

To more about patent expiration, the Amgen case gives you valuable insight into how it affects sales.

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In value investing, you buy value that has not been appreciated yet by the market. What happens now is buying that appreciation even when the value has not yet materialized.

At Least We Make Money Easily. Nothing Wrong.

This is a dream job. No annoying boss, no traffic jam in the morning, flexible schedule, just a few clicks, and money come to you. Just need a little knowledge or skill, when the price breaks resistance – click buy, when the price reaches support – click buy, when you believe in Elon Musk ambition – click buy. Just buy for every tech prospect: Palantir, Snowflake, Nikola.

Easy right?

Boy, You can’t extrapolate a monthly performance into a forever horizon. A rookie quarterback can play his best game in one match and call it his “true form”. When he plays bad – which he used to play – he calls it his bad day. We tend to overvalue our skills, don’t we? Your best one-month (or even one year) stock trading doesn’t define you at all. It could be your best day (or year) ever.

In investing we know outcome bias. This cognitive bias is best explained with examples. You have a colleague and he makes a great return investing in Gold. So, instead of analyzing the factor behind the bull of Gold, you just believe that investing in Gold is attractive. Just by one outcome, we generalize that the decision-making is of high quality. A good outcome (makes money in the stock market) doesn’t mean good decision-making (buying Palantir). Good decision making not always lead to a good outcome. Add “s” and that statement become true. Good decision(s) lead to a good outcome(s), which is proven along with time. A long time.

But, but, we make money? Yes, for now. The million-dollar question is, for the next ten years, could you replicate your performance?

Harvard Business Reviewed provide us insightful source with regard to this topic: what we miss when we judge a decision by the outcome

Luck Factor

In the real world, luck plays an important factor in your outcome. We love poker as the representation of a real-life problem, you can draw the full house and win without breaking a sweat. It is your luck, not your skill. Munger Wisdom – “It’s Not Supposed To Be Easy. Anyone Who Finds It Easy Is Stupid.

Even Warren Buffett said that he and Charlie Munger are both lucky. The Oracle admitted that it is prestigious to be born in the United States – male, and white. In another universe, Mr. Buffett could be born in Syria and witness a war. In our perspective, the list of Warren Buffett’s luck could be even longer: He is lucky to meet Benjamin Graham, the father of value investing. He is lucky since his relative is wealthy so he could access much capital. He is lucky to meet Charlie Munger. Warren Buffett’s style of investing in the deep value before he met compounder type like Munger.

Warren Buffett’s success is the combination of skill and luck. So, never throw away luck from the equation. If you make easy money in the stock market today, it is luck until time proves it isn’t. Humphrey Neill, the father of contrarian ever said, “Don’t Confuse Brains With a Bull Market.”

Stock Market Bubble: How it could be really easy right now?

This is though.

When the dust is settled, investors are hungry for a return. In conventional times, they could buy Treasury bonds or another less risky asset. Problem is, THE FED monetary policy suppresses the interest rate very low thus making an asset like a bond have ultra-low returns. Moreover, the central bank also floods the market with money. it should be invested somewhere, does it?

So, in the pursuit of a reasonable return, the stock market is the only answer. This brings us to believe when we make easy money these days, it is THE FED. Not us. It is luck, Not our skill.

The other factor is people assuming that technology company not only has a safe haven characteristic – recession-proof but also has growth opportunities without any constraint, The weird acronym, FAAMG – which consists of the five largest companies by market cap (Facebook, Amazon, Apple, Microsoft, Google) – has an impressive return of 39% this year)

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Why So Harsh Old Man?

Yeah we know, we don’t mean to be very strict. In this tide, just enjoy your ride. But always warn yourself and ensure you play small. Throwing all your capital in these high valuations is not wise. Before I close this post, try to ask ourselves:

  1. If it really easy, everybody will join it. (I remember my youtube ads, raging bull dot com. Our guy, Jeff Bishop)
  2. If you buy Tesla just because you believe EV is the next big thing, who doesn’t know? Everyone love Elon Musk. If everyone knows, where is your edge?
  3. In the long run, making money is never easy. Apple needs to compile component all over the world, Adobe keeps innovating their Suite, if you think you make money just by clicking buy – please reconsider it.

From now on, enjoy the ride, happy new year, fellow investor.

  1. Actually, ever they? []