What Were They Thinking?

One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?

A simple record of the collective delusions from the past can be quickly garnered from a price chart over time.  Market peaks appear so obvious, after the fact.  Perhaps with a little examination we can prevent some of our hard earned capital from being returned to dust.

Take bitcoin, for instance.  What were those morons thinking who bought bitcoin at over $17,000 in late-2017?  Why couldn’t they tell that a severe price collapse was imminent?  Now, over 16 months later, their bitcoins are about $5,230 – or roughly 69 percent less than what they paid for them.

What’s more, if bitcoin doesn’t hit $1 million by the end of 2020, John McAfee – the cybersecurity guy – will have to eat his most private part on national television.  Apparently, McAfee consulted his proprietary pricing model before making this outrageous claim.  Maybe he should have back tested it a bit more before going public with his findings.

Still, we won’t count McAfee out just yet.  He has 20 months left before his trade expires; anything can happen between now and then.  And while it’s unlikely that bitcoin will hit $1 million anytime soon, with a little luck, bitcoin buyers from late-2017 will break even much sooner than the new era dot com believers of the new millennium did.

Down Beyond Measure

The savvy fellows who bought the Nasdaq in early-2000 at over 5,000 were in full agreement over one very seemingly obvious point.  They all knew they were getting rich.  But that was before the Nasdaq crashed over 75 percent and crushed their new era delusions into millions of tiny pieces.  Yet things could have been much worse…

Sometime around early-2015 the Nasdaq eclipsed its early-2000 high, and it hasn’t looked back.  After traversing across a Grand Canyon sized bear market, the Nasdaq’s about 60 percent higher than at the peak of the early-2000 dot com bubble.  In fact, just this week the Nasdaq spiked back up above 8,000.

Wouldn’t it be nice if markets were always this forgiving?

Certainly, the erstwhile investors who bought the Nikkei in October 1989 at over 38,000 would like a do-over.  They’re still down about 40 percent – nearly 30 years later.  Factor in the opportunity cost of what these Nikkei investors missed out on over this time, and they’re down beyond measure.

Indeed, the significant wealth building years of several generations of Japanese investors have been lost.  They’ll never get their investment potential or time back.  There are some mistakes that there are no recovering from.

Should we feel sorry for them?  Shouldn’t they have known that the market was grossly overvalued in the fall of 1989?  Why did they lose their collective minds?

What Were They Thinking?

Yet the real “my name is mud” award goes to the enlightened speculators who bought tulip bulbs in the Dutch Republic in January 1637.  At the time, a single tulip was trading for the price of an entire estate.  One month later, the price of a tulip had collapsed to the price of a common onion.

By our rough calculation, tulip bulbs have remained at par with common onions for the past 382 years.  It’s likely they’ll remain there for all eternity.  But for a brief moment, roughly November 1636 to February 1637, people lost their minds in unison.  Charles Mackay, in his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, described the mania:

“Many individuals grew suddenly rich.  A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot.  Every one imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them.  The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland.  Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.”

What in the world were these tulip bulb speculators thinking?  Certainly, they didn’t read the fine print in their prospectus; the part that reads past performance is not indicative of future results.  But would it have even mattered?

The current cyclically adjusted price to earnings ratio for the S&P 500 is at 30.62.  That’s nearly double its average going back to the late-19th century.  And for the first time in three years, corporate quarterly earnings for the S&P 500 are forecast to fall.  Hence, the gap between price and earnings will be stretched out even further.

Clearly, U.S. stock markets have been rigged by the Federal Reserve.  But the popular delusion of many of today’s stock buyers is that risk has been eliminated, and that the Fed can propel stocks higher forever.  Thus you should buy stocks, and buy even more stocks…so you don’t miss out.

No doubt, future generations will smirk at our imbecility, and rhetorically ask: What were they thinking?


MN Gordon
for Economic Prism

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