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You’ve all seen the Captain Obvious commercials I’m sure. I’m not going to give any free commercials but it’s for one of those travel sites. You know, the guy dressed up like the Captain giving advice.
Well, you don’t need Captain Obvious to help you survive a bear market, but you do need to think like him. I’ve mentioned before one of the themes of this blog is I point out stuff that should be really obvious but, for whatever reason, people ignore it and get distracted by the sparkly thing over there.
Even when you point out how obvious the thing is, people still want to argue and tell you why you’re wrong. There are many irrational people in the world.
By the way, I don’t mean that disparagingly. It is normal to be somewhat irrational. It is only a problem when carried to excess.
I view my public service, if you’ll let let me call it that, as making people aware when they are excessively irrational. Like when they bought into Insuretech IPOs or NFTs or keep betting the Lakers to win the NBA every year.
For those paying close attention, if you just made the connection between this idea of helping people making better decisions and what Informed is all about, good work! Ten points for Gryffindor!
Why am I headed down this road today? There is a reason. Follow along…
When a bubble is being inflated, rational thought has little value. People get rewarded for being irrational. This is how we create false idols like Cathie Wood, Chamath, Ryan Cohen, etc.
You have two choices in that environment. Fight for what you believe in (and lose badly) or walk away and wait. In this case, the Captain Obvious choice is to walk away and wait.
However, when the script flips and the bubble pops, many of the irrational people have become true believers and refuse to see reality. They lose everything they gained. Often, more. For example, ARKK has lost $ for investors cumulatively because it was a bigger fund on the way down while it was a small fund on the way up.
Buying the dips no longer works. Being down 80% doesn’t make something cheap. If if was 10X overvalued, then it is now 2X overvalued. Better, but not attractive.
You can’t anchor to recent events on the downside. Recent history is no longer of any value. You need to start with a fresh piece of paper.
This is why I wrote the crypto piece. It is safer to short Bitcoin down 50% on the way down to near zero then to have shorted it at the peak when momentum could have run you over because nothing would stop it from doubling again.
In other words, it is a safer short at $30K than $60K because the melt up risk has been removed.
Keep It Simple
If it no longer works to stay irrational after the bubble pops, it necessarily follows that it pays to do what’s obvious. Basically, anything Jeremy Grantham was telling you was a bubble in recent years…guess what, it’s a bubble. Get out before it completely collapses!
Any business that had a stupid model like “buy now, pay later” with no credit checks and funding provided by constant securitizations? It’s over. Any of the Ponzi scheme like stablecoins? Done. Any insurance startup that thought they could sell at a loss forever and make it up in volume? You’re a horse, not a unicorn.
Remember 15 years ago (God, has it been that long)? Subprime loans to people with no income: obvious. Flipping houses on margin: obvious. Interest only loans to people with zero down buying a home 3X the price of their old one: obvious.
Look, people, stop making this hard! When you find things that are obvious, make a mental note of it, sit out while the bubble is growing (or if you’re truly a pro you can try to ride it up and sell first but that’s one of those “do not try this at home” tricks), and then pounce when things fall apart.
The Obvious List
Not sure what’s obvious today? I mentioned a few things already, but here’s a bigger list:
- Nobody is going to live in the metaverse. “Virtual real estate” doesn’t have real value. It’s just a video game. Facebook changing it’s name was a clear sign of the top. They will either change it back or come up with a third name.
- Quantitative easing (QE) doesn’t work. It was only a temporary high. We will regard QE as the modern version of the Fed’s punch bowl. What happened was the Fed kept bringing more and more and more punch bowls creating the illusion of a bottomless well. Alas, the bowl is now empty and the police have come to break up the party. Not everyone is going to make it home safely.
- Meme stocks were pump and dumps. While crowds can manipulate prices for a short period of time, they can’t continue to defy reality. “HODL” was the way the pumpers convinced the marks to hold the bag while they dumped.
- ESG may have had good intentions, but it was nothing more than an excuse to own tech over energy. That’s not so appealing anymore. As corporate profits get squeezed, it becomes harder for corporations to justify spending millions on big ESG departments while they fire middle class workers. ESG was a sign we were living in boom times.
- FOMO and TINA are over. The idea that risk assets are the only game in town ended with inflation. I can now make more on a one year Treasury than the S&P dividend yield.
- Credit is the next shoe to drop. The Fed’s main goal the last ten years was to prop up credit. Equities, crypto, and other risk assets worked as a derivative of the credit trade. With the Fed put off the table, the Fed doesn’t have the tools to avoid credit losses. They can hopefully prevent contagion, but they can’t keep credit losses at zero.
- Something always breaks when the Fed raises rates. It’s a little surprising it hasn’t happened yet, but it will. There will be another Enron or Madoff or fx crisis. It’s inevitable.
- We will all soon be re-reading Milton Friedman. People thought they didn’t need him anymore, but history has a way of rhyming and the pendulum will swing back towards sound monetary policy and shareholder value.
Don’t Be The Last Believer
If you’re still tempted to buy the dip because you read a bullish post from a 16 year old on Reddit…don’t. This is not the time to be singing Journey songs. Stop believing. Let go of that feeling.
Do what’s obvious. If something doesn’t sound right, don’t let yourself get talked into it. It’s probably not right.
You may have heard the old phrase “the market can remain irrational longer than you can stay solvent”. Today, the applicable phrase is “if you remain irrational, you will soon find yourself insolvent“.
2 thoughts on “How To Win When A Bubble Pops? Be Captain Obvious”
Love this article Ian. Couldn’t agree more.
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