The best description of the late stages of a bull market comes from the great “Adam Smith’s” Supermoney:
We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment, the Black Horseman will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking “What time is it? What time is it?” But none of the clocks have any hands.
The CEO of Longfin, a company a never heard of before this morning, went on Fast Money today to discuss the mania surrounding his recent IPO. This sure seemed like the proverbial Black Horseman. It was one of the crazier financial television segments I’ve ever seen. If this is the top of the crypto mania, which it probably isn’t, this will be the defining moment.
Here’s another wild headline from today, “I started from the bottom”–Bitcoin investor went from poverty to launching a hedge fund.
The thing is, in the 24-7 news cycle that we live in, it’s literally impossible to use these anecdotes to gain an edge. With a few dozen of these a day, they’re all noise, no signal. One of these crazy headlines will coincide with the top, but good luck figuring out which story that will be.
If reading newspapers gives us a glimpse into the past, then watching videos provides a front-row seat. One of these old videos from January 1997 resurfaced last week.
Jim Grant is in it talking about the market environment. “The 1996 model stock market is the most overwrought, overexcited, thyroid case if you will, we’ve ever seen in this country…Companies that change hands at 600 times the sum of money they can expect to earn this year, literally things that are seen once twice or three times in an entire investment lifetime, have come to pass in 1996. It is a living museum of speculation.”
Below is a chart showing the NASDAQ and the S&P 500 in the three years prior to this video being made. If I saw this on PBS or wherever it aired, I would have sold everything like it was 1929.
The narrator tells a story of Sharon and Russ who put their life savings into two tiny technology stocks. When asked why she said, “Because we’re working very hard and not furthering ourselves. We’ve got to do something aggressive.”
The video does a very good job, showing retail investors like Sharon and Russ on the one side, and market veterans on the other sounding the alarm bells. Bill Fleckenstein, one of the people sounding the bell said, “What’s particularly dangerous about the present mutual fund boom is what is called investing is really speculating. The techniques are about more trading, rapid turnover, paying any price for a stock as long as it goes up…It is about crowd behavior and stock price behavior, not about analyzing the underlying businesses.”
If I watched this video in early 1997, I would have sworn stocks were in the bottom of the ninth inning. But they weren’t. The game hadn’t even begun. Over the following three years, stocks would go on one of the most spectacular runs of all time.
Bill Gross gave a great analogy on Master’s in Business to describe how investors deal with market anxiety. He said that everybody has an internal alarm clock. The thing is, most people are unaware of when they’re alarm clock goes off. Speculators try to get in early and then exit early while the music is still playing. Obviously, we can’t all do this and more likely, nobody can.
Fleckenstein’s analysis was spot on, but his alarm clock went off way a few hours too early. “The risk is that if that process gets started again and we only traverse back to the average level of expensiveness never mind cheap…that would mean a decline in the stock market of 50%. What will happen is we will simply get too high, there wont be enough new money coming in to keep the market going up, losses will start and losses will beget losses and then people will be people and they’ll sell.”
He was right, but he would have to wait more than three years for the crash, with stock prices and investor behavior growing more irrational by the day. When all was said and done, it took the market took six years to get back to where he was saying it would crash from.
Since the beginning of time and for the rest of it, investors will be looking for clues that a turn is coming. We all want to know what time it is, but we’re all staring at a clock with no hands.