Last night something happened that will stay with me for the rest of my life.
Before I get into that, I want to share my favorite description of the late stages of a bull market from “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.
It sure feels like the clock is about to strike midnight.
One of the tell tale signs of every market top is when people who know nothing about investing are making more money than the seasoned veterans who are scratching their heads. This is where we are today.
There are several reasons to explain why people are trading more than ever. Sure it’s the free commissions, the quarantine, and the $600 a week for the unemployed, to name a few, but all of these forces could be in place, and absent this one condition, they would not be nearly as active. They’re trading because they’re being rewarded for it.
There are 170 names in the Russell 1000 that are up 100% or more from their bottom.
For example:
- Wayfair, 835%
- Tesla, 326%
- Wendy’s, 211%
- Docusign, 194%
- Zillow, 165%
- Chipotle, 144%
- Roku, 140%
- Beyond Meat, 140%
- GrubHub, 130%
- Zoom, 124%
Click on this eye sore to enlarge.
You can only see your friends doubling and tripling their money for too long before you get sucked in, and that’s just what happened to my plumber.
I was upstairs in my office last night writing a version of this blog post when my plumber, I’ll call him Warren, walks in and asks, “What are you working on. Do you do stocks?”
“What do you got?” I say to him.
Warren’s eyes light up. He reaches out his phone and says, word for word, “What should I do? I’ve got 130 grand in the market and I have no freaking clue what I’m doing.”
He takes out his phone and shows me his portfolio. It’s exactly what I expected to see, with one exception; He wasn’t on Robinhood.
Here are his holdings:
- Amazon
- Alphabet
- American Express
- Boeing
- Capital one
- Global Payments
- Lyft
- Madison Square Garden
- Microsoft
- Nikola
- Paypal
- Sarepta Therapeutics
- Tesla
- Visa
- Walgreens
This will end badly, you’re probably thinking. I’m not gonna lie, I can’t help but think of the Joseph Kennedy line, where he reportedly said “If shoe shine boys are giving stock tips, then it’s time to get out of the market.”
The problem with this line of thinking is that it’s not an investment strategy. People have been sharing anecdotes like this for years now. I’ll admit that this one is juicy, but anytime I hear something like this I remind myself of the most toppy headline of all-time, the one that had contrarians salivating like Pavlov’s dogs, “Mila Kunis rotates from cash to stocks.” This was back in 2013.
I understand the temptation to act on these stories. I really do. And if you’re trading for a living then maybe anecdotes like this are actionable, but that’s probably not how you feed your family. You’re not trading for income, you’re investing for a better future.
There are always reasons to sell, and stories like this are one of them. But before you do that, you have to understand that It’s easy to get out of the market, it’s incredibly hard to get back in. If you’ve tried this yourself, then you know exactly what I’m talking about.
This might end badly, but the best way to make sure you don’t lose is by playing a different game.
Building wealth slowly over time is a reasonable objective. Trying to get rich quick is the opposite.
As Warren walked out I asked him, with a smile on my face, what’s this gonna cost me? One shares of Amazon, or closer to three?
