- I was Wall Street’s top-ranked internet analyst during the dot-com era.
- Detailed below are the three main lessons I’ve learned about bubbles during my career — and how I’m handling the latest ones in stocks and crypto.
- Read more about me and my experience with market bubbles.
Many market gurus believe we’re in the middle of one of the biggest speculative bubbles in history. I think they’re right. But I’m not betting the farm on it.
I was an internet-stock analyst during the dot-com bubble two decades ago, so I have some firsthand experience with financial bubbles. I’ve summarized the experience here, along with my subsequent run-in with the SEC.
In a future article, I’ll explain why I’m in the bubble camp. But here, I’ll just share three things I learned last time that explain why I’m not going all-in in either direction this time around.
1. No one knows what will happen, including your favorite market gurus.
Back in the 1990s, I got to know some of the most sophisticated professional investors in the world. As I talked with them, and learned from them, I realized that one of my long-held assumptions about Wall Street was wrong.
I had assumed that, somewhere, there were some investors who were so smart and well-informed that they knew what was going to happen.
Instead, I learned that no one knows what is going to happen.
Some investors’ guesses are more sophisticated and better informed and reasoned than others, but they’re still guesses. No one actually knows.
Why does this matter?
It matters because it’s important to remind yourself that your favorite market gurus don’t know what will happen. Not George Soros. Not Warren Buffett. Not Ray Dalio. Not your crypto-zealot buddy or your trusted financial advisor. So don’t put too much stock in what anyone says or thinks will happen. They don’t know.
2. It’s really hard to “call the top.”
It’s always tempting to think you can ride the market up, “call the top,” and then get out before the crash.
Alas, this is harder than it looks.
(Also, unless you never plan to invest again, you have to also correctly “call the bottom,” so you can get back in. And you have to pay taxes on any gains you accrued on the way up. So to make it worth selling out, you have to get the timing right twice and make more than the 25%-to-50% tax hit on your gains. That’s hard.)
From 1995 to 2000, I thought what was happening with tech and internet stocks might be a bubble, and I was on the lookout for “the top.”
The problem is that, except in hindsight, it’s hard to tell the difference between “a dip” and “the top.”
From 1995 to 1999, everything that looked like it might be “the top” — including a big, scary “dip” in the fall of 1998 — proved to be just another “buying opportunity.”
By early 2000, things had been crazy for years, and, despite the occasional dip, they had just kept getting crazier. So even in March 2000, when the Nasdaq fell by a third in three weeks, most of us didn’t know we had passed “the top.”
The market rallied that summer. By fall, we were almost back to the previous highs. It wasn’t until then that the bottom fell out.
In hindsight, the cause of the top was obvious: The source of cash that had accelerated spending on all manner of tech and internet products for years — wide-open IPO and debt markets that allowed anyone who wanted money to raise as much as they wanted — disappeared. And the spending disappeared with it.
Unfortunately, to most of us, this was only obvious in hindsight.
(You may think I only missed the top in 2000 because I’m an idiot. That may be so, but please read this excellent WSJ article by Greg Zuckerman describing how one of the smartest investors in history, Stan Druckenmiller, also missed it. Druckenmiller is not an idiot.)
3. It’s almost as painful to miss out on crazy gains as it is to lose your shirt. (Almost.)
One thing everyone forgets after a bubble bursts is how painful it is to miss out when everything is going up.
It’s really painful.
Just ask anyone who sold Tesla five years ago. Or who never bought bitcoin. Or who jettisoned everything in the depths of the Great Financial Crisis. Or who got spooked during last year’s COVID crash and missed the extraordinary rally since.
Almost nothing hurts more than that.
Almost nothing… except one thing:
Losing your shirt when the bubble bursts.
That REALLY hurts.
So how do I invest my own money when I think it’s a bubble but I know I don’t know; when I don’t think I can “call the top and then call the bottom”; and when it hurts almost as much to miss out on gains as to lose my shirt?
I stay diversified.
Unlike professional investors, my job doesn’t depend on my outperforming competitors every week. This gives me the flexibility to avoid betting money on things I don’t know and can’t control.
It the market is a bubble, I’ll take it on the chin. But I’ll live to fight another day.
If it’s not a bubble and it just keeps soaring higher, I’ll make less than those who bet the ranch, but I won’t miss out completely.
This approach may sound boring, unambitious, and wimpy. But if you like to sleep well — and not waste time worrying about things you don’t know and can’t control — I recommend it.