How To Know When The Bubble Will Pop: Talk To A Cab Driver
“Yesterday my hair dresser told me that I need to be buying Bitcoin. She said she’s buying a lot of it because it’s only going up from here.”
Professional investors, traders, and portfolio managers will joke with one another about investment advice they receive from non-professionals. This isn’t meant to be condescending. Portfolio managers simply understand that buying individual securities involves long hours of research, not to mention technical know-how. Anyone speaking with too much conviction is probably blind to the holes in their investment thesis.
In plain English: The markets are incredibly complex. If you don’t recognize this and guard your capital, you will lose.
In the industry, the saying goes,
“When your cab driver gives you investment advice, the bubble is about to pop.”
This saying stems from The Greater Fool Theory. This is the theory that you can earn a profit from your foolishly high-priced investment so long as you can resell it to a greater fool (greater a fool than you). The buck stops at the greatest fool.
New York traders will tell stories of the tech bubble in ’99, how their cab drivers were saying things like, “Oh you’re on Wall Street? I hope you’re buying [hot new tech IPO] stock. It’s gonna be big, I know it!”
Did these cab drivers know anything about growth rates and discounted cash flow? I’ll give you two guesses.
This theme was repeated in the housing industry in ’06 & ’07. Strippers – err, exotic dancers became real estate investors on the side, flipping houses and condos because “housing prices never go down.”
Did these dancers know anything about floating interest rates and securitization? I’ll give you two guesses.
Investing is hard. Part-time investing is harder.
I like to think of the market as an ocean, and we investors are sailors. Generally we move with the tide, but we set our sails to move our ship east or west, trying to avoid storms. Sometimes the seas are turbulent, and sometimes it’s smooth sailing. The problem arises when the waters look calm, everyone wants to take their dinghy out, but they aren’t even equipped with paddles…
…just in time for a hurricane!
I tell this story because I just met with a business partner today. We were talking about our opinion of the markets – are they overvalued? Undervalued? Etc. I told him the only obvious bubble (in my opinion) was Bitcoin.
He had a good laugh and said, “Yesterday my hair dresser told me that I need to be buying Bitcoin. She said she’s buying a lot of it because it’s only going up from here.”
Let that sink in…
…and make your own conclusions.
Do you have a question, or would like me to cover a particular topic, feel free to leave a comment below!