I chanced upon this clip the other day while listening to Ben Carlson’s and Michael Batnick’s excellent podcast. If you haven’t been in the markets for more than 10-15 years, you should watch it. If you have, you should watch it anyway.

The clip is about 30mins long and is a good look at what the psychology in the markets are like during a boom. These were times when most new investors (in their 20s) were barely born or those who have limted investing experience (like myself) were still in the early days of our schooling life.

Amazingly, there were quite a few people interviewed who called it fervour and so many of the new participants in the stock market were people who had never touched the markets before (there was a cop, owners of a carpet business) and these people were doing incredibly stupid things (day-trading, buying stocks without even knowing the name of the company or what it does, buying on rumours etc.). Problem is, they made money doing these stupid things. And as anybody will tell you. If you get rewarded doing stupid things, you keep doing more of it.

The problem, as pointed out in the episode (#9, in case you’re curious) is that all the people who called it were basically early. I don’t know the exact date that the show was broadcast or when the people were interviewed for the show but let’s assume that the show was broadcast in mid-1997, that would still have made all the experts in the show who were calling it a bubble early by about 2.5 years.

The amazing thing, as I watched the clip, is how many parallels I could see with 1997 and markets in 2007 and markets today. While the S&P 500 and Dow has been climbing new heights many times over this year, I don’t think there’s a bubble in equities. Stocks aren’t cheap but how many people who have never touched the stock market in their life are coming to the party? Not many. Many people are still scarred by the Global Financial Crisis of ’08/09.

So where is the bubble? The obvious answer for me is in the startup scene and the cryptocurrencies.

The startup scene

Startups or Venture Capital is a brutal game where the odds of finding a success story is probably 1 in 20 or worse. Yet, SoftBank’s Masayoshi Son managed to raise a $100b Venture Capital fund.

Even the ones that ‘succeed’ are still burning through investors’ monies at an incredible rate. Take Uber for example. As recent as Aug 2017, Uber was estimated to be burning through cash at a rate of $2b a year. If Uber’s business model is anything like Grab’s, I’m not sure how they are going to ever make money. Grab’s model is basically predicated on subsidising both the consumer and drivers in order to grab (pun intended) market share.

So, if all these ride-sharing/hailing companies aren’t making money right now? What happens when investors get sick of throwing good money after bad? For one, those companies have to start monetising their customers. Maybe they raise money through selling ads on their cars? Or they raise prices of the rides and reduce the incentives given to drivers? The question is how much profit will they have even after doing all that? Will that be enough to give a significant rate of return to investors?

Cryptocurrencies

I cannot even tell you how ridiculous this one is. The bubble in crypto is painfully obvious for anyone who has studied markets.

  • Buyers who don’t even know what they’re buying? Check.
  • Unregulated asset class? Check.
  • Totally unrelated businesses trying to ride the crypto wave? Check.
  • Institutional investors coming late to the party? Check.

It’s painful to see how some people who are only about 20 years old think that they are going to become multi-millionaires in just a few weeks when they’ve never had more than a few thousand dollars just a few months ago. I guess this is what older investors mean when they say that there are no old and brave men on Wall Street. The markets are where brave men die young and cautious people live longer.

What to do about all this?

The best thing to do about all this is to stick with the strategy that you already have. As an investor, it’s not easy to find bargains in the market as it was a year ago when things were murkier and when almost everyone thought that things were going to get worse.

I don’t know if the bubbles pointed out above will pop soon or they will go on for some more. All I know is that I’m staying away from those places.