“History doesn’t repeat itself but it often rhymes,” – Mark Twain
“There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence. Of this I am sure.” –Jesse Livermore
As I and others much smarter than me predicted, and was obvious to anyone with long term market experience, Bitcoin is crashing as the bubble implodes. As I write this article Bitcoin is trading at $8815 down from its peak of nearly $20k. I wrote in my prediction article for 2018 the following concerning Bitcoin;
“What you are really doing is gambling and hoping to sell your Bitcoin to someone else at a higher price than you paid. This is known as the greater fool theory.”
And gambling was what this crypto mania was all about. One person who did not know anything about anything selling to another moron who didn’t know anything because he was scared of missing out and looking small compared to his doofus big mouth brother in law who was bragging about his bitcoin profits at Thanksgiving. That is gambling and not investing and if you continue operating like that you will stay poor.
All the classic signs of a bubble were present; fear of missing out driving the price up, novice investors (Uber drivers) putting money into crypto (something they could not value nor explain), touts on tv and social media, fraudsters and scammers showing up in mass, and most telling of all a parabolic price spike. The whole thing went viral on social media and sucked in every shoeshine boy and school teacher.
They say you can only see an asset bubble in retrospect. However the signs were everywhere. As Charlie Munger said when asked about bitcoin; “It’s asinine, the idea that people with no particular insight or doing any work thinking they can get rich is absurd.”
The average person is always looking for a shortcut, a tip, or a way to get something valuable without working for it. Bitcoin is just another example of this dangerous mindset. If you learn anything from this episode it is that in order to get rich or make money in these markets you need to have an insight or ideas that others do not have. You than need to work your butt off to get rich. Beleive me thinking is hard work. Thinking you can get rich without work or knowing anything is why you are poor to begin with!
I am talking about a decline in Bitcoin of over 60% and yet most people that are involved in this think it is just a temporary setback. Buy the dip mentality has set in. These stoops are getting ready to get acquainted with some more speculating terms like bull trap and overhead resistance.
“A bull trap is a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline.”
“Resistance (resistance level) is a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level.”
All the people that bought Bitcoin at $19k or $20K and every level down to where we are now are unsophisticated “investors” (I use the term investor with trepidation when referring to bitcoin buyers) and will be looking to sell on any bounce upward. Fear on missing out is transforming into fear of losing.
Guys, I have said it before and I will say it again. When a bubble pops the asset class that was in the bubble usually declines 85-95%. Before this is over most of these crypto currencies will be down that much or go to zero. Bitcoin will go into the bargain bin with beanie babies and baseball cards. Bitcoin will not be the exception no matter how badly you want to believe otherwise.
I am sure out of the thousands of crypto currencies out there that some will end up having some value and utility. However, the chances of most “average” people being able to identify and position themselves correctly is low.
When the tech bubble popped in 2000 many high flying internet stocks were extremely overvalued. There were dozens of companies that had no earnings much less sales being valued in the tens of billions based solely on the number of “eyeballs” looking at the site.
Many astute investors pointed out that it was a bubble but guess what all the Johnny come lately’s were out in force coming up with all kinds of reasons why the valuations made sense. Guess what happened, most of those stocks went down 95% or even to zero and never came back!
I actually had death threats made against me online because I had the temerity to point out that a business without sales was not a real business and could not be legitimately valued at billions of dollars.
Guys go watch the movie the “Big Short” on Netflix which chronicles the housing bubble that occurred in 2006-2008. It is a great movie and you will notice quite a few similarities to what we are seeing today in the crypto market.
However, there is good news. It is quite likely that the blockchain itself could have some long term value. In fact, quite a few smart people are working on various applications. That is where the big money and lasting wealth will be made. I am investing in startups that are developing real world applications to solve real world problems. If you are interested read my primer on Equity Crowdfunding.
That is what occurred after the tech crash in 2000. All the crappy companies that did not have real businesses died and legit businesses that had real products and applications that provided actual value and utility emerged. Some of these companies that came out of the tech wreck are today worth tens of billions or hundreds of billions of dollars.
Now let’s talk about how you actually should invest even though it is not as fun or sexy as crypto mania. Read this statement carefully as it is one of the keys to consistently making money.
“YOU MAKE YOUR MONEY WHEN YOU BUY NOT WHEN YOU SELL”
The way the big money is made in markets whether it is stocks or real estate is to buy undervalued securities or properties and then hold them until they become fairly valued or revert back to the mean. Or to make it even easier for your reptilian brains to understand; “Buy Low and Sell High”. Sounds easy but is extremely difficult to do.
I will give you a case study that occurred during the time of Bitcoin’s parabolic rise.
Editors Note 9/2/2018: Markets always fluctuate so this exercise is for illustration purposes. Currently Brazil is down as are most emerging markets. Another opportunity to buy Brazil cheap may happen again in the near future.
This is a chart of the stock market index for the country of Brazil. You will note the big run-up in the index in 2008. Brazil at that time was hitting on all economic cylinders. The country is a big exporter of commodities and was benefiting from the run-up in commodity prices. An example, the oil price topped out at almost $150 per barrel in 2008 and Brazil has huge offshore oil production and reserves.
If you recall 2008 was the time of the “Great Financial Crisis” when the US economy almost collapsed because of the housing price implosion. Because the US is the largest economy (that is changing by the way), when it sneezes the rest of world catches a cold. That is what happened to Brazil and is noted on the chart. The world economy was in a severe recession and commodity prices basically collapsed.
This directly affected the Brazilian economy in a negative way. The economic issues Brazil was dealing with were exacerbated by a political scandal with respect to supposed corruption charges being levied against the former President.
This all resulted in the collapse of the Brazilian index in 2008. You will note the index rallied back (dead cat bounce) into 2010 but could not get back above the old highs. The Brazilian stock market than began a long slide which coincided with the slide in commodity prices and resulted in an almost 50% haircut to the Brazilian stock market.
You will note from the chart that the Brazilian stock market made a bottom in 2016 which almost exactly coincided with the bottom in oil prices. Remember when I discussed the fact that Brazil is a commodity exporting country with huge oil reserves?
Now you may say to yourself that is all great in retrospect but who knew oil and other commodities were going to bottom in 2016. Well as a student of the cyclicality of resource markets some of us were looking for a bottom in commodity markets. However, another tool I use to determine undervaluation and overvaluation, the CAPE ratio was indicating that Brazil was a great buy because it was historically cheap.
I have discussed the CAPE ratio before and you can go read my article on it here. The CAPE ratio was telling me that Brazil was cheap. I also knew that resources markets are cyclical and commodity bear markets are always followed by commodity bull markets. I also understood that Brazil is a physical place filled with actual physical resources, capital, and actual people and would not dry up and blow away.
No matter what happened Brazil would have some value and an actual floor price as the place was not going to disappear like a crypto currency, an internet stock with no sales, or a CDO full of dogshit wrapped in catshit mortgages (reference from the movie the Big Short).
Now this did not mean that an investment in Brazilian stocks was a layup. What it did mean is that the odds were in my favor that a return to at least the mean was at some point inevitable. The trade was to buy the Brazil ETF and wait. If you think you are right in your analysis you have to than have the patience to do as my hero Jesse Livermore said;
“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
As you can see by the chart the Brazilian stock market was up massively between 2016-2018 as the political winds changed in Brazil and went from bad to less bad. In addition, the commodity markets are in a new bull market and that directly benefits Brazil as I noted above.
Now of course I used proper position sizing and stop loss settings to ensure that if I was wrong that I could cut my loss, without emotion, and either re-analyze or wait for an inevitable turn. As it became obvious that the Brazilian market had turned upward you then become a trend follower and march your stop losses up along with the price.
This is a basic analysis of how you actually make money in the markets. How many of you will follow this methodology? Most people will not because it is not the shiny new thing but then again most people severely underperform the stock indexes. Is that you? Are you consistently making money in both up and down markets?
Warren Buffet said that if he was running a small fund he could easily make 50-100% per year. There are so many smaller value opportunities that he cannot buy with Berkshire Hathaway because they literally are the market now and need to be able to place billions into an investment in order to move the needle.
Those smaller off the radar plays are open to all of us smaller, quick, and nimble players. The question is will you take the time to learn how to invest/speculate correctly or will you wait for your big mouth ex-brother in law to give you that next hot tip that goes down 50% right after you buy it.
By the way analysis of the recent CAPE ratios are showing Greece and Russia to be the cheapest major markets currently. I also like Egypt as the currency devaluation last year, continuing economic reforms, and huge natural gas reserves coming online are resulting in a turnaround and higher stock prices. How many of you will at least look at those situations and try and understand why they have potential?
I will close this article with one more Jesse Livermore quote;
“All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.”
Or as King Solomon said, “There is nothing new under the sun”
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