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Fear, Opportunity and Stock Bubbles

If someone forwarded this to you, you can read about who I am here. I was a strategist and equity partner at the biggest hedge fund in the world. Now I make my thoughts available to you and implement them with my own capital. This Substack grows via word-of-mouth, so please forward to your friends. If you like this writing, you will enjoy my books Master, Minion, and Raising a Thief. This is not investment advice. Investing is risky and sometimes painful.

Words that caught my eye.

“No human being can know the future. The greatest of disasters may overtake a man in the best of places, and the greatest happiness may seek him out in the worst. ”

Solzhenitsyn, The Gulag Archipelago

“I’ve no doubt it is in our biology to be aggressive and lethal, just as it is to be deeply caring and loving.”

Anthropologist Robert Foley, quoted in The Violence Inside Us, by Chris Murphy

Fear as Motivator

I was plunging downhill on a mountain bike when I saw the thick, oscillating midsection of a rattlesnake parallel to me and crossing the path below. Without thinking, I simultaneously clutched the brakes, dismounted, and ran uphill while the slithering mass of snake crossed the trail. My heart pounded. I could see shiny Salt Lake City visible in the distance below. That was a time when our inborn fight or flight mechanism worked exactly as designed.

As a motivator, fear works well, but it is an unpleasant way to live if it is a consistent throb as opposed to an isolated spurt. I only realized how much fear dictated my behavior in the academic and corporate worlds once I left them. One universal, unwritten rule was that you got paid if your boss liked you, meaning the incentive was survival conviviality. Of course, they’d justify any decision based on metrics in the same way the Supreme Court claims can overturn a precedent based on “logic.” My novel—Master, Minion—I only realized after I wrote it, is about how tough it is to escape such strictures, which are both emotional and financial.

Money is a tool that facilitates escape, like the little saws prisoners use to get out of jail in the movies. You get it by spending less and earning more. But once you realize how volatile the money system really is, you recognize eliminating fear about its future value is neither realistic nor advisable. It’s just a question of dialing in the right magnitude of fear, such that it is enough to keep you on your toes, but not so much that you miss an opportunity.

Emotional Balance Beam

I’ve been trying to figure out that balance for some time. Some heart in my throat makes me feel alive. I felt that before leaving for Russia in the fall of 1991, staring at my supplies, including a short-wave radio, which was how you got news back then. Ditto becoming a young parent, putting on a trade for the first time, and voluntarily giving up a regular corporate paycheck to do what I do now. All these episodes pushed me forward but were also terrifying because they forced me into situations where I had to invent rather than follow an existing track.

That struggle to appropriately channel emotion also applies to investing. Our in-born, fight-or-flight mechanism can come in handy and it can impede our ability to see opportunities. Fear has helped me avoid many risks but eliminated certain possibilities. In particular, I’ve wrestled with stock market bubbles, of which I’ve lived through two and may be in the early innings of another as excitement or perhaps euphoria over artificial intelligence (AI) sweeps markets.

As of Friday, the 10% return of the S&P 500 this year is fully explained by just 5 stocks. What that means is that if you own individual stocks then your portfolio can be losing money even as the news breathlessly reports a rising stock market. The table below shows the top five stocks, their weight in the S&P500 index, annual performance, and contribution to the index return. For instance, Nvidea alone, up 172%, is responsible for 30% of the S&P 500 returns this year.

There are two possible explanations. Either investors think these companies in particular are about to make an enormous amount of money or we are in the early stages of a bubble. Confusingly, both might be true.

Techphoria #1

Humans get excited by new technology in the same way that they are fascinated by Star Trek and spaceships. I recall in the 1970s wondering if it would ever be possible to see the person you were talking with on the phone. That sounded futuristic at the time. Now, FaceTime, Google Meets, and the rest of it are our day-to-day.

In the process, we have had two massive tech bubbles, 1999-2001 and 2020-2022. I remember them each vividly and this leaves me cautious about the enthusiasm of crowds because they tend to get carried away and their behavior impacts the pricing of everything I own. In each case there was a) a fundamental change in technology and b) an overreaction to the potential profitability of this technology that ended in losses for people who bought in late. Because total capital is limited (though it can come from multiple sources), the money going into the bubble comes from somewhere, including the assets you already own. It’s like a wave so powerful that, as it gathers strength, it sucks all the water out to sea.

Chart: Price history of the NASDAQ with the stock market bubbles indicated in red.

During the 1999 stock bubble, I worked on a currency trading desk. I didn’t understand much about the stock market back then except that all the people around me were excited by what was going on and buying stocks that were increasing in value at an astonishing rate. I vaguely knew about the 1929 crash my father had lived through, where stocks lost 90% of their value. On the advice of a salesman who serviced tech companies, I made two small investments. (Key lesson: never ever make an investment because someone you know says it is a good idea, do your own homework).

One company went bankrupt in the ensuring bust. I don’t recall its name. I lost 100%. The other,, allowed you to print postage from your computer, sidestepping the post office. After I bought it, it briefly rose in value. Then, once the market peaked, it lost most of its value. I held on. Years later, not only did it return to that original share price but rose well above it, just like the NASDAQ above. I sold my shares slightly above where I’d bought them, considering myself lucky I got my money back.

The company was finally bought for $330 a share by a private equity firm in 2021 at the peak of the second tech bubble. This means if I look at the two investments together I lost 100% on the first, could have made roughly 100% on the second, and together would have earned about 2% per year over 20 years. In other words, if you buy a stock that is too expensive at the outset, it is very hard to earn decent money.

Techphoria #2

The second

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