Smells Like a 12-year Bull Market

Everywhere around you, people are getting rich. Crypto, stocks, real estate. Doesn’t matter what you buy — it matters that you buy.

I see people who have no knowledge of financial markets, practical or theoretical, making >400% returns in a matter of months. I see friends who significantly over-bid to purchase a house make 20% unlevered returns in less than a year. And all across the world, credit and equity valuations are through the roof.

Good for these people. I wish them much wealth and happiness. But many of them are now not just getting rich, but actually advocating for the purchase of whatever assets have done well for them.

(I imagine that almost everyone has at least one relative who is proselytizing for the Blockchain, or who claims that Tesla is a good stock to own, or that you ought to invest in real estate.)

It reminds me of something I read a long time ago. I can’t remember the author or the exact quote, but it was about a financial advisor who had learned to recognize the market cycle. The quote went something like this:

“Take the family barbeque. In down-markets, nobody ever took much of an interest in my profession. At best they would ask ‘how’s that going?’ and I would answer with platitudes that shifted the conversation away to something else— the last thing you want to do is give financial advice to your relatives.

But when the tides changed and markets started going up, otherwise uninterested family members who had never been much involved in financial markets suddenly started asking me about my thoughts on specific stocks, especially about those that were ‘hot’ or had done well in recent years. I gave them my opinion, which was nearly always in opposition to theirs.

Finally, as valuations started reaching levels that were completely unjustifiable by the quality of the underlying assets, and as the doomsayers retreated to reclusivity — for an overdue bear market never came — that is when I noticed my relatives were no longer asking me to tell them what to buy, but that they were telling me what to buy.”

We have now reached that stage. In fact, we probably reached that stage a long time ago.

Great. Anecdotal evidence of overvaluation aplenty. What can you do with this information? Nothing, of course. With the current ZIRP-forever central bank policies, assets might simply be worth a much higher multiple of current earnings than when interest rates were in the 4–6% range. As such, I am not calling the top of the market. I am not even calling a bubble.

All I am saying is that you should realize that many people who are giving you financial advice have never experienced a prolonged economic downturn as an adult with a sizable stake in the market. For them (and for me), their only experience with asset prices is that they go up, up, up. In an environment like that, every investment is a good one. And because nothing ever goes down, everything seems risk-free.

Now it might just speak about the qualities of these assets. Maybe Bitcoin and Ethereum are the future. Maybe residential real estate turns out to be a good investment at current prices. Maybe Tesla will own the world some day. At least some of those things will turn out to be true. But not all of them, which is what today’s valuations seem to imply.

I hope this article doesn’t cast me as having a view on the markets. I don’t. Up or down, it makes no difference. All my investments have a large margin of safety and I have zero leverage. If my stocks go up, fine. If they go down, fine too. As long as the underlying business chugs along.

Although, wouldn’t it be nice if one day the tables turn and asset prices actually start to, you know, decline for a while? Just to see what that’s like? And that people start behaving normally again, so that you don’t have to listen to your nephew, who is an HR manager or a strategy consultant, droning on and on about his crypto trading strategy? And that perhaps the unsophisticated index-investor can buy assets at a fair valuation and not have their future depend on central bank policy? Would it even be possible, dare I say, that some sort of a market cycle still exists?

Well, from a man with no view on the markets: here’s to that.