The Pendulum of Ideas (and Recurring Mass Delusions)

[My views are my own].

I bought my first stock at the age of 23.

It was 1995.
We were in the middle of a raging bull market.
Over the next five years, the Nasdaq 100 index rocketed from 480 to 4,800.

Boy . . . that was fun!

During that first bull market, with every passing month, my opinion of myself grew more and more certain.

Going into 2000, I was a 28-year-old Master of the Universe . . . with a fatal blind spot.

In hindsight, I was just surfing the crest of a tidal wave.

I’ve now been investing for more than 25 years. I’ve survived two massive bear markets and innumerable market crashes.

I’ve analyzed at least 1,000 companies; I’ve worked as a senior analyst on Wall Street; and I’ve made every mistake in the book.

One thing I’ve learned along the way is that the “big ideas” of every market cycle are almost always unmasked as mass delusions.

Let me give you an example.

In 2006, I was at a Value Investors Conference at Lincoln Center. The speakers were the rock-stars of our generation. There were over a thousand attendees.

What had once been an obscure corner of the investment world had gone mainstream. It felt like a golden age for value investing!

The fatal blind spot was that the value-style is all about ignoring the crowd. However, by 2006, it had become the mania.

Over the last fifteen years, the value-fever has broken and been unwound. Value investors have been crushed — with many returning outside money or just leaving the business.

This swinging pendulum of ideas (and recurring mass delusions) doesn’t just happen in the crucible of the stock market.

It can happen any time we turn our trust over to the crowd.

It’s QAnon. It’s Gamestop. It’s the Tech Boom. It’s the Tech Wreck. It’s “Housing Prices Never Go Down.” It’s the Global Financial Crisis. It’s Weapons of Mass Destruction in Iraq. It’s Disco and the Macarena. It’s even frickin’ Beanie Babies and Fidget Spinners.

It’s the human condition.

So, next time you feel absolute certainty about something, and everyone around you is reinforcing how you are all geniuses . . .

Don’t be so quick to buy your own bullshit.

And, if you are going to take the time and energy to buy into a specific mental model, you should spend time really understanding the bear case against it.

Not that there is a bear case against the Macarena . . . but . . . you get it.

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PS – My wife and I just watched the movie Our Friend. It’s beautiful. We had a good cry. Highly recommended.

PPS – Tom Brady is the GOAT!