Back in the nineties, I thought I knew something. As the Dow Jones blew past 6,000 mid-decade, I said to myself this kind of upward spike has to level off. Around this time, Alan Greenspan famously commented on the “irrational exuberance” in the markets. When the Dow Jones rocketed through 7,000 and then 8,000 in 1997, I thought this simply cannot continue, but continue it did into the 21st-century.
However, I heartily agreed with Greenspan. My agreement led me to to lose a ton of money on gold stocks because the irrational exuberance continued much longer than anyone expected. I listened to “pundits” who claimed the way to participate in the market as well as hedge was with gold stocks. If I had bought physical gold, I would have been better off, but stocks can go to zero. When gold prices plummeted many of these mining companies went out of business.
By the time things finally started to sputter with the dotcom flame-out, all of my bearish positions were completely wiped out. It took years, LITERALLY YEARS, for the house of cards built on irrational exuberance to come crashing down in 2000. Market timing can be very very expensive. I write this essay as a cautionary tale. Right now in early 2020, I feel the “fear of missing out” (FOMO) quite strongly at this moment.
The last time I felt such FOMO was after I had recovered my economic wherewithal and nerve from the losses of the nineties. I stayed in the markets almost 100% during the beginning of this century. I ignored the price of gold even as it spiked. I even went out on a limb and opened my own software consulting firm. Working largely from my living room easy chair, the aughties were a halcyon time of easy money and high employment.
Some of my clients started to slow pay me in late 2007. I even saw a couple go out of business going into 2008 leaving me with uncollected accounts receivable. Little did I know how bad 2008 would become as I ended up shutting down my consulting firm. The FOMO I had felt post the nineties debacle had led me to be lackadaisical in my portfolio management. I figured I was staying in no matter what, so why pay attention and make myself crazy.
Not paying attention coupled with FOMO caused many of my assets to shrink significantly during the Great Recession. It was a terrible time. I will always recall the 2008 Christmas as one of special stress and sadness for me. Things were very tight and the only income my wife and two young sons had was ME! I wondered how I would make it, but I made it through somehow.
I managed to save my house and my wife rebooted her career. A decade after the Great Recession, we are solid, if not rich. Having made it through, I realized I needed to pay very close attention to my investing and savings. I needed to steer the boat. Even if it meant doing constant course recalculations which yielded no course change, I needed to keep at the tiller.
There has been so much volatility in the market the last couple of years, I have moved a good deal of money to the sidelines. I moved to about 50% cash near the market tops of 2018. I was quite smug in December of 2018, but as the markets started to “melt-up” in 2019, my smugness was replaced by my current and intense FOMO.
I am thinking to myself how much this feels like the nineties. Then again there was a lot more “slop” in the system back then, coming out of the tight monetary policies of the eighties. My experience in the nineties taught me “irrational exuberance” can continue for years. In fact, the central banks of the world seem to be hell-bent on stoking the exuberance with cheap money.
With the central banks participating and negative interest rates now occurring, it is hard not to be worried, but also to not understand this could continue for a few years. Calling a top can be difficult when SO MANY NEED this loose policy to continue. It will continue to go up until it doesn’t, but when will the downturn come…dunno.
Every single economic principle I ever learned about capitalism and monetary theory says this will end badly, but WHEN? It is hard to say everything is rosy, when the repurchase market has required so much intervention from the Federal Reserve. The reaction of the market to normal tightening was extreme in late 2018, but I am not sure it justified juicing the markets to the extent 2019 saw.
In light of all of this uncertainty, I can share this one principle which invariably has been a positive for me in trying times. I think this one tactic is the magic trick to playing the stock market. This IS the market timer’s secret strategy. Remember to buy low and sell high and everything will be fine!