Week 3: It’s A Bubble
To many of my friends and colleagues, I am known as ‘the stocks guy’. On a daily basis, I get multiple people asking me “what stocks should I buy?”, “should I start investing?”, and “how should I invest?”. These questions were one of the biggest reasons why I started this blog in the first place — to educate and enable you to become a Millionaire By 25.
But, these questions, specifically the “should I start investing my hard earnt cash?” question are some of my hardest advice that I give to people. I want people to invest. The more money you invest, early in your life, the better off you will be in 20–40 years. For instance, if you invested $30,000 (a starting salary) now, you could forget about it for 40 years, and come back to a million dollars. But as much as one half of me wants you to invest, the other half wants to say no. Why? Because we are in the biggest stock market bubble in history, one which is soon to pop.
I really don’t want you to put your first $2,500 into an investment account, and watch it quickly vanish. You worked hard for that money, and if your first investment turns out to be a loss, you may get ‘investors regret’ and not want to invest in the future. This is why I am torn when asked that question. My current answer is as follows: “You should absolutely invest in stocks. But, only invest with money that you can afford to lose. Learn and study the markets, and understand that at any day, we could spiral into a recession. Learn and know when to buy and sell.” Basically, you should invest everything, always. But you should understand that the market is cyclical, and we are due for a recession in the next two years.
How Do I Know That It’s A Bubble?
There are a few main indicators.
1) It looks just like a bubble. The stock market is cyclical and has cycles of growth and recession. It’s natural. Due to this, we have a lot of charts from previous bubbles to analyze. Compared to the last few major recessions (think tech bubble and 2008 great recession), market charts today look very similar, if not worse.
2) We’re due for a bubble. Every 8–10 years we have a market recession. The last recession was in 2008, and if the markets continue to follow this historic trend, we are due for one very soon.
3) A small collection of stocks (mostly tech) are driving up the market. Think Amazon. Apple. Google. These big guys are pushing up the market. If we look towards other industries, we can see that they are experiencing low to no growth. Just take a look at REITs or MLPs.
4) Certain events/entities push the market up and do not allow it to go down. Recently the Senate tax reform bill has pushed the market up to record highs. President Trump’s election caused the ‘Trump bump’ (which circumvented the ’16 correction). Since ’08 the Fed has lowered interest rates, leaving it with little tools to handle corrections, which will probably turn into recessions because of this.
With this information in mind, I will leave you with these two takeaways. I think that you always should invest, especially when you’re young because you have limited real-world consequences. Learn how the markets work. Read books and watch media. But you should understand that investing isn’t always green. There will be red days as well. Many young investors who have started post-2008 only have experienced a raging bull market, but the economy is cyclical. It will go down, as well as up. Remember that you can play both sides. Warren Buffet, my favorite investor, sums this up perfectly, and this advice is great for any new or seasoned investors:
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
But remember:
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
- Warren Buffett
