I see it, but I have trouble believing it. The damn stock market is over 27,000. It has never been that high in all of human history.
This is a bubble. If you don’t know what a bubble is, it’s when the value of a certain asset skyrockets due to dirty dealings and/or market irrationality rather than key fundamentals. In other words, it’s a temporary explosion of fake value. Bubbles are always followed by crashes. Big ones.
We are currently experiencing not one, not two, but three market bubbles.
The biggest one is the bond bubble, the largest in history. Since interest rates are being kept low by artificial governmental measures, this means bond prices are being held up simply because of government shenanigans. The future crash in bonds is going to be terrible to behold.
Next is the stock market bubble, bigger now than even before the stock market crashes of 2001 or 2008. The only reason the stock market is doing well is because companies are using cheap credit (created by big government again) to buy their own stock, thus artificially inflating the price. It’s not because Tantrum Trump did anything right, even though he’s tried to take credit for it, just like it’s not because Pussy Barack did anything right, even though he tried to claim credit as well. It’s just a gigantic, bullshit bubble. There is little real growth in value in these companies.
The third bubble, though a smaller one, is the real estate bubble. This is the reason I’m actually holding off on purchasing any real estate at the moment. I’m patiently waiting for the next crash.
If we know we’re in the middle of several bubbles, how does one make money during a bubble?
There are only two ways that I know of:
Selling means you sell at the top of the bubble, when prices are nice and high, before the crash. I did this with bitcoin two years ago and did very well. I sold at near the top and made a handsome profit. Most guys kept their bitcoin, it crashed, then they cried.
Selling at the top of the bubble is hard, because you’re speculating, meaning you’re guessing. You could be wrong. However, selling in a rising market doesn’t mean you lose money. Instead, it means you make less money than you could. It feels like you’re losing money, but you aren’t.
Example: Let’s say the Dow goes from 25K to 31K and then crashes to 15K. You buy in at 25K, and as it climbs to 29K, you think it’s the top, so you sell. You make a decent amount of money (4K in value). But then it keeps going, all the way to 31K. Your buddies who didn’t sell laugh at you since you could have made more money. You feel like you’ve lost a possible 2K. You haven’t, but it still feels like it.
However, a little later the stock market crashes to 15K. All of your buddies who were making fun of you are now near suicidal, having lost the bulk of their retirement savings.
But you’re doing just fine. You already made your money, so you don’t give a shit.
This has exactly described me several times over the last 20 years in terms of my investments, including real estate, gold, and cryptocurrencies.
The tricky part here is that you must sell before the crash occurs, so if you bought in at 25K and didn’t sell at 29K, hoping to make more money, and then keep everything until 31K and then 15K, then you’re just as screwed as anyone else. So, in a way, you want to “lose money” on the way up when you sell. That guarantees you don’t actually lose money.
So, if you own any stock index funds right now, then in my opinion, you should sell them. All of them. Right now. If you wait, yeah, you might make a little money in the short term as the market bubble continues to climb. But when it crashes, you’re going to be fucked. Waiting a little longer won’t be worth it.
The second way to make money in a bubble, an even riskier way, is to short the market. If you don’t know what that means, it means instead of betting on the market going up like most people, you invest money betting it will go down. If the market goes up, you lose money. If the market goes down, you make a lot.
Sticking with our example, when the market is at 28K, you short it. When it goes to 29K, you lose money. When it goes to 30K, you lose more. When it goes to 31K, you lose even more. You feel terrible and want to kill yourself because of all this damn money you’re losing. It’s even worse than that, since as you’re losing your ass everyone else is making money hand over fist. It’s hard.
But then the market crashes to 15K, and you suddenly make a mountain of money so large that you can dive into it like Scrooge McDuck.
As you can probably see, shorting markets and assets is pretty damn risky and also much more complicated than betting for something (i.e. going “long”). Guys like Jim Rogers have made hundreds of millions through shorts, so it can be done, but it’s tricky.
I recently put a little hunk of money in my speculation bucket into shorting the US stock market. It’s not very much money as a percentage of my portfolio, but it still scares me. The stock market could keep inching up for a long time, causing me to lose that cash over time. Or the stock market may stagnate at its current level, stressing me out.
But the entire reason I’m doing this is a bet, a gamble, that the stock market will crash, and crash relatively soon. I think it will. I actually can’t see it not happening soon. But as always, that’s only a guess on my part, and I could be dead wrong. This is why speculating is not investing, and speculating should only be done with money you can afford to lose.
A Possible Third Way
There is one other way you can make money during a bubble, but it’s very indirect. Invest in things that do well when other things do well, or poorly. For example, gold does well when the value of the US Dollar declines, or when there is fear in the market. Natural resources like oil do well when there are wars, or when people think war is imminent. And so on.
I am invested in several things like this; assets that do well when shit hits the fan but that don’t necessarily do badly when things are good. When things are good, these things do okay or just sit there. When things crash, these things do fantastic, or at least can. Ideally I want to make money multiple ways during the next crash.
You will notice that under the “sell or short” list I don’t say you should buy. That should be obvious, but it isn’t. As I’ve discussed many times before, human beings stupidly tend to buy high and sell low. When things are exploding in value, like the stock market and bitcoin are right now, they buy, which is the absolute worst time to buy anything. You’re insane if you purchase a bunch of stock market index funds right now. You’re buying at the top of the market. But that’s what a lot of people are doing.
Bitcoin is a little more complicated; perhaps you could buy now and still be okay, maybe, but you really should have bought last year when bitcoin was in the shitter, not now when it’s exciting again.
That’s how you lose money in bubble: buy or refuse to sell when everything is white hot. That’s what most people do.
Most people get excited when the value of a particular asset class is skyrocketing. The smart investor instead gets very nervous. Again, note that I’m not going to buy real estate right now when I originally planned to. Real estate is doing too well, so I’m nervous, thus staying out of the market.
The reverse is also true. When everything is crashing, normal people are terrified, but smart investors get really excited.
I will be very excited when the crash comes. It can’t come soon enough.