How to Profit from a Market Bubble - Caleb Jones

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:

  1. Sell.
  2. Short.

Selling

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.

Shorting

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.

18 Comments on “How to Profit from a Market Bubble

  1. There is another major and very important reason why stocks are so inflated and it is because stuff companies do – I have seen this nonsense first hand at corporate job: they get bad sales so instead of declaring bad profit year or quarter they fire people and cut projects which makes it look on the paper that they are doing very well instead. So the stock price goes up instead of going down. Of course the problem is they can’t keep doing this forever and especially cutting project means in a few years they will have even bigger problem with sales because they won’t have any new products or they will be really bad.

    This is in my view a very likely possible trigger point for a major huge crash. There can be other triggers but in absense of other triggers I expect this to trigger the crash. Which means max 5 years till the massive crash based on the product cycles.

  2. Hi Caleb,

    How about applying Dollar Cost Averaging instead of selling your investments in the stock market (via index funds for example) ?

    Let’s say that you decide to invest each month / couple of months a regular amount (% for income, or a big investment in small parts…), and not really look at how high or low is the market.

    That way, you eliminate some of the risk of selling too soon, or buying too late.

    Assuming it will eventually grow (except if capitalism collapses), you would probably get your 7-8% per year doing that if you invest long term ?

    I am curious to know your thoughts about it ?
    Thanks.

  3. I’m most looking forward to the real estate crash so I can buy again. I’m waiting on the sidelines for now since everything seems insanely overpriced where I live. I made the mistake of buying in 2005 last time and just last year was able to finally rid myself of the damn thing(converted it into a rental property for a few years).

    I feel like 2020 will see a big downturn, especially if the Dems win the presidency and try to start up all these even bigger welfare programs-since we don’t have the money and “eating the rich” won’t even begin to pay for it all, it’ll be inflation. Although politicians don’t directly impact the markets, to your point about trump and obama not having the effect they claim to have, I believe they can create an atmosphere that influences the buying/selling patterns of investors since, again, there’s a lot of irrationality in the stock market especially.

  4. “eating the rich”

    Not to mention that even if it did pay for stuff the reaction will be such people will either move away (and renounce citizenship) or stop working hard since the incentive will be lost and the government will end up with even less money than before they tried to tax them more.

    All the left wing future scenarios point towards a single outcome: complete economical and social collapse.

    Only way to have any other future is for the whole country to become ultra right wing. But since that won’t happen the best thing is to assume a collapse will happen and prepare for it.

  5. Can a Women Market possess attributes of a bubble?
    what does the absolute worst time to “buy” women?

  6. How about applying Dollar Cost Averaging instead of selling your investments in the stock market (via index funds for example) ?

    Dollar cost averaging is one of those “it works with a calculator but not necessarily with emotional human beings in the real world” things.

    Yes, DCA works, but only if you do it for decades, consistently. How many people do you know who have actually done DCA for decades, consistently? And there’s the problem. People in real life do it for a while, then do something else.

    “Imminent” not “immanent”

    Fixed; thanks.

    Can a Women Market possess attributes of a bubble?
    what does the absolute worst time to “buy” women?

    I have no idea what your quesiton means.

  7. BD, I just entered the workforce, what is your advice about investing in 401K’s given based on this information? Should I put any money in it at all? (my company matches 80 cents up to 5%)

  8. I get that you want to keep the explanation simple but speaking in terms of all or nothing is counterproductive. It leads to huge emotional swings because when you do it it feels like you’re trying to catch the top. When you decide the Dow is too high at 29K, you don’t sell everything. You start a “program” to sell that begins immediately, by selling a quarter or so of your index funds that day and leaving the rest for the next few months. If it goes down, you already have one foot out of the water so you have nothing to regret. If it goes up, you made even more money!

    Mentally, much easier than seeing the 31K ticker and regret that minute you clicked the sell button at 29K to sell everything. There are few things worse than falling in the “sell high, rebuy higher” trap.

  9. When you decide the Dow is too high at 29K, you don’t sell everything. You start a “program” to sell that begins immediately, by selling a quarter or so of your index funds that day and leaving the rest for the next few months.

    Sure, that’s fine too.

    There are few things worse than falling in the “sell high, rebuy higher” trap.

    Well, that would be your fault. “Sell high, rebuy higher” is extremely stupid. Instead you should “sell high, stay the fuck out until the next bear market, and redeploy somewhere else in the meantime.”

    BD, I just entered the workforce, what is your advice about investing in 401K’s given based on this information? Should I put any money in it at all? (my company matches 80 cents up to 5%)

    I’m exactly 50/50 on 401k’s since on the one hand they’re stock-based and government-controlled (very bad), but on the other hand that match is pretty amazing (very good). So you should make your own decision.

  10. Very brave to go public with a call like this. I hope it works out.

    I’m sitting in safe income investments waiting for the next “sale” — CDs, dividend stocks and short term bonds. But I’m also re-reading “Reminiscences of A Stock Operator”. He traded breakouts. Buy when stocks are making new highs. Short on the way down. To him that indicates the timing is probably correct. Another perspective from a very successful speculator.

    SB, on the 401K question: most I’ve seen had a money market or short-term bond option for those not wanting stock market exposure.

  11. What do you think are good career choices when the shit hits the fan? Working for a gold/silver mining company for example?

  12. where were you at in your business career when you went through your first bubble? this is my first one where im in the marketplace.

  13. Shorting sounds very risky and potentially dodgy. At which point do you decide to stop with shorting if its not going the way you want?

    I personally go for third option and think its is always a good low risk way for balanced portfolio that as a balance can make me some very good profit if stuff does crash. I include there gold and silver but also crypto. If there is a major war or collapse of major currency anywhere in the world then I expect those things to explode in value.

    What do you think are good career choices when the shit hits the fan? Working for a gold/silver mining company for example?

    Being able to change the career / location fast is the most important or better yet already having income from different industries and different countries and already being location independent. It is hard to know exactly what will happen and where (although some places look way worse than others and seem to have way less time) so flexibility is key.

  14. Timely article as it looks like the Fed will cut 25bps at the FOMC meeting this week.
    Depending on how dovish Powell comes out as (my feeling is just enough to not cause a sell-off) the market might see the conditions to rip this market higher on the sole reason that more liquidity is on its way. This coupled with the fact that all the world central banks are cutting rates as well (they are all coordinated) could mean a large credit impulse is on its way, extending this bloated market far past anyone could imagine. When it all comes to a head, its going to be very ugly. The next decade will be very different than this one.

  15. What do you think are good career choices when the shit hits the fan? Working for a gold/silver mining company for example?

    Noooooo. Mining is a fine place to speculate but it’s a dreadful industry; you don’t want to work there. Instead follow my usual advice of starting your own highly niched Alpha 2.0 location-independent business.

    where were you at in your business career when you went through your first bubble? this is my first one where im in the marketplace.

    I was already making six-figures but barely, like right at $100,000 per year, in a traditional non-Alpha 2.0 business.

    Shorting sounds very risky and potentially dodgy.

    Risky, yes, very much so. Dodgy, no (unless you’re stupid and don’t do your research).

    At which point do you decide to stop with shorting if its not going the way you want?

    Based on your research beforehand (stop loss). Frankly, if/when I short things, I put in a small enough amount where I never stop shorting it. I just wait forever until it crashes (because it will eventually). Though I’m by no means a shorting expert so take what I say about it with a grain of salt.

    Timely article as it looks like the Fed will cut 25bps at the FOMC meeting this week.

    Yup. All 12 of those jerks can burn hell 🙂

    the market might see the conditions to rip this market higher on the sole reason that more liquidity is on its way.

    Yes, that could very well happen. Crazy!

    The next decade will be very different than this one.

    Oh, yes. In many, many ways.

  16. I was already making six-figures but barely, like right at $100,000 per year, in a traditional non-Alpha 2.0 business.

    solid thanks

  17. Nine rate hikes and QT while the SPX goes up 50% should put down the incorrect aphorism “Don’t fight the Fed”.

    But it probably won’t.

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