In this bonus episode, Matt and I continue our conversation about stock market bubbles and in particular behavioral economics. We discuss how the future investing models might change based on more studies of human behavior. Smarter people than the two of us will study and dissect the market in new ways based on human participants.
We also chat about different areas of the markets, different aspects of bubbles, and how various investment strategies can work.
Be sure to listen to the end where I reiterate why I pound the table on simple portfolio allocations!
Like how do you separate. Piece of this may be coming from which psychological quirk from loss, aversion, information, availability, bias, whatever, any of these behavioral economics things are that skew the pure kind of physics-based evaluation of how markets are supposed to operate. We'll have some tools to understand better this kind of bubble question, right?
Are we frothing right now? How much is froth? How much is real? And even if it is froth, it reminds me a little bit of, I'm going to spoiler alert for Harry Potter. People who have not finished the seventh book, it's the scene in Kings cross where Harry Potter is with Dumbledore and that the chapter ends with, of course, all of this is happening in your mind, but why on earth would that make it any less real?
Just because this is happening in investor's minds, for all kinds of crazy we're human reasons doesn't mean it's not real and it doesn't have a real market effect and that it can't persist and that you can't invest around it.[:
I was like I don't think I read the ending.[:[:[:[:[:[:
And so that gets at this sort of exuberance or momentum. There's now another data point called the VIX and people start betting on the VIX, right? And so as you have these measurements, people start using them, it's a bet on or invest in, but I'd be curious too, because I don't know about parsing.
Parsing the market on behavioral data. It will be pretty interesting, but part of the issue with behavioral economics so far behavioral data and biases is that even knowing them, you still fall for them. And I still think we're in a young field in terms of trying to understand what it means on a variety of data points, not just the market.[:like the early it like circa:[:
And so that was the exuberance in that instance and that the oh 8 0 9 was very different in terms of the housing and who was participating in this one. Again, the participants in this market are very different. They're mostly retail. Investors, and that's interesting as well. And that gets a point.
I may like the access to the markets from having Robin hood apps and low cost, no cost trading and more participants that this rally is really being fueled by retail. And you could maybe say this time is different because they're not going to, get wiped out for X, Y, or Z reason, cause they're not a massive hedge fund where they're levered and, I don't think that's true.
I think it's still will, come down at some point investors for whatever reason will sour on particular parts of the market. And a little bit of, selling can go a long way quickly when you're levered up. I still think that's true, but who knows what it's going to be this time?use it's very different. I In:[:
And they were, creating these collateralized debt obligations and mezzanine CDOs, which were layers. It's all kinds of acronym soup. But the point is they were on the hook and that's what I think. Everyone rebelled against found revolting with the bailout was okay. The bailout worked, it paid back more than we put into it.
It was good idea. It was the right thing to do, but it was just like, you guys went out and treated wall street, like a casino, and now we're going to make sure that the rest of us don't get dragged down with you. That's a very interesting decision. So how does it matter? Kind of thinking about this bubble question, the difference between a wall street speculation, fueled bubble and a retail.
Hey, things are pretty good kind of bubble.[:
I'm not sure to answer your question, but I will say this, which is interesting around stability and unstability then. There may be a component where we try to make the markets more stable. Okay. And we try to say, oh look, you have these rules of participation, so that things stay rather stable.
So whether it's the fed now is jumping in and making the markets stable, more stable by buying up certain assets and putting floors on interest rates and other things to try to make the markets more stable. That's exactly what happened in oh 8 0 9 with housing that's very stable.
We have all these rules around housing. The banks took that stability and made it unstable. So you have this relationship between. Once you create stability, we will push that. Humans will push that further and further back to being unstable. So the banks did it with the CDOs and the mezzanines and all this stuff and reselling certain things and making up new instruments to push things, to try to make as much money as possible and create creating unstability.
And are we in the same situation now? You could say, oh, you have a ton of retail investors and we've made access completely free, easy push of a button. And maybe that's going to lead to more, unstable markets because of that.[:
a reform standpoint to try to create circuit breakers in the system. And so there are some not literal. I don't want to say literal, I'm not into this new fangled Merriam Webster definition of literal word. Literal means figurative. No, I call shenanigans. What are really intended in a emotional sense, like circuit breakers in the market.
If the market can't fall more than a certain amount in a single day, you shut off trading, Right.
You give everyone a cooling off. So there's stuff like that. And then there's more subtle. There's banks need to keep more real assets on their books. They can't get so levered up, that kind of thing.d we did see this recently in:[:
And no matter what you've created to try to make a stable environment now we will never have another depression. We will never have another recession. We figured it out. I'm not in that camp. I'm not buying like, Hey, we figured it all out. This is never going to happen again. We've got stability.
I just think humans are ingenious enough to find ways to push the limits. And there's so many different parts of markets. Now. It doesn't have to be like the market, it could be, a country, it could be sectors. It could be, crypto or NFTs or whatever it is.
Crashing down for X number of reasons. But I just think humans will keep pushing the limit. And so there's a lot of unstability in any situation.[:
Take a long-term view, take a deep breath. Maybe don't look at your statement from whatever financial services firm you're with. Just don't open the envelope, Chuck it for a while. And that seems like good long-term[:
If you were 70% and it's suddenly dips to 60, you're buying on sale. And so that's why you only want to tweak your portfolio until such time. That it goes roaring up or roaring down, and then you get it back in balance. You buy when they're on sale and you sell when they're high[:
Take the long-term view, throw out the statement kind of thing, but there is a segment out there and we've talked about it in previous discussions. There's a segment of the investing world out there that says, look, I want to do a little bit of speculating. And you said in our previous show on this are you investing?
Are you speculating? What are you doing? It's okay. If you have the money, it's free country. Do what you want. And so it does suggest to me this question of If you have some funds to speculate with, can you take advantage? Are there ways that we could think about. Having a better eye on here's some exuberance.
I see a bubble forming. I mean, Look, you remember the movie trading places and you remember when Dan Akroyd and Eddie Murphy are starting their big thing on the commodities market. They're going to corner the market on frozen concentrated orange juice. And then the scene cuts. There are these two old white dudes who are like, have been on the floor trading since the Dawn of time.
, oh no, it's it's duke and duke. Looks like they're trying to corner the market on frozen concentrate, orange juice. Let's get in on it. Is it possible for our listeners and your clients to like, be those two old white guys and to say, Hey, there's a bubble forming here.
Let's get in on it. Or is it just like subject to the same risk as any old bubble?[:[:[:[:[:[:
bad idea has occurred to other people makes me feel great[:[:
I love it.[:[:[:
So you have one problem, which is how do you jump back? When do you jump out? And so that's why I say yes, and yes, you can play the game. And so it's a momentum trading, and there's now robots. So speaking of robots, searching Reddit forums and parsing there's robots searching Twitter for how many times ticker symbols are mentioned.
So that gives you an idea of how popular they are, right? In terms of momentum. How many, how popular names and tickers, . You can imagine there's so much software running out there. Parsing Reddit, forums, Twitter, everything, to try to figure out exactly what you're saying, Matt. Okay. So that's who an individual investors are up against, right?
Understanding there's hedge funds that are, releasing software to measure these things, to try to figure out where the behavior. Is where the momentum is. Oh, it looks like AMC is really getting talked about more, maybe we should jump into that. So there's a lot of things that are going up against you as an individual investor, just trying to keep an eye on this stuff and then jumping in and out.
So that's why you get a yes. And yes, you can get involved in it and hopefully do well. But you have the same issues of when do you buy and when do you. And so the same with the total stock market here, we are talking about the total stock market. Hey, is now a time to sell? I don't really, I don't recommend selling because it could go up from here for two more years.
So you can't sell, if it's in your 401k and this is your retirement, I'm not going to tell you to do that. So you have the same issues, even when you're talking about, individual companies.[:[:[:
It sounds to me like the theme here is bubbles. And you could think of it as like a big bubble. We're all living under the dome, right? Like the Simpsons movie, we're all, I'm sure we're talking movies that were all under the dome. But there's another way to think about it, which is more like your kids bubble bath.
There are lots of. And they're going on every day, all the time. And if you want to do a little bit of momentum investing my guests is that one of the fundamental tenants of market economics is you assume. Perfect information symmetry. You assume that anything, is available to everyone else.
We're all acting with perfect information and that's in the real world, never the case. What really happens is there are time lags. I find out about something a little after you, or, I just never know about something. And so there are probably short-term. Little frothy bubbles. And it's probably a lot easier to try to ride those because I'm assuming that in the long run across the whole market, over a matter of days, like these big institutional investors are going to grind all of those asymmetries out and they're going to just roll across everything.
And that's the market is then going to recalibrate to that information.[:
And here's an idea that our a mutual friend came across using glass door, investing in the best rated companies, people that the employees who love their companies. And that strategy has done very well over the last three years. So you can come up with strategies and that's what these there's little books of investing.
They're called the little book of investing by multiple authors.[:[:
You can't just jump in. The worst thing you can do is to jump from strategy the strategy year to year, that will not work. And[:[:[:[:[:[: