When you tell people something is a safe investment, money will flock to it. When money flocks to it, the price goes up. When the price goes up, people will see it as evidence that it’s a safe investment, so the price goes up even more. That’s essentially the logic behind the idea of index investing being in a bubble, proposed by Michael Burry.* Regular people are told they’re too dumb to understand when a stock is cheap or expensive, so they’re taught to just buy index funds.
What happens as a consequence is that the required level of intelligence to tell the difference between undervalued and overvalued assets simply goes down. I’m not going to claim I’m a genius. I don’t even have a long period of studying finance behind me. Rather, I’m going to claim that in the current situation even an average person can figure out that valuations no longer make sense. Here’s how. Take a look at this company, NVIDIA:
Earnings can be manipulated either way, so I tend to ignore those in favor of sales. Sales are how a company earns its shareholders money. So how is Nvidia going to earn you money? Let’s say it spends the next 23 years selling its products. It crafts them out of thin air, it fires its employees. It stops paying taxes over its profits, it hands the money over to you in a dark alley without any dividend taxes. It does this for the next 23 years. That’s how long it would take for you to break even. Does this make sense to you?
You have to come up with a really good story, to convince me that this company isn’t overvalued by 90% or so. “Really, 90%?” Yes. That would merely take it back to the valuation it had back in 2015-2016. This is the kind of giant company pension funds buy on your behalf. But they’re not the only one. Take Amazon. With its last reported earnings, it would take a total of 120 years, for Amazon to earn as much money as the company is currently worth. What could they possibly do, to justify this kind of valuation? Crank up their profit margin? You’ll just look for another webshop.
For whatever reason, everyone seems to have forgotten that a company actually needs to make a decent profit to be a good investment. “If it’s one of the biggest 30 companies in my country, then it’s fine.” Congratulations, if you’re German that means you bought Wirecard. The guy who has your money seems to have faked his death, good luck finding him.
But let me try to explain this in a different manner. Here are the biggest companies on the planet, back in the year 2000:
|Rank||Name||Headquarters||Primary industry||Market value (USD million)|
|1||General Electric||United States||Conglomerate||477,406|
|2||Cisco Systems||United States||Networking hardware||304,699|
|3||Exxon Mobil||United States||Oil and gas||286,367|
|4||Pfizer||United States||Health care||263,996|
|5||Microsoft||United States||Software industry||258,436|
|9||Intel Corporation||United States||Computer hardware||227,048|
|10||Royal Dutch Shell||The Netherlands||Oil and gas||206,340|
Look up the stock price of these companies, you’ll see what I mean. When you buy the biggest companies on the planet, you’re buying into a bubble. It’s much easier to tell when you’re in a bubble, than it is to tell when a bubble will collapse. That’s why I don’t really short sell. I’m happy I learned that lesson when I was young, when it was still a cheap lesson to learn.
So what are good companies to invest in then? Well, the most important two principles I can teach you when it comes to investing are as following: Market cap and Price to Book Value. Buying small companies, at low price to book values, is the way to see a return on your investment. Buying large companies, at high price to book values, is how you buy other people’s bags. You should look up the literature on this topic if you want to understand it better, it’s outside of the scope of this post.
The question now becomes how seriously you want to take investing. If you have less than 25,000 Euro and you’re not really that interested in the topic, I can recommend just letting professionals do the job for you. Japanese stock are currently very undervalued, particularly the smaller Japanese companies. They’re also relatively low risk. The easiest option I would recommend for most people would just be to buy a smallcap Japanese Exchange Traded Fund.
In my own situation, I like investing and understanding what’s going on behind the scenes. I also have quite a bit of money to invest, so in my situation I don’t really have to worry as much about broker fees eating into my profits. So, what I personally try to do is to build a well diversified portfolio of a variety of assets, most of which trade at a market cap between around 25 and 250 million dollar. This means I’m harvesting the small cap premium.
Here you can see my current portfolio:
At this moment, my net worth hovers around 275,000 euro, so I am still around 55% in cash. Almost all of this derives from cryptocurrency. In general, value investors are less hesitant to maintain cash on the sidelines in market situations like the one we have today. However, I do aim to increase my holdings. Specifically, I’m aiming to build up a portfolio comprised primarily of microcap quality-filtered value stocks.
In theory, if the stock market performs the way it has in the past, I now have enough money to stop working for the rest of my life. How is that possible? An investment strategy focused on selecting microcap value stocks filtered for quality and holding onto those stocks would historically deliver you a return of 20.3% per year. When you have a 20% annual return on 275,000 euro worth of stock, you’re technically done.
I’m not planning to stop working anytime soon however, for a number of reasons. To start with, I’m quite sure that a 20% annual return on your principal is currently possible, but I don’t know if it will be possible ten or twenty years from now. Artificial intelligence is getting better at investing, so what guarantee do I have that the market will remain as inefficient as it is today? This is an issue beyond my level of understanding.
Second, it’s not work itself that human beings hate, it’s working for a boss that we hate. Your monkey brain is very simple, it wants to be the monkey on top of the rock beating with its knuckles on its chest. The human equivalent of that is having your own business where you’re the boss. If you say to me “no, you’re a narcissist, I don’t want to be the monkey on top of the rock”, I say to you that you have convinced yourself that you don’t want to be the monkey on top of the rock because you simply don’t consider it a viable possibility.
Monkeybrain tells other monkeys to deliver it coffee and the monkeybrain is happy. Monkeybrain has to deliver cofee to other monkeys and the monkeybrain is unhappy. Why did I get depressed in college? You spend your days doing pretend work and paying for the “privilege”, while some middle-aged guy decides whether you get a passing grade or not based on his arbitrary judgement. For my monkeybrain, that feels like humiliation. Most people manage to bite through that humiliation, particularly young hyperfeminine women high in conscientiousness. A man doesn’t want to have someone else tell him what to do.
The problem is, when you bite through the humiliation as a young working class man, regardless of whether you’re indigenous white trash like me or originate from a more exotic background, you just set yourself up for a long path of more humiliation. If you’re not entirely naive you know the student fraternities are where you meet the people who actually end up running the world when they graduate.
So, you try to join a student fraternity, then the next thing you know is that you’re standing drunk in a ditch, as people feed you dead ground-up mice and defecate on you until you die. Remember what Foucault argued: Universities serve the purpose of justifying and institutionalizing socioeconomic power discrepancies within a pseudo-meritocratic society. One of the ways universities do this is simply psychologically: If you remember standing in a ditch as people fed you dead mice and defecated on you, you’ll spend the rest of your life with your human potential stunted, content working a shitjob where your boss expects you to ask permission to go to the toilet.
Sanda Dia matters, but not according to the Belgian university that simply gave his murderers an extra homework assignment and suspended them for a week after killing him. With a bit of luck Black Lives Matters will now ask themselves whether they should have been throwing molotov cocktails at their college professors instead of the police all along. Is there anything more amusing than watching a golem rise up against its master?
What the leanfire crowd seems to be missing is that you need something else to fill the void after you’re done working for a boss. I hate to break it to you, but you’re not going to be happy painting watercolours and growing vegetables in your garden forever. To your monkeybrain, that’s ultimately the equivalent of getting cast out of the group without dying of hunger. Sure, the monkeybrain prefers that over getting feces thrown at it, but it’s still not a path to happiness. The most important issue you run into is that it’s just hard to genuinely get to know people when you live that way.
Rather, I currently prefer to look at my assets as a hedge against the worst case scenario. What’s the worst case scenario? You get fired from your job and now you have to apply for a shitjob at some warehouse or a supermarket, just to avoid getting kicked out of your appartment. You wear a silly uniform with a nametag, someone you used to know walks in during their coffeebreak one day and you awkwardly pretend not to recognize each other. That’s the worst case scenario.
Having assets can essentially be considered a hedge against that, they give you a few years worth of time to build up an alternative in your life. A restaurant spends its first years generating a loss, a youtube channel will take months before it gets subscribers, you need to be able to survive such a period.
To be honest, what I would enjoy doing most in the foreseeable future is just turning a small pile of money that protects me against having to wear a name-tag into a big pile of money that allows me to do interesting things. I also genuinely consider analysing securities fun, that’s how big of a nerd I am. If you’re a millionaire, it becomes more fun: Now you reach the point where you can buy enough stock in a company to start influencing its decision making process. That’s power.
If you weren’t aware yet, your monkey brain enjoys power. The only reason I seem weird to you is because I am just honest about it. Your brain has sequestered all your dopamine away deep inside your neurons, keeping it hostage until you trigger a neural pathway that it interprets as meaningfully influencing how the world around you evolves.
Dumb people are blessed, they feel a sense of power when some guy from the other side of Europe wears a shirt of their local soccer team and kicks a ball into a net. You and me? You won’t get your dopamine shot until you find yourself in a space suit terraforming Mars or creating a Neanderthal-human hybrid in a lab or something along those lines. I might get a tiny bit of it if I’m sailing off the coast of Lithuania in a boat I commandeer myself, but even then I would probably still run into a sense of emptiness.
I have a number of regrets in my life. As a fourteen year old I said I wanted to buy stock, but I didn’t. My second big regret is going to college. You come from a good nest with parents willing to help pay for it and you have a clear vision of what you want to spend the rest of your life doing? Fine, go ahead. Most of us white trash don’t really have a clue and we just waste a few years of our life, only to end up at an office where we do a job that really doesn’t require any of the knowledge we paid for.
Why do I regret not buying stock? I missed out on a big bull market of course, but more importantly, I missed out on cheap learning opportunities. Sixteen year old me would have bought Tesla, just like any other naive boy. You’re an eighteen year old who threw a thousand euro at an ICO with nothing to show for it? In the long run it means nothing. You learned more from being scammed than you would from a year in college studying business. Your brain doesn’t like getting scammed, so it instantly figures out what to look for. “Well put together marketing campaign” Used to mean “great opportunity” to you. After getting scammed it now means “I’m the product” to you.
To make a long story short, I have one humble request to you, my dear reader. I’m asking you to please avoid being dumb enough to listen to people who tell you to simply buy index funds and try to convince you that you have zero ability to predict or comprehend what stage of the cycle the stock market is in. Remember, one way to control people that works almost without exception is to convince them of their own powerlessness. Listening to people like this means you’re buying companies like Wirecard and Nvidia, which means you’re handing your little pile of money away to guys with big piles of money. Please don’t be rich people’s bagholder.
*If you’re looking for any more reasons to admire Michael Burry, consider that he’s pleading on Twitter to end the lockdowns.