Hindsight offers us an advantageous lens through which we can critique the past mistakes of others. We all make more errors than we may care to acknowledge. So why not adopt a superior perspective and learn from the missteps of previous generations?
A simple analysis of historical price charts reveals a clear record of collective delusions. Market peaks, in retrospect, seem glaringly obvious. By closely examining these patterns, we might protect our hard-earned wealth from being squandered.
Consider bitcoin as an example. What were the buyers thinking when they purchased bitcoin for over $17,000 in late 2017? Couldn’t they see that a significant crash was lurking? Now, more than 16 months later, their bitcoins are valued at approximately $5,230—about 69 percent less than their initial investment.
Furthermore, if bitcoin doesn’t reach $1 million by the end of 2020, John McAfee—the well-known cybersecurity figure—will face an outrageous consequence: he must consume a personal part of himself on live television. It appears McAfee relied on a proprietary pricing model to support this shocking statement. Perhaps a bit more back-testing could have served him well before his public announcement.
That said, we shouldn’t write off McAfee just yet. He has 20 months before his bet expires; anything could transpire in that timeframe. While it seems improbable that bitcoin will reach $1 million anytime soon, it’s reasonable to hope that those who invested in late 2017 will recoup their losses more swiftly than the early 2000s dot-com enthusiasts did.
Down Beyond Measure
The savvy investors who bought Nasdaq stocks in early 2000 at over 5,000 were confidently thinking they were on the verge of wealth. Little did they know, the Nasdaq would plummet over 75 percent, shattering their optimistic illusions into countless fragments. However, the outcome could have been far worse.
By early 2015, the Nasdaq surpassed its peak from the early 2000s and has not looked back since. After navigating a bear market as vast as the Grand Canyon, the Nasdaq has soared over 60 percent from the pinnacle of the dot-com bubble, recently crossing the 8,000 mark.
Wouldn’t it be wonderful if markets were always this forgiving?
Certainly, those who invested in the Nikkei in October 1989 at over 38,000 would gladly accept a do-over. Nearly 30 years later, they remain down about 40 percent. When considering the lost opportunities over that span, their situation is far worse.
Indeed, countless years of wealth-building potential for several generations of Japanese investors have been squandered. They cannot reclaim their investment potential or the time lost. Some mistakes are, unfortunately, irretrievable.
Should we feel sympathy for them? Shouldn’t they have realized that the market was excessively overvalued in the fall of 1989? What caused this collective lapse in judgment?
What Were They Thinking?
Meanwhile, the truly infamous award goes to those who speculated on tulip bulbs in the Dutch Republic in January 1637. At that time, one tulip was worth as much as an entire estate. Just a month later, its value plummeted to that of a common onion.
By our estimates, tulip bulbs have remained comparable to onions for the past 382 years, and likely will continue to do so. Yet, for a brief period—from November 1636 to February 1637—people collectively lost their judgment. Charles Mackay captured this mania in his 1841 work, *Extraordinary Popular Delusions and the Madness of Crowds*, stating:
“Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after another, they rushed to the tulip marts, like flies around a honey-pot. Everyone imagined that the passion for tulips would last forever, and that the affluent from around the world would send to Holland, paying whatever prices were asked for them. The wealth of Europe would coalesce on the shores of the Zuyder Zee, banishing poverty from the favored land of Holland. Nobles, citizens, farmers, craftsmen, sailors, servants, maidens, even chimney sweeps and rag merchants dabbled in tulips.”
What on earth were these tulip bulb traders thinking? It’s clear they overlooked the fine print in their prospectus, warning that past performance does not guarantee future results. But would it have even made a difference?
The current cyclical price-to-earnings ratio for the S&P 500 stands at 30.62—almost double the historical average dating back to the late 19th century. Additionally, corporate earnings for the S&P 500 are projected to decline for the first time in three years. This discrepancy between price and earnings is likely to widen.
Clearly, U.S. stock markets are influenced by the Federal Reserve. Yet many current stock buyers remain under the illusion that risk has been eradicated and that the Fed can perpetually drive stock prices higher. Hence, the advice is to buy stocks—and buy more stocks—so as not to miss any potential gains.
It’s certain that future generations will chuckle at our actions and ask, “What were they thinking?”
Sincerely,
MN Gordon
for Economic Prism
