Just a week ago, people were cheering yet another guru predicting mind-blowing growth for stocks like #NVIDIA (Nvidia’s market cap will soar to $50 trillion—yes, trillion—says early investor in Amazon and Tesla). Then, why were they holding their breath so anxiously when the stock was dangerously heading fast towards the $100 mark during the last trading session? If you truly believe something is worth much more and sooner or later the value will be reflected in the stock price, then why care so much about short-term price action?
#NVIDIA is just an example here, but you can observe the same behavioral pattern across the board in the market. Sadly, even among Fixed Income traders that, in theory, are supposed to be among the smarter ones in the pack. Yesterday, once again, I was asked why I don’t invest in stocks even if I spend so much time understanding them. Two reasons:
1 – If you see a house completely on fire but you know that inside there is a 50-carat diamond, would you risk running inside to fetch it and run out? This is exactly the reason why I am out of #stocks completely. Yes, you can make money, but it isn’t worth the risk. Furthermore, the longer the house keeps burning, the higher the chances it will fall over your head if you are inside looking for that 50-carat diamond.
2 – I don’t necessarily care about a stock or an asset per se, but what I do care about is understanding what’s going on. Similar to playing poker in a tournament, it’s not about the single hand you are playing, nor the one after it. In order to maximize your odds of getting ahead in the tournament till the final table, what matters the most is to “read your opponents” to understand the environment you are set into and then play accordingly, keeping your emotions at the very minimum (also to not give “tell signs” to the other players). Understanding that stocks are crap, broadly speaking, it is important to stay away from them and look for opportunities where there are high chances to find them, very simple.
Believe me, it wasn’t easy to get where I am now, in particular checking my portfolio NAV at most once a day (and never before going to bed) despite having the habit of keeping an eye on major market indicators and indexes nonstop. If you want a piece of financial advice from me, here you have it: observe the market to understand in which direction the world moves and whether or not there are opportunities to be exploited, but unless you are a professional trader (meaning trading is your only or major source of income), then checking your broker app multiple times a day will increase your chances of making mistakes driven by emotions and not rational decisions. Beware “trader” and “investor” are two very, very different things, if you don’t hold an asset for more than a year you are not an investor. period.
Understanding “who you are” is very important since, like in poker, the rules of the game might be the same, but when the rules of the tournament are different and you aren’t aware of that, you will simply play wrongly and ultimately end up being kicked out early by people outplaying you regardless of the cards they get.
Why was what happened in the past 48h a “storm in a teapot”? Simply because, as a matter of fact, and if you exclude JPY and BOJ insanity, the market moves we saw happening this week are “statistically normal.” Furthermore, all risk indicators in the market aren’t really sounding the alarm, yet. Ok, I do also agree the VIX is “broken,” but the MOVE index, FX Volatility measures, and Credit Spreads aren’t, so there isn’t much to worry about, yet. What is not normal, and here lies the problem, is the vast majority of people believing that stocks or whatever assets they invested in are supposed to go up every single day forever. Even worse is when people start to believe they can “predict the market” and begin leveraging to make more money faster to “retire young” while in reality, they are simply having a good run at the roulette table and betting all their stack in every next spin simply increases the chances of them being wiped out (because in the long run, the casino always wins).
To conclude, if you are feeling uncomfortable with what happened this week, then I have a piece of advice for you: spend the next weekend thinking hard about whether the risks you are taking are worth it. The ultimate goal is always to live a happy and comfortable life; if whatever you are doing goes against that, then it is better to reconsider it. 🤷🏻♂️