“Markets can remain irrational longer than you can remain solvent.”
I'd like for you to read the quote at the top of the page and let it soak in. Take a few moments and read it over and over and out loud if you have to so that you can become a believer in that statement. There is no greater cause for money lost than conviction in the wrong direction. This post goes hand in hand with the first post of this thread "Stick to the Plan."
The purpose of this post is to reassure you that neither I, nor you, nor your mom, nor your best friend, nor Goldman Sachs, nor the Market Maker, nor Warren Fucking Buffett know where the market will ultimately go. We have our charts, our technical analysis, our valuations, and we play the odds but ultimately that is all we are doing -- playing odds in our favor.
The stock market's prices are strictly an indication of future value based on speculation. As such, the "game" of speculation is determined based on future favor. Simply put, an equity's price is basically what people are willing to pay for it now based on where think the company's value will go later. That said, how is a stock's price often determined? Let's address this below.
People often mistake a company's market cap as the value of the company. That is not only wrong, but it will certainly mislead you into believing a company is good/bad depending on its size. A company's market cap is simply the total dollar value of a company's outstanding number of shares. In layman terms, market cap is the total number of shares a company has x the stock price.
Market Cap Example: Company A has 500 shares available for sale at $2.00/share. Company A's Market Cap is $1000.00.
So what's the point? Why does any of this even f'ng matter?
The point of this is to remind you that when you're wrong (you being everyone, myself included) you need to admit defeat quickly and get out of your false assessment. Markets move irrationally, and when that irrational behavior takes over against you, it will cost you more than you'd typically imagine. I will highlight this irrational behavior below with several examples, some present and some from previous days. To start, I will highlight the craziest one of them all -- the Tulips.
TULIP0MANIA
For those of you who don't know, Tulip Mania or Tulipomania was a period during the Dutch Golden Age where in 1593 tulips (yes the flower) was brought over to Holland from Turkey. They started off as a novelty and the flower quickly became sought after and ultimately pricey. Fast forward a bit and the flowers contracted a virus called mosaic that didn't kill the flower, but instead changed them causing "flames" of color to appear on the flower petals. This made the flowers more "rare" and "unique" flowers. This ultimately drove the price of the flowers through the roof. The flowers were subsequently priced based on how their virus alterations were valued, or desired. Seriously, people were putting different prices on the same flower because they thought one was more valuable than the other. Soon after, everyone began "dealing in bulbs" and boom a speculative tulip market was created and believed to have no limits.
Bulb buyers (the garden centers of the past) soon started to fill up inventories for the growing season. This only limited the supply further and increased the demand and "scarcity" of the tulip.
That's when supply and demand took over and irrational exuberance set in.
Prices started rising so fast and high that people were selling and trading their land, life savings, and their loved ones (joking here... I think) so they can get their hands on more tulips.
Now if you think I sound like I'm crazy you're right. I sound like I'm fucking nuts. But sadly I'm not, and I'm not making it up either. That really happened. So how high do you think the cost of a tulip bulb went in the 1600's?
$20?
$30?
$50?
I wish it stopped there.
Prices moved nearly 20-fold in a month in an already insanely overpriced market. At it's manic peak, an average bulb could be sold for 160-200 Guilders.
Put into perspective at today's prices, tulip bulbs (even the bad ones) sold between $48,000 and $64,000.
Tulip prices From November 12 1636-May 1 1637.
The point I'd like for you to take away from this is that markets set themselves. Let your positions run as long as you can afford to, respect your stops, and never think you won't have another opportunity like this again. It takes two sides to make a market and in doing so the market is always binary and always wins. Secondarily, whether it’s tulip bulbs, houses, .com stocks, crypto assets, or any other future novelty that will come; this shit is nothing new. It is all the same. The intrinsic value of whatever asset you hold is determined based on the scarcity of the supply and the perceived value at any given time. With any asset or store of monetary value there is always an inflection point where the risk paradigm skews in favor of releasing the “asset” and returning to “cash.” Cash here is in quotation marks to account for the different permutations of “cash” that have existed and will exist throughout time.
In the next post we'll cover the previous story using other, more practical, examples.