It is no secret that the stock market is in a bubble. The majority of investors are oblivious to it and are just interested in the thrill of the trip. They’re playing the “Fool’s Gambit,” hoping that a bigger fool would come along and buy their inflated shares. Why not? For years, bigger idiots have been turning up in droves. Low-interest rates inflated the value of all assets, driving everyone to adopt increasingly risky actions.
Then there’s greed, pure and simple. This market bubble, like other bubbles, is fuelled by a desire to “get wealthy quick” and a fear of losing out.
This time, the market has been further distorted by social media, which appears to be a massive amplifier and arguably prolonger of that behavior, providing what appears to be an infinite supply of incremental customers (bigger fools).
What is a stock market bubble?
A stock market bubble, also known as an asset bubble or speculative bubble, occurs when the price of a stock or asset rises exponentially over time, well above its inherent worth. As the bubble “pops,” prices eventually hit a ceiling and then plummet dramatically. Aside from equities, bubbles may develop in a variety of assets, including real estate, collectibles, commodities, and cryptocurrency.
The bet of the market timer
Rational individuals who aren’t greedy and don’t mind earning money slowly may want to stay away from this market. They may play a game called “Market Timer’s Gambit.” Their reasoning appears to be sensible on the surface. It goes like this: “For the time being, I’m going to wait on the sidelines and enter when the market drops.”
There are two issues with this approach. To begin with, market irrationality can persist for a long period. Second, while it sounds nice in principle, it is difficult to put into reality.
Here’s an example: Assume you went all cash and waited for the market to adjust. You’ve been waiting for a long time, and finally, the market drops 10%. You feel partially vindicated, but the market has only recently returned to its previous level. You must choose between getting in and waiting. Of course, you’re cautious, and the market is down, so you decide to wait.
The stock market has dropped another 10%. You’re feeling a little more confident now. You now feel rewarded for your patience, as well as the return you’ve been missing out on for the last few years. However, your instinct tells you that if the market drops 20%, it can fall far lower. You have to be patient.
You were absolutely correct. The stock market drops another 10%. The economic news is bleak. The economy might enter a recession as a result of the market drop. Alternatively, the economy may already be in a downturn. You’re now concerned. You make the decision to wait.
The stock market drops another 10%. You don’t want to part with this money since it has become so valuable to you. You think you’ve got it all figured out. You promise yourself that you’ll invest when the news improves.
The situation is not improving. But then something weird happens. There have been a couple of solid days in the market. Commentators have dubbed it a “dead cat bounce,” with analysts predicting additional falls. Following these few strong days, there will be a few more. Suddenly, the market has reversed the final 20% of its losses. You’re kicking yourself for not investing two weeks ago (at the now-obvious) low.
You get the drift. It’s extremely tough to go back into the market if you’ve been entirely out of it.
One Stock at a time
Investing in the stock market does not have to be as risky as Fool’s Gambit or the Market Timer’s Gambit suggests. “One Stock at a Time” is a different game that you may play.
Not all equities are overpriced and looking for a bigger idiot in this crazily inflated market. Look for high-quality firms managed by outstanding management that are considerably undervalued, armed with patience, a long-term time horizon, and our well-tested value investing approach (i.e., have a margin of safety).
Even if you get the market timing perfect once, it’s hard to turn it into a repeatable process. You must also time the stock market’s reaction to the economy in addition to getting the economy’s timing correct.
This isn’t a short procedure, and it won’t make you rich overnight. It necessitates drudgery and a lot of rock turning. We examine financial reports, speak with management and rivals, create our own financial models, and discuss these investments among ourselves and with our worldwide network of investors at our business.
Thousands of equities are available to investors throughout the world. We just require 20 to 30 people at our company. Our cash balances rise when we can’t discover enough equities that match our rigorous investing requirements, then fall when we locate new stocks. We don’t try to time the market; instead, we value individual equities, buying when they’re low and selling when they’re high.
To summarise, today’s stock market in the United States is a $1 bill worth close to $2 or more. Many $1 stocks change hands for $4, $6, or $20. But we don’t control the market; instead, one stock at a time, we’ve built a portfolio of firms valued advantageously at 30- to 60 cents on the dollar.