The market hasn’t and it’s condemned to repeat it — again!
Experience is the best teacher. And she is cruel mistress!
Building Arks with Jason Clendenen recently posted his article Elon Musk And Mark Cuban Are Trying To Make You Poor and he couldn’t be more right. Fear of missing out and greed is taking over the market just like it has so many times in the past.
In the 1920s, there was a similar fervor about the stock market. It was called the “Roaring 20s” partly because of this. Joseph Kennedy, the father of President John F. Kennedy, told a story about a shoeshine boy giving him stock tips. That’s when he decided to get out of the market. Having this insight, he became a multi-billionaire in today’s dollars when he shorted the market in 1929!
Similarly, in the late 90s, the market got overvalued during the DotCom bubble and could have been called the Roaring 90s! The stock market, especially the NASDAQ, was flying high. Unemployment was extremely low, especially in areas like the Silicon Valley.
DotCom companies that had the fundamental value of a gas station had a market capitalization of $100s of millions! This couldn’t last and it didn’t. After the negative downturn, there were stories lamenting the fact many near-retirement seniors had their 401ks cut in half. The joke was that they now had 201ks!
The question no one seemed to be asking was — why would someone so near retirement be investing in an overvalued and over-heated stock market?
In 2008 it was a different kind of bubble. It was an overheated housing market but a bubble just the same. With interest rates near zero, buying a house was extremely cheap. You could buy a house you couldn’t afford with very little down and an initial low-rate adjustable mortgage, but when the low, introductory offer periods ended, the homeowner couldn’t afford to pay the monthly payment.
This cascaded because Wall St. was selling Credit Default Swaps (CDS) with the same mortgages repackaged multiple times. The movie The Big Short tells a complicated story in a convoluted way but gives a basic idea of what happened. The bubble burst bringing down some major financial firms which led to a market decrease of -34%.