The Intelligent Investor
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Good morning.
With the tech-heavy Nasdaq Composite index dropping more than 10% since Feb. 12 and even bitcoin down sharply from its peak last month, tempers are flaring a bit.
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In last weekend's column, "You Can Earn 6%, 8%, Even 12% on a Bitcoin ‘Savings Account’—Yeah, Right," I pointed out that lending cryptocurrencies in these accounts carries some significant risks in exchange for the potential of high returns.
Some readers responded as if I had recommended cleaning your ears with a nail gun.
My mailbox filled up with emails telling me that I am "ignorant" or "lazy" and that the column was "stupid" or "ridiculous." One said "You're pathetic" and compared me, in a vivid phrase my editors won't allow me to show here, to soiled underwear.
That got me wondering: When investors get so angry at anyone who questions their approach, what should that tell us?
During the internet-stock bubble in 1999-2000, proponents went through three phases:
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First, they tried to educate skeptics: Let me explain why I'm right.
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Then, they lapsed into bragging about their profits: Mine is bigger than yours, so therefore I'm right.
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Finally, they resorted to namecalling, labeling doubters as idiots or likening them to various parts and products of the human excretory system. (I received many such valentines at the time.) In my experience, these messages peaked in early 2000, a few weeks before the bubble burst. Tech stocks went on to lose roughly 80% over the next two-and-a-half years.
Financial adviser and historian William Bernstein, in his new book The Delusions Of Crowds: Why People Go Mad in Groups, calls this "vehemence, verging on raw anger, directed at doubters," and says it is often the final phase of financial bubbles.
Such anger might seem strange. As the British philosopher Bertrand Russell wrote in 1928:
When there are rational grounds for an opinion, people are content to set them forth and wait for them to operate. In such cases, people do not hold their opinions with passion; they hold them calmly, and set forth their reasons quietly. The opinions that are held with passion are always those for which no good ground exists; indeed the passion is the measure of the holder's lack of rational conviction.
In Russell's view, anger arises out of insecurity.
More recently, psychologists have found that anger shapes not only how we treat each other, but how we make decisions. Anger makes people feel confident they know the truth and fosters the feeling of being in control of a situation, as if a devil is perching on your shoulder, dictating what to do.
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Jacques Callot, "Anger" (ca. 1620), Philadelphia Museum of Art
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Some unpleasant emotions—sadness, disgust—push us away from the target of our feelings. Anger makes us approach it. (Just think of how you want to wave your fist in someone's face when you're mad.) That "approach tendency" makes it harder to reverse a decision you're irate about.
Anger also fires people into feeling "indiscrimately optimistic about their future chances of success," as psychologists Jennifer Lerner and Larissa Tiedens have written. It also makes people more likely to make quick, impulsive decisions and less likely to consider alternative actions or viewpoints.
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Even his hair is angry:
"Head of Bhairava" (India, 11th century), The Walters Art Museum
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Taken together, all this suggests that anger is a useful emotion when someone is threatening your loved ones: It will drive you onto the offensive, focus all your attention on the threat and prod you into taking decisive action.
Those same features mean that anger is a destructive emotion when you're investing. You should always remain open to the possibility that someone else might have better information, that you might be overoptimistic, that you need to change your mind or undo a decision. Anger makes those options feel like cowardice.
Perhaps anger tends to foreshadow the end of financial manias because it makes skepticism almost impossible.
So, if you find yourself feeling angry when someone questions your investing decisions, that isn't a sign that something might be wrong with them. It's a sign that something might be wrong with you.
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Be well and invest well,
Jason
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Anna Atkins, "Delesseria sinuosa," cyanotype (ca. 1844). New York Public Library
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In last week's newsletter, I asked:
Have you recently been pitched a "safe" investment that didn't seem so safe to you? Or a high-return-low-risk asset that sounded too good to be true?
Lots of readers emailed back.
I was pitched a combination of structured notes by my banker, touting above market interest income, "participation" in market gains, a "floor" for losses (actually no floor at all if the losses exceeded 30% on the final day of each note), and "generous" call options. The devil was in the details, and involved highly asymmetric risk. —Chris Viscomi
Recently I have been pitched on something new to me amongst all the noise from the typical "forex gurus" and "binary crypto experts." Last week, someone approached me digitally to ask if I would be interested in learning about their non-fungible token gains, or NFT. These tokens are quite literally digital pictures of things, a common example is the NBA's collection of highlight reels...To me, this just seems like a market built around greater fool theory, given there really is no value or purpose to this. —Charles Rumberger, Piscataway, NJ
How about annuities saying you can get 11 to 12% annual return with no downside risk?! Sign me up. —Robert Miller, Tega Cay, SC
DLIF (Direct Lending Investment Fund)...promised double-digit returns on safely collateralized loans made (so the spiel went) to doctors looking for quick cash to build out their offices, etc. It was sold as safe for retirees. I rolled over my gains, which proved fictive....Two years ago, the fraud was exposed, a receiver took over and a wind-down began. We will see returns of capital (shorn of all "gains') on the order of 30-70 cents on the dollar....Investors included some big bulls and many hundreds of "accredited" investors, a large number of whom were retirees. —Michael Mendle
Two problem pitches, one of which I bought (yikes): 1) Harvest derivative strategy like UBS Yes that was supposed to deliver safe unspectacular returns...not so much. 2) A promised 12% return floor, with upside from lending money to borrowers shut out of banks at 20%. Said no to this one. —57scottowk
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When you feel negative emotions like anger or fear start to disrupt your ability to think calmly, what do you do to regain your mental composure? Did the 2000-02 Nasdaq crash, the 2008-09 financial crisis or last year's pandemic panic teach you some useful guidelines on how to restore balance and make calm investment decisions?
Just hit reply to this email to share your thoughts.
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Some Insights You Shouldn't Miss
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Claude Raguet Hirst (1855-1942), "Still Life with Bowl," Museum of Art and Archaeology, University of Missouri
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Here are some of the best things I found over the past week outside The Wall Street Journal:
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Value investing is doing so poorly now partly because it did so well in the past, making it less of a bargain, says fund manager Cliff Asness
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Can the ARK funds hold all the money investors have been throwing at them? ask Morningstar analysts Ben Johnson and Bobby Blue
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Financial adviser and historian William Bernstein talks about his new book on popular delusions with podcaster Barry Ritholtz
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It seems sleepy now, but inflation never naps forever, and when it finally wakes up it is often dangerously grouchy, says economist Ken Rogoff
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Two regions of the human brain appear to be able to forecast changes in stock prices, even if people don't always know it, finds a study in the Journal of Neuroscience
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Yes, there's a case for "investing" in non-fungible tokens, writes The Hustle, but it involves some bold assumptions and leaps of faith
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Archeologists at Pompeii discovered a nearly 2,000-year-old luxury vehicle, reports NPR, and it sounds like the Lamborghini of chariots
Here are some of the best things I found recently in The Wall Street Journal:
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Short-sellers are betting against superstar investor Cathie Wood's ARK funds as well as some of their favorite stocks, shows Michael Wursthorn
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In bitcoin and SPACs, financier Chamath Palihapitiya seems to be everywhere at once, report Peter Rudegeair and Maureen Farrell
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A physicist rang up $6.4 million in credit-card charges just to rake in the rewards—until the IRS reeled him in, explains Richard Rubin
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Miriam Gottfried and Mark Maremont profile Robert Brockman, the brilliant recluse who is facing charges of concealing about $2 billion of income offshore
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How the new boss of United Parcel Service Inc., Carol Tomé, is bringing a new focus on data to the delivery giant, by Paul Ziobro
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Our columnist Joanna Stern shows how to use technology to snag a coronavirus shot even when "no appointments are available"
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Your mom told you it's a waste of time, but daydreaming appears to unleash the power of creativity, writes contributor Alison Gopnik
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Have a question you'd like me to answer? Want to weigh in on what you just read? Got a tip on something that I or my colleagues should investigate? Itching to tell me I'm wrong about something?
Just reply to this email and I'll see your note. Don't forget to include your name and address.
Image credit: Mary Cassatt, "The Letter" (ca. 1890), Art Institute of Chicago
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Right before this, he was probably angry.
"Man's head on a turnip's body," advertising trade card (ca. 1870-1900), Boston Public Library
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When a man tells you that he knows the exact truth about anything, you are safe in inferring that he is an inexact man…. In matters where the truth is not ascertainable, no one admits that there is the slightest possibility of even the minutest error in his opinions. It is an odd fact that subjective certainty is inversely proportional to objective certainty. The less reason a man has to suppose himself in the right, the more vehemently he asserts that there is no doubt whatever that he is exactly right.
— Bertrand Russell
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