“Investment guru” Howard Marks latest memo: How to get out of the market before the crash

For a hundred years, the stock market has been ups and downs, and it has never stopped. Countless cycles have passed through the historical sky like bright shooting stars.

Why is there a “cycle”? Why do investors put so much energy into the ongoing battle against market volatility? Because their investment psychology is always influencing the direction of the market. As long as humans are involved in investing, we’ve seen them happen again and again.

In this latest memo titled “Bull Market Rhymes,” Oaktree Capital co-founder Howard Marks analyzes the regularity of the bull market cycle and points out that through investors Behavior can determine the current stage and get out of the market before it crashes.

Out of the pursuit of wealth dreams, investors will lack the appropriate fear in the bull market frenzy, and the emergence of this kind of frenzy indicates that the risk is approaching.

Investors must know when bull market psychology takes hold and maintain the necessary caution, Marks said . “Bull mentality” is not a compliment, it means mindless behavior and high risk tolerance, and investors should be worried, not encouraged :

It is risk aversion and the fear of loss that keeps the market safe and sane. Marks noted that asset prices depend on fundamentals and how people perceive those fundamentals . High returns in a bull market make people more confident that new things, low-probability events and optimistic outcomes will happen. When people are convinced of the value of these things, they tend to come to the conclusion that “stocks were never too expensive.” At this time, new entrants bought aggressively, and the stock market remained high. Prudence, selectivity and discipline disappear when they are most needed.

Marks also cites the current stock market conditions as an example:

On Wall Street today, news of a rate cut pushes the stock market higher, but then the expectation of inflation due to lower rates pushes the stock market down, and then the realization that a rate cut can stimulate a depressed economy pushes the stock market higher, and then , the stock market eventually fell amid fears that an overheating economy would lead to another rate hike. Max said bluntly that he believes in the enduring investment adage, so the greatest investor behavior should be “a wise man begins and a fool ends.”
Howard Marks says ETFs can't go on forever - KED Global

Below is the full text of the memo:

While I use a lot of aphorisms and quotes in my memos, only a few make it to my top list, and one of my favorites is Mark Twain’s quote:

History will not repeat itself, but it will repeat with a similar rhythm.

It is well documented that Mark Twain said the first four words in 1874, but there is no accurate evidence that he ever said the latter.

Over the years, many people have said similar things. In 1965, psychoanalyst Theodor Reik made the same point in an article titled “Out of reach”. He added a few more words of his own, and I think his formulation is the best:

The cycle is iterative, with its ups and downs, but the process is basically the same, with little variation. Some people say that history repeats itself, but this may not be accurate, history just repeats with a similar rhythm.

The investment events of the past will not be repeated, but the main theme of the event will be repeated, especially related to investment behavior, which is exactly what I study.

Over the past two years, the cycle Reik writes about has had its ups and downs and caught the attention of the market. What strikes me in particular is the re-emergence of the typical style in investment behavior that will be the subject of this memo.

Let me state in advance that this memo does not predict the potential direction of the market . As an example, the market’s bullish behavior started when it hit a bottom in March 2020, but since then there have been serious problems and major corrections both inside the economy (inflation) and outside the economy (Russian-Ukrainian conflict). No one, including me, can know how these things combine to affect the future.

My purpose in writing this memo is simply to put recent events in historical context and uncover some implicit lessons . This is crucial because we have to go back 22 years ago, before the tech-media-telecom bubble burst in 2000, to see the beginning of a real bull market and the end of the bear market it caused. Many readers have not experienced the events of the time because they started investing late.

You might ask, “What were market returns like before the global financial crisis in 2008, 2009, and the pandemic in 2020?”

In my opinion, prior to both crises, the market was rising gradually, not going parabolic. The rise was not driven by mania, nor were stock prices pushed to crazy heights, and high stock prices were not the cause of either crisis. The 2008 and 2009 crises stemmed from the housing market and the emergence of subprime mortgage securitization, and the 2020 crash was the result of the Covid-19 pandemic and government shutdowns to contain it.

Regarding the aforementioned “true bull market”, my definition of it is not from Investopedia:

  • The price of an asset or security in a financial market continues to rise over a period of time.
  • The market typically sees a 20% rally after a 20% decline in stock prices.

The first definition is too bland and fails to capture the core sentiment of investors in a bull market. The second definition is wrong, a bull market should not be defined by a percentage change in price. For me, it’s best described in terms of how it feels, the investor psychology behind it, and the investment behavior it engenders.

I started investing long before the bull and bear market numerical standards were set, and I thought such standards were meaningless. Does the S&P 500 drop 19.9% or 20.1% really matter? I still prefer the old-school definition of a bear market—nerve-racking.

Excess and Correction

My second book is Mastering the Market Cycle: Getting the Odds on Your Side. As we all know, I am a student of cycles and a believer in cycles. I have gone through several important cycles (and education) over the years as an investor.

I believe that knowing where we are in the market cycle can inform us of what comes next. But when I was two-thirds of the way through this book, I suddenly thought of a question I hadn’t considered before: Why are there cycles?

For example, since the S&P 500 index was born in 1957, the average annual return over the past 65 years is slightly more than 10%. Why can’t its return be 10% every year? Just to add to the question I raised in my July 2004 memo “The Doctrine of the Mean”, why did the S&P 500 return between 8% – 12% only 6 times during this period, why was it at 90% The performance in time is far from this?

After thinking about it for a while, I think it can be explained that there are “overs and corrections” in the market .

If you compare the stock market to a machine that you want to keep running steadily over time, it makes sense. However, I think that the significant influence of investor psychology on their decisions can go a long way to explaining the volatility in the market .

When investors start aggressively bullish, they tend to draw the following conclusions.

First, everything will always go up, and second, no matter how much they pay for an asset, someone else will buy it from them at a higher price (the “Greater Fool Theory”) because They are highly optimistic about the market:

  • The stock price will rise faster than the company’s profits, and the increase will be much higher than the fair value (excessive rise).
  • Then the investment climate starts to disappoint, the folly of overpaying becomes apparent, and the share price falls to fair value (correction) before falling further below that price level.
  • A fall in the stock price can further trigger pessimism in the market, which in turn causes the stock price to fall well below its value (excessive fall).
  • Buying at the bottom will eventually push the depressed stock price back up to its fair value (correction).

Excessive upsides can result in above-average returns for a period of time, and excessive downsides can also result in below-average returns over a period of time. Of course, there may be other factors at play, but I think that “overs and corrections” can explain most things. During 2020-2021, we saw some excessive gains in the stock market, and now we see them being corrected.

Bull Psychology

In a bull market, a favorable environment will lead the stock price to rise and boost investor confidence, and this investment confidence will induce aggressive actions, which will then lead to further stock price increases, and then there will be a more optimistic investment mentality and continued risk-taking operations. .

This upward spiral is the essence of a bull market, and its upward trajectory seems unstoppable.

In the early days of the outbreak, we witnessed a classic asset price crash. The S&P 500 first hit an all-time high of 3,386 on February 19, 2020, before plunging by a third in just 34 days, before falling to 2,237 on March 23. However, with the joint efforts of various forces, the stock price rose sharply again:

  • Among them, the Federal Reserve lowered the federal funds rate to near zero and announced massive economic stimulus measures along with the Treasury Department.
  • These actions have given investors confidence that state institutions will do whatever it takes to stabilize the economy.
  • A rate cut significantly reduces the expected return on an investment, affecting its relative attractiveness.
  • These factors combine to force investors to start taking risks that arise in the short term.
  • Asset prices then rose: By the end of August of that year, the S&P 500 had recouped all its losses and rose past February highs.
  • Big gains in FAAMG (Facebook, Amazon, Apple, Microsoft and Google), software stocks and other tech stocks drove the market higher.
  • Ultimately, investors concluded that they could expect the stock market to continue rising, which is also in line with their conventional mindset in previous bull markets.

Like the last point above, the most important thing in bull market psychology is that most people think that the stock price rise is a positive signal for the future market, and many people start to become optimistic. Only a few people would suspect that this market is excessively rising, and its returns are dependent on future expectations, so the rise will not continue and the market will reverse .

This reminds me of another of my favorite adages that I first learned about 50 years ago, ” The Three Phases of a Bull Market” :

The first stage , when some visionaries start betting that a bull market may come;

The second stage , when most investors realize that a bull market is happening;

The third stage , when everyone thinks the bull market will go on forever.

Interestingly, even though the stock market quickly turned from a weak March 2020 bottom to a May boom, led by the Fed, skepticism was the most common investor psychology I saw during this period, they asked me The most questions are:

The environment is so bad, the epidemic is raging and the economy is stagnant, can the stock market still rise? It was hard to find optimists back then. Many investors became what my late father-in-law described as “handcuffed people”: they didn’t buy stocks because they wanted to, but because they had to because the cash returns were low. Once the stock market starts to rise, they chase higher prices out of fear of being left behind .

Therefore, the stock market rally appears to be the result of the Fed’s manipulation of capital markets, rather than good corporate earnings or investor optimism. It wasn’t until the end of 2020, after the S&P 500 rose 67.9% from its March bottom and 16.3% for the year, that investor psychology finally caught up with soaring stock prices.

Bull markets rarely go through the first stage, and the probability of going through the second stage is also very low. Many investors have changed from the deep despair at the end of March of that year to the extreme optimism later.

It’s a good reminder for the moment. While some themes of historical events do repeat themselves, it would be a big mistake to expect an exact repeat of history.

Reasons for optimism, super stocks and new things

In a frenzied bull market, investors can become hysterical . In extreme cases, their thoughts and actions deviate from reality. The premise here is that something must emerge that both stimulates investors’ imaginations and prevents them from thinking carefully.

So it’s worth noting that there’s always something going on in a bull market: new developments, new inventions, and reasons to push stocks higher.

Bull markets, by definition, are characterized by upward prosperity, increased confidence, gullibility, and investors’ willingness to pay high prices for assets, all of which in hindsight prove to be out of bounds. Historical experience has shown that keeping these characteristics within reasonable bounds is critical. For this reason, the rational or emotional reasons that can stimulate a bull market come from new things and cannot be explained by historical experience .

History has amply proven that when markets experience bullish behavior, stock valuations are pushed higher, and investors begin to embrace new things without hesitation, the consequences are often very painful.

Everyone knows (or should know) that after a parabolic rise, the stock market typically falls 20% – 50%. However, as I learned about “the willing suspension of disbelief” in my high school English class, the above behavior continues to recur among investors.

Here’s another of my favorite quotes:

The feeling of ecstasy was and is little known. People’s memory of financial markets is very short, causing financial crises to be quickly forgotten. And when the same or very similar situations repeat themselves, even within a few years, the crisis will be hailed as a major financial and economic discovery in the eyes of a young and extremely confident new generation. In all walks of life that human beings dabble in, there are few industries that are as meaningless as the financial industry. In a way, historical experience becomes entirely a part of memory, a primitive refuge for those unable to appreciate the spectacle of the present – John Kenneth Galbraith, A Brief History of Financial Ecstasy, 1990

I’ve shared this quote with readers many times over the past 30 years because I think it sums up some important points nicely, but I haven’t previously shared my understanding of the behavior it describes. .

I don’t think investors are forgetful. Instead, knowledge of history and appropriate caution are on one side of the scale, and the pursuit of wealth is on the other, and the latter always wins. Reminiscence, prudence, realism, and risk aversion only get in the way of the dream of getting rich. So for this reason, when a bull market starts, investors are always short of moderate worries .

Instead, it’s often a case of looking beyond historical valuation standards. This phenomenon was described by Anise Wallace in an October 11, 1987 New York Times article titled “Why This Market Cycle Isn’t Different.” At the time, people were optimistic and positive, looking for a reason for the abnormally high stock price, but Wallace pointed out in the article that this kind of thinking is untenable:

John Templeton, a 74-year-old mutual fund manager, once pointed out that the four most dangerous words in investing are “this time is different.” Investors will always use this reason to rationalize their emotion-driven decisions during periods of ups and downs in the stock market. Over the next year, many investors will likely repeat these four words in defense of high stock prices. But they should view the stock market rally with a “the check’s in the mail excuse to delay” attitude. No matter what the brokers or fund managers say, the bull market will not last forever.

As a result, it didn’t take a year, just eight days later, the world encountered “Black Monday”, and the Dow Jones Industrial Average plunged 22.6% in a single day.

Another explanation for the bull market is that investors believe that certain businesses must have a bright future. This applies to the “Nifty Fifty” growth stocks of the late 1960s; semiconductor manufacturers of the 1980s; and telecommunications, networking, and e-commerce companies of the late 1990s. It is believed that every development can change the world, so past business realities do not limit the imagination and willingness of investors to invest. They really changed the world. Still, the high valuations that were once considered justifiable did not last .

In many bull markets, the rapid rise of one or more groups I call “super stocks” has made investors increasingly optimistic. Growing optimism has driven stock prices to highs, a feature of past market cycles. This positivity and higher valuations are further reflected in the valuations of other securities (or all securities) through relative value comparisons and a general improvement in investor sentiment .

Looking back at the previous two years, in 2020, 2021, FAAMG (Facebook, Amazon, Apple, Microsoft, and Google) topped the list of companies that excite investors with unprecedented market dominance and ability to scale. FAAMG’s stunning performance in 2020 caught investors’ attention and supported the general bullish trend.

By September 2020 (within six months), these stocks had nearly doubled from their March lows and were up 61% from the start of the year. It’s worth noting that these five stocks are heavily weighted in the S&P 500, so their performance led to a good overall rally in the index, but it distracted attention from the other 495 underperforming stocks.


The massive success of FAAMG has had a generally positive effect on tech stocks, where investor demand has surged, and as is the case in the investment world, strong demand has spurred and increased supply. A notable barometer in this case is the attitude of unprofitable companies toward IPOs.

Before the tech bubble of the late 1990s, there were relatively few IPOs of unprofitable companies, which surged during the bubble, but have since declined again. In the bull market of 2020 and 2021, unprofitable initial public offerings (IPOs) have experienced a big rally as investors backed tech companies’ desire to scale and biotech companies’ spending needs on drug trials.

If companies with bright prospects are fueling the bull market, then something new in the market could be helping fuel its rise . A SPAC (backdoor listing) is a recent example. Investors offered these newly formed companies a blank check for their acquisitions, and they could get their money back with interest if the following two conditions were met: “If the acquisition is not completed within two years, or if the investor disagrees with the proposed acquisition “.

It appears to be a “no loss” (the most dangerous word in the world) trade, with the number of SPACs soaring from 10 in 2013 to 59 in 2019 to 248 in 2020 and 613 in 2021 indivual. Some companies made huge profits, while in other cases, investors got their money back with interest and principal. But a lack of skepticism about untested innovation, coupled with a bullish mentality, has led to too many SPACs being created, either by competent or incompetent promoters, who get paid handsomely for completing acquisitions… any acquisition.

Today, the average selling price of SPACs through acquisitions and exits since 2020 is $5.25, compared to an offering price of $10.00. It’s a good example of how new things are not as reliable as investors think — investors are again paying for “something that must never happen.”

Proponents of SPACs argue that the entities are just another way for companies to go public and are not concerned about its potential role. My focus is on how investors embrace an untested innovation in hot times.

Another dynamic on the innovation factor is also worth mentioning, showing how “new things” can contribute to a bull market:

  • Robinhood Markets began offering commission-free trading in stocks, ETFs and cryptocurrencies a few years before the pandemic hit. In the wake of the Covid-19 outbreak, that has encouraged people to flock to the stock market and start speculating, as casinos and sporting events have stopped gambling.
  • Millions of people who have not lost their jobs have received generous financial subsidies, which means many have increased their disposable income during the pandemic. And social networking sites like Reddit have turned investing into a “home quarantine social event.”
  • As a result, a large number of novice retail investors flock to the stock market, many of whom lack basic investing experience.
  • Newbies can get excited by admiring a public figure and claim that “the stock market can only go up.”
  • As a result, many tech stocks and “meme stocks” (grouped retail stocks) surged in price.

The last emerging thing worth discussing is cryptocurrencies. For example, proponents of Bitcoin cite its multiple uses and its limited supply relative to potential demand. On the other hand, skeptics point out that Bitcoin lacks cash flow and intrinsic value, making it impossible to determine a fair price. Regardless of which side is right, Bitcoin satisfies some characteristics to benefit from a bull market:

  • Bitcoin is relatively new (although it has been around for 14 years, people have only paid attention to it in the last 5 years).
  • Bitcoin prices have surged sharply, from $5,000 in 2020 to a high of $68,000 in 2021.
  • According to Galbrait, it’s certainly something previous generations “couldn’t appreciate.”
  • In all of these respects, it fits perfectly with Galbrait’s description of something that “is ardently embraced by a new, young and very confident generation as the great innovation in finance.”
  • Bitcoin is now more than halved from its 2021 highs, but the thousands of other cryptocurrencies that already exist have fallen even more.

The 2020 astounding performance of FAAMGs, tech stocks, SPACs, holding stocks and cryptocurrencies has fueled the fascination and added to the general optimism among investors. It’s hard to imagine a full-blown bull market without something unprecedented or unheard of . Beliefs in “what’s new” and “this time is different” are typical of the recurring bull market theme.

race to the bottom

Another bull theme across cycles is the detrimental impact of bull trends on the quality of investor decision-making. In short, when cool sanity is replaced by burning optimism :

  • Asset prices rise
  • Greed trumps fear
  • Stop worrying about losses, turn to worrying about stepping out
  • Risk aversion and caution fade away

It must be remembered that it is risk aversion and fear of loss that keeps markets safe and sane . The above-mentioned developments usually lift the market, wiping out caution and rational thinking, making it a dangerous place.

In my 2007 memo, “Race to the Bottom,” I explained that when investors and capital providers have too much money in their hands and they are too eager to put it to work, they bid too aggressively for securities and lending opportunities. Intense bidding drives down expected returns, increases risk, weakens safety structures, and reduces fault tolerance.

  • The prudent investor stood his ground, saying, “I’m sticking with 8% and strong covenants.”
  • Its competitor responded: “I accept 7% interest and ask for less covenant.”
  • The most unruly people don’t want to miss the opportunity to say, “I can accept 6% interest and no covenant.”

It’s a “race to the bottom,” which is what people often say “the worst loans come from the best.” When people are distressed by a recent loss and afraid of going through more, that’s not going to happen . The Fed’s massive response to the global financial crisis has ushered in more than a decade of record economic recovery and stock market gains, but it has also been accompanied by:

  • A wave of IPOs by loss-making companies
  • Record issuance of subordinated securities (high-risk CCC-rated bonds)
  • Companies in high-volatility industries (tech and software) issue large amounts of debt, sectors that people tend to avoid in times of prudence
  • M&A and acquisition valuation multiples continue to rise
  • Risk premium continues to fall

Favorable developments also encourage greater use of leverage. Leverage magnifies gains and losses, but in a bull market, investors are convinced that gains are inevitable and ignore the possibility of losses. In such a situation, few people can find a reason not to take out debt, because the interest cost of debt is negligible and can increase the return of success.

However, adding liabilities at high prices late in an up cycle is not the best way to succeed. When things get bad, leverage can turn against you. When investment banks issue debt at the end of their investment, they get into trouble. Debt “hanging” on a bank’s balance sheet tends to become a “canary in the coal mine,” suggesting danger looms.

Since I believe in the time-honored investing adage, at this point, it is quite appropriate to quote from what I believe to be the greatest investor behavior adage, “The wise begin, and the fool end . ” People who bought stocks during the first phase of a bull market, with lower prices due to widespread pessimism (such as during the global financial crisis in 2008 and 2009, and early in 2020 during the COVID-19 pandemic), have the potential to earn great returns with minimal risk , the main prerequisites are funds and guts.

But when a bull market heats up, and decent returns encourage investor optimism, the traits that make those returns are desire, credulity, and risk-taking. In the third stage of a bull market, new entrants buy aggressively and stocks remain high. Prudence, selectivity and discipline disappear when they are most needed .

Of particular note is that investors who are optimistic and rewarded by their risk tolerance often no longer discern investment opportunities. Investors not only believed that something “new” was sure to succeed, but in the end they concluded that the field had a bright future, so there was no need to make any further distinctions.

For these reasons, “bull market mentality” is not a compliment. It implies mindless behavior and high risk tolerance, and investors should be worried, not encouraged. As Buffett said, “The less careful others are with their own affairs, the more careful we are with our own.” Investors must know when bull market psychology takes hold and maintain the necessary caution .

Pendulum effect

Bull markets don’t happen out of thin air. The winners of every bull market are winners for the simple reason that there is some truth behind their profits. However, the bull markets I described above tend to inflate the value of stocks and push them to levels that are too high and therefore vulnerable. And, upward swings won’t last forever.

I wrote in “On the Couch” (January 2016): “In the real world, things usually swing back and forth between ‘pretty good’ and ‘not too hot.’ But in the investing world , people’s expectations often change from “hopeful” to “desperate.” In the market, taking things too far is one of the key characteristics of investor behavior. During a bull market, investors believe that it is difficult and unlikely to happen. And something unprecedented will definitely work.”

But in less buoyant times, good economic news and “beating expectations” have failed to spur buying, and rising stock prices are no longer regrettable by investors with low positions. Therefore, we see that people are no longer willing to temporarily put aside their doubts, and the mentality quickly turns negative.

Investors can interpret almost any piece of news, positive or negative, depending on how it is reported and their mood, which is the key. (The comic below, my all-time favorite, was published decades ago, looking at the depths of those antennas and TV cabinets, but it’s clearly the text that is relevant to the subject of the moment.)

On Wall Street today, news of a rate cut pushes the stock market higher, but then the expectation of inflation due to lower interest rates pushes the stock market down, and then the realization that a rate cut can stimulate a depressed economy pushes the stock market higher, and then , the stock market eventually fell amid fears that an overheating economy would lead to another rate hike.

Reversing this prevailing statement reflects the “hope-to-despair” process I mentioned earlier. While there is some truth to the idea that a bull market will happen, when it goes well, investors see it as a foregone conclusion. However, when some flaws in this view were exposed, it was considered completely wrong.

In the good days (about a year ago), tech bulls said, “You have to buy growth stocks because their earnings are likely to grow over the next few decades.” But now, after a slump, we have instead Hear: ” Investing based on future potential is too risky. You have to own value stocks because you can be sure of their present value and they’re reasonably priced.”

Likewise, in good times, investors who participated in IPOs of loss-making companies said, “There’s nothing wrong with companies reporting losses, and it makes sense for them to spend money to scale.” But the story is different now, with many saying, “Who would invest in Unprofitable companies? They just burn money.”

People who haven’t spent much time watching the markets might think that asset prices are all about fundamentals, but that’s not the case. Asset prices depend on fundamentals and how people perceive those fundamentals. Therefore, changes in asset prices depend on changes in fundamentals and/or how people perceive changes in those fundamentals.

Company fundamentals are theoretically subject to so-called “analysis” and maybe even forecasting. Views on fundamentals, on the other hand, are subjective, unaffected by analysis or forecasting, and change more rapidly and dramatically.

Some colloquialisms also reflect this view:

  • The balloon deflates much faster than it inflates.
  • Things happen later than you think, but they happen much faster than you think.

As for the latter, in my experience, we often see positive or negative fundamentals coming together for a period of time without the stock price reacting. But then a tipping point — both fundamental and psychological — is suddenly priced in, and sometimes over-represented.

What will happen then?

Bull markets do not treat all industries equally . As I discussed before, in a bull market, optimism is most strongly concentrated in a certain class of stocks, such as “new things” or “super stocks.” This category of stocks rose the most, becoming a symbol of the bull market during this period and attracting further buying. The media focused the most on these stocks, prolonging the process. During 2020-2021, FAAMG and other tech stocks are prime examples of this phenomenon.

The truth is self-evident, but I will say that investors who hold a large number of stocks that are leading in a bull market are doing well . Some fund managers are smart enough or lucky enough to focus on these stocks, so they achieve the highest returns, optimism prevails, and at the same time they appear on the front pages of newspapers and TV shows. In the past, I’ve said that our industry is full of people who are famous for consistently making the right decisions. And for fund managers who are smart enough or lucky enough to add to the sectors that lead the bull market, the famous ones can double.

However, stocks that rose the most in up years tended to lose the most in down years. The adages that apply here come from the real world, but that doesn’t make them less relevant: ” Success is bad, but defeat is bad”, “If you rise, you will fall”, and “The higher you climb, the harder you fall” :

The first tech fund grew 157% in 2020, from obscurity to fame. But it’s down 23% in 2021 and another 57% so far in 2022. A $100 invested at the end of 2019 was worth $257 a year later, but has now dropped to $85. Another less volatile tech fund rose 48% in 2020 but has since fallen 48%. Unfortunately, the 48% upside and the 48% downside don’t cancel each other out, in fact, for every $100 invested, there is a net $22 drop. The third tech fund was up a staggering 291% in its first year, but fell 21%, 60%, and 61% in the following three years. Over those four years, the $100 invested at the start was worth only $43 at the end, representing an 89% drop from the incredible highs at the end of the first year. Wait a minute, the current boom/bust period hasn’t lasted four years. No, I’m citing results from 1999 to 2002, when the last tech bubble also burst. I mention them just to remind you that the current performance is a reenactment. Earlier I mentioned Robinhood, the originator of commission-free trading. It is the epitome of digital currency stocks during the 2020-2021 bull market. Robinhood went public at $38 per share in July 2021, and the stock surged to $85 a week later. At just $10 today, shares are down 88% from their highs in less than a year.

But the average performance of stocks isn’t actually that bad, right? The tech-heavy Nasdaq Composite is “only” down 27.4% in 2022. A feature of this “bull market” is that the largest constituent stocks are the best performers, boosting the index . Consider what this means for the rest of the constituents, which means 22% of stocks are down at least 50%. (Data here and below as of May 20)

Below are the declines in some of my random picks of well-known tech, digital currencies, and innovation stocks. Perhaps, when some of the stocks here are at their peak, you feel guilty for not picking up:


Suppose, you still believe that stock prices are determined by a consensus of smart investors based on fundamentals. If so, why did these stocks fall so hard? Do you really believe that the value of these businesses has evaporated by more than half on average over the past few months? This question raises some questions that I have often wondered about.

Bitcoin often moves in the same direction amid wild swings in the stock market. Is there some underlying reason behind this that causes a correlation between the two movements? The same goes for market linkages between countries: when Japanese stocks start off sharply, European and American stocks tend to follow suit. At times, it seems that U.S. stocks are leading while Japanese stocks are falling at the same time. Are the fundamentals of these countries linked enough to cause them to move together?

My answer to all of these questions is usually “no”. The common denominator is not fundamentals, but psychological factors, and when the latter changes significantly, all of these things are similarly affected.


For investment students, the most important thing is not what happened in a particular time, but what we can learn from those events. We can learn a lot from the 2020-2021 trends, which are consistent with those of previous cycles. In a bull market:

  • Optimism is built on things “doing really well.”
  • The impact is strongest when the stock price rises from a base that is quite depressed both psychologically and price-wise.
  • Bull market psychology is free of worry and has a high level of risk tolerance, so it is accompanied by extremely aggressive behavior. Taking risks pays off, while the need for hard work is overlooked.
  • High returns make people more confident that new things, low-probability events, and optimistic outcomes will happen. When people are convinced of the value of these things, they tend to conclude that “there are no stocks that are too expensive.”
  • These effects will eventually cool down after they (and prices) reach unsustainable levels.
  • Markets at high levels are vulnerable to external events, such as the Russian-Ukrainian conflict.
  • The assets that have risen the most, and the investors who are accumulating them, tend to experience painful reversals.

I have seen this happen many times in my career, and not one of them is entirely fundamental, instead, psychological factors are the main cause, and the way the psychology works is unlikely to change. That’s why I’m a firm believer that as long as humans are involved in the investing process, we’ll see them happen again and again.

Also, be aware that the wild swings in the market are basically driven by psychological factors, which is fairly obvious, and if at all possible, market movements can only be predicted when prices are extremely high or low.