I learned a long time ago that knowledge of people (including self) is more important than knowledge of things. The military strategist Sun Tzu wrote “Knowing thy opponent and thyself will win thee every battle fought”. He didn’t write “Knowing thy weapons and terrains will win thee every battle fought”.
As a leader in any context, one has to motivate and enable one’s followers to perform. As a follower (except for someone in a lab coat locked up in the back room), one’s performance depends on the cooperation and support of peers. No man is an island.
Knowledge of people translates to understanding people’s psychology, or simply “know how others tick”. I am educated left-brained (in engineering and business), and thus better with things than people. I don’t read people well, and doubt I ever will, even with the help of a bunch of psychology classes. I suspect that ability is shaped early in childhood by environmental factors. I am an only child and didn’t interact much with others of my age, so therefore never honed that ability.
So why am I even writing this, given my ineptness with people? It turns out that knowledge of people applies both at the individual level and in aggregate. It is the latter I have some insight on.
You see, I know a little something about finance, investment, and speculation. I have “played” the stock market for well over 40 years, experienced first-hand major market crashes (Black Monday in 1987, the Dot Com Bust in 2000, and the Global Credit Crisis in in 2008). Not only that, like any good “anal” geek, I performed thorough postmortems on all three to understand the “who, what, how, when” of each.
Textbooks would have you believe financial markets are about things. One applies sophisticated Capital Asset Pricing Modeling to make decisions on how to balance well-diversified portfolios. Textbooks further would have you believe financial markets are “efficient” (i.e. self adjusting for overpriced and under-priced situations).
If this were true, there would never be financial bubbles (because mis-pricing is self-adjusting). Truth is, the stock market had been nothing BUT a series of bubbles, driven not by financial calculus but by one single human emotion, — GREED. And if you want to look at the bubble bursts as “adjustments”, they too are not driven by financial calculus but by the other human emotion, — FEAR. That’s it! Those are the two strongest human emotions when it comes to the business world. (By the way, greed itself is often a manifestation of fear, — the Fear of Missing Out, or FOMO.)
The creation of bubbles is amply discussed in my other article “Investing” in the 2020s. Bubbles are how you make serious money. Having your stocks go up double digits day after day is positively orgasmic, — like watching the best porn on big screen with surround sound! You just don’t want to be among the last to head for the exit because everyone in the theater will be heading to the same exit when someone yells “Fire!”. You want to be among the first to exit and yell “Fire!” as the door slams shut behind you.
Ever noticed how easy it is to make money these days? Mom and pop’s IRA accounts, merely indexed to the S&P500 without even any stock picking, are making new highs almost daily, despite the world still struggling to come back from having been completely shut down last year. Does that make sense? Startups with ridiculous ideas get taken public by SPACs, netting founders millions of undeserved dollars. The latest insanity? Dogecoin!
Yet mom and pop and institutions alike still pretend they are “investors”. Investing is judging price appreciation of an asset based on financial calculus. Speculating is expecting price appreciation of an asset counting on a greater fool to come along behind you and pay a higher price. At this late stage of the current 12-year long bubble, there’s a whole lot of speculation going on.
So there you go. I may not be good at reading people individually, but I think I read market participants in aggregate pretty well.