Dear Reader,
Today I wanted to talk about an interview with another very wise, experienced, billionaire hedge fund manager named Stanley Druckenmiller.
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I recorded a quick video that explains everything for you.
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He was interviewed by Bloomberg TV about where we are in the market right now, and he said we are in a classic “melt up” situation.
There’s just too much money chasing too few opportunities.
When that happens people just start outbidding each other for limited shares of stock.
One of the things that helps me understand where we are right now is, imagine you’re at a party with 100 people.
And the drunker they get, the crazier they start to pay for your stock.
So somebody runs up to you and he’s really drunk and he’s like, “I’ll pay you $25 for your Rocket Lab!” and you say, “okay, I’ll sell that to you.”
They’re just euphoric.
Everybody’s excited and euphoric and crazy.
They start to say, “I think the S&P could go to $7,000! I think the Dow could go to 50,000!”
Everybody just gets so excited and drunk on euphoria.
What you have to understand is that when people start making money, it releases dopamine much like what happens when people drink.
There’s pleasure receptors.
So it actually distorts their capacity to reason at a high level.
And we are at that kind of melt up situation here, which is the hallmark of the top of all bull markets, where basically the capacity to reason soundly starts to go down as people get drunker and drunker.
So you know, you’re free to ignore the drunk person who wants to buy Rocket Lab at $25 a share, or you’re free to take advantage of them.
But you certainly don’t want to follow them for financial advice.
They’re distorted. They don’t have the emotional discipline, experience or wherewithal to understand what’s going on.
So right now, it’s like we are at a party with a bunch of drunk people running around singing, “happy days are here again.”
I like to visualize us on the sidelines of the party looking at the guys who buy biotech, the guys who buy tech stocks, the group that buys this, that – and you know, whenever they want to run over to us and make us a stupid offer for anything that we own, we’re going to sell it to them.
Conversely, a bear market is the opposite of that.
Imagine the same room of 100 people, but everybody’s really depressed.
“Omg… what’s going to happen? The jobs are never going to come back. The interest rates are so high.”
Everybody becomes a Debbie Downer.
In that situation the exact opposite dynamic is at play – you have capital and people come up to you and say, “Ugh, this is never going to work. I will sell you Palantir at $7 a share,” for example.
And you’re free to take advantage of those people.
You don’t want to take advice from them, but you know, we’re all adults here…
If they act against their own self-interest because they’re stunted emotionally – they don’t understand what chemicals are at play in their head, then we are fully allowed to take advantage of that.
It’s just kind of what investing is.
The stock market is a place where impatient people give money to patient people. Or less experienced people give money to more experienced people.
When you start ignoring valuations – the precedent by which all money is lent, all businesses are bought, all finance is done – when you start popping away from historical valuations, that’s where trouble starts.
You know, I’m the guy who likes to go home. I don’t think there’s anything you’re going to find after midnight at a party.
So, you know me – I leave the party at 12:00 because I like to get a good night’s sleep – both when it comes to investing and in my own personal life.
I wish the same for you. You know my #1 priority for you and for me is “don’t lose money.”
We are going to take advantage of every opportunity I see the market present over the next 4 years (and beyond)…
And I’m going to be here to help keep you from getting too drunk at the party – to stay on the right side of every trade.
Now, and forever, I hope.
That’s why members of my Alliance are lifers. Some of you are reading this right now – hello!
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