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hey jj here with the other values so today i want to talk about uh a memo by howard marks better in investor howard mark's a memo called bull market rhymes which is really important really good one i think i'm going to summarize to give my thoughts on it if you want to hear the full podcast and you sing this on twitter i'll put a few first few seconds up there but click the links to go to the full podcast all right let's get straight into it so bull market rhymes so he talks about last few last few years really in the stock market and what's happened is written he wrote a book called uh about market cycles a few years ago his last book it was really good so he talks about that too but he starts off by saying one of my favorite adages is widely attributed to mark twain history doesn't repeat itself but it does rhyme it's well documented that twain used the first four words in 1874 but there's no clear evidence that he ever said the rest many others have said something similar over the years and in 1965 psychoanalyst theodore rake said essentially the same thing in an essay titled the unreachables he said here there are recurring cycles ups and downs but the course of events is essentially the same with small variations it has been said that history repeats itself perhaps uh so this is perhaps not quite correct it merely rhymes the events of investment history don't repeat but familiar themes do occur especially behavioral themes it's these that i study that's uh that's uh howard mark's saying that in the last two years we've seen dramatic examples of the ups and downs rake wrote about and i've been struck by the reappearance of some classic themes in investor behavior that will be the topic of this memo i want to mention up front that this memo has nothing to do with assessing the market's likely direction from here so he's not predicting any you know what's going to happen from here but you know just looking at the last couple of years a bull market shouldn't be defined as a percentage price movement for me it's best described by what it feels like the psychology behind it and the behavior that psychology leads at that that the psychology leads to does it really matter where whether this s p 500 is down 19.9 or 20.1 percent i prefer the old-school definition of a bear market nerve-wracking and we could say that it's kind of been nerve-wracking lately and the nasdaq's down way more than 20 percent as you as he said the i mean that was from a news headline about uh the market being you know 19 20 down but it feels like a bear market right now there's no kind of no doubt about that i think you had have to agree so he says excesses and corrections my second book is mastering the market cycle getting the odds on your site i would highly recommend that book i've read it's really good and i read it uh before like the 2020 uh covert sort of bust and then the and then the and then the the parabolic move after that so it was really a good time for me to read it it's well known that i'm a student of cycles and a believer in cycles i've lived through and been schooled by several significant cycles during my years as an investor i believe understanding where we stand in the market cycle can give us a hint regarding what's coming next if the stock market was a machine it might be reasonable to expect it to perform consistently over time instead i think the substantial influence of psychology on investor investors decision making largely explains the market the market's gyrations so behavioral investing that's generally called and you know he talks about that in the book and market cycles talking about taking the temperature of the market anyway let's go on when investors turn highly bullish they tend to conclude a everything's going to go up forever and b regardless of what they pay for an asset something else will come along to buy it someone else will come along to buy it from them for more the greater full theory because of the high level of optimism so he's got some bullet points here stock markets rise faster than company profits soaring well above fair market value access to the upside eventually conditions in the in in the investment environment disappoint and or and or the folly of the elevator prices becomes clear and they fall back toward their fair value correct that's correction and then through it so past the correction stage the price declines and generate further pessimism and this process eventually causes prices to uh to far unders understate the value of stocks excess that's access to the downside resulting buying on the part of uh bargain hunters causes the depressed prices to recover toward their their fair value correction the excess to the upside makes for a period of above average returns and the swing towards excess on the downside makes for a period of below average returns there can be many other factors at work of course but in my view excess and corrections cover most of the ground we we saw a number of excesses to the upside in 2021 20 and 2021 and now we're seeing corrections seeing corrections thereof so he talks about uh this is just a summary he goes further talking about how markets spends most of his time to the upside or downside so the s p 500 averages for instance you never really get the average it's usually more or less than the average so you know it doesn't it doesn't as far as the the swings go it doesn't it's hardly ever kind of in the middle it's always up or above like a like a wave so bull market psychology in a bull market this is a heading in bull market psychology in a bull market favorable developments lead to price rises and lift investor psychology positive psychology induces aggressive behavior aggressive behavior leads to higher prices rising prices encourage rosie psychology and further risk taking the this upside spiral is the essence of a bull market when it's underway it feels unstoppable so yes can we think of anything any time time recently in the last couple years where this has happened we saw a classic collapse of asset prices in the early days of the pandemic for example the s p 500 reached a then all-time high of 3386 in february 19 2020 before falling by one third in just 34 days yes i'm sure most of us remember that well if you're not new you're not super new to investing to a low of 2237 on march 23 after that a number of forces combined to produce massive price gains here we go i think we will remember that the federal reserve cut the fund feds rate to the fed funds rate to roughly zero and uh fed was was joined by the treasury in announcing massive stimulus measures these actions convinced the investor that these institute institutions would be what it would do whatever it took to stabilize the economy the interest rate cuts uh significantly reduced the prospective returns required to make investments look attractive in relative terms this combination of factors forced investors to bear risk they had been running for they had been running from just a short time earlier as their prices rose by late august the csb 500 had retraced its decline and surpassed its february high again the fang hit the fact the fam facebook amazon apple microsoft and google saved for software uh stocks and other tech stocks rose dramatically pushing the market higher eventually investors concluded as they often do when things are going well that they could expect more of the same this is i remember this this so well this is when people uh kind of let's just call it started piling in so the most important thing about bull market psychology is that as cited in the final bullet point above most people take take rising stock prices as a positive sign of things to come many are converted to optimism relatively few suspect that the gains are to date might be excessive and borrowed from the future returns and and they uh and they and that they may they may herald a reversal not not continuation that reminds me of another of my favorite adages one of the first ones i've learned roughly 50 years ago the three stages of the bull market so i think this is really this is really simple and really succinct here and it's worth really remembering for the next time around the block whether that be 10 20 years or earlier or in certain sectors and certain stocks the first when a few forward-looking people begin to believe things will get better the second when most investors realize improvement is actually underway and third when everyone concludes that things will get better forever and i heard a lot of people say that in late 2020 and the old stocks only go up so the bull market of 2020 was unprecedented in my experience and that there was essentially no first stage of the very and very little of the second many investors went straight from hopeless in late march to highly optimistic later in that year this is a great reminder that while some themes do recur it is it's a big mistake to expect history to repeat exactly raging bull markets are examples of mass hysteria and at the extreme thinking and thus and this behavior becomes unmoored from reality and thus behavior comes unmoored from reality in order for this to occur however there has been so some factor that activates investors imagination and discourages prudence thus a special attention should be paid to an element that almost always characterizes bull markets a development a new development invention or justification for rising stock prices so this uh i've done previous episodes of a book called boom and bust it was about uh financial bubbles and they say that too it's either they kind of brought it down to two things that could kind of cause bubbles and that was you know a new technology people getting in super excited about a new technology new end of innovation and we can think about the innovation stocks it was actually called innovation this time and uh and also another one is government policy sometimes like real estate boom real estate bubbles can be can be uh can be generated that way so bull markets are both he says mark says bull markets are by definition characterized by exuberance confidence credulousness and willingness to pay higher prices for assets all at levels that are shown in retrospect to have been excessive history has generally shown the importance of keeping these things in moderation for that reason the intellectual or emotional rationale for bull market for for a bull market is often based on something new that history can't be used to discount so it's new it's a new economy like in the combo all the previous valuation all the previous metrics don't matter we're in a new era sort of happens quite often in these super bowl markets for certain in certain sectors or in the dot com bubble it was pretty widespread those last six words are very important history and history amply demonstrates that when a markets exhibit bullish behavior b valuations become excessive and see that the latest thing is accepted without hesitation the consequences are often very painful everyone knows or should know the parabolic stock market advances occur and recur embedded by what i've i learned in high school english class to call the willing suspension of this disbelief i don't think investors are actually forgetful rather knowledge of history and the appropriate appropriateness of prudence sit on one side of the balance and the dream of getting richer sits on the other the latter always wins memory prudence realism and risk aversion would only get in the way of that dream for this reason reasonable concerns are regularly dismissed when bull markets are get going which is so true and we've we have all experienced that recently with certain stocks and sectors another justification for bull markets is often found in the belief that certain businesses are guaranteed to enjoy a terrific future this applies to the nifty 50 growth companies the late 1960s and a disk drive manufacturers in the 1980s and telecom internet and e-commerce companies in the nine in the late 90s each of these developments was believed to be capable of changing the world such that the past realities of business need not constrain investors imaginations and willingness to pay up in many bull markets one or more groups are anointed as what i call super stocks the rapid rise makes investors uh increasingly optimistic in this in the circular process that often characterizes these markets this rising optimism takes the stocks to still higher prices and some of the positivity and appreciation reflects favorably on other groups of securities and all securities through through relative value comparisons and or because the general improvement in investors moved so he was talking he's saying topping topping the list of companies that fed investors excitement in 2021 where the fed whether not the fangs the fam fams he says f-a-a-m-g so he's including microsoft there and not netflix whose level of market dominance and ability to scale had never never been seen before the dramatic performance of the banks in 2020 attracted attention of investors and supported a widespread swing towards foolishness so it's is a it's talking about the this is the kind of bubble well the biggest stocks are the smaller stocks that really took off wasn't it but it caught it it caught fire and spread these stocks had nearly doubled from their march lows and were up 61 from the beginning of the year notably these five stocks and heavily weighted in the s p 500 so their performance resulted in a good overall gain in the index but this distracted attention from the far less impressive performance of the other 495 stocks in the s p 500 the performance of the super stocks inflamed investors uh our door uh enabling them to disregard worries regarding the persistence of the pandemic and other issues the raging success of the fang fans uh created a luster that rapidly posit that reflected positively on tech stocks and general demands soared to stocks in the sector and as as as as usual is the in the investment well strong demand encouraged and enabled supply and so then he talks about the ipo process the uh one notable barometer in this case was the attitude towards ipos and the unprofitable companies which soared prior to the tech bubble of the 1990s ipos from companies that didn't make money were relatively rare they became the norm during the bubble but their numbers sank altogether thereafter in the 2021 period bull market uh ipos from unprofitable companies experienced the big resurgence as investors eagerly made allowances for tech companies desire to and to scale and biotech companies need to to spend on drug trials all right i'm going to leave it there because that's we're up to when the bubble took off and this is i'm gonna break this into two so this is i find this a this is a fascinating memo demo and uh i know a lot of people won't read it so i'm kind of just summarizing it and saying what i think but he spells it out and the nexus is back so i'll leave it there so subscribe if you found this valuable and subscribe on youtube and for video youtube and spotify video and catch me on twitter at the out of value as i said i put the first few seconds of this on twitter and i'm gonna do part two and i'll upload that to break it into two so come ring the bell on youtube and uh and uh and on spotify to to get the second to be notified of the second part of this okay see you next
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