Jerry Seinfeld had the most popular show on TV. Then he quit.
He later said the reason he killed his show while it was thriving was because the only way to identify the top is to experience the decline, which he had no interest in. Maybe the show could keep rising, maybe it couldn’t. He was fine not knowing the answer.
If you want to know why there’s a long history of economies and markets blowing past the boundaries of sanity, bouncing from boom to bust, bubble to crash, it’s because so few people have Jerry’s mentality. We insist on knowing where the top is, and the only way to find it is keep pushing until we’ve gone too far, when we can look back and say, “Ah, I guess that was the top.”
Two things are important here.
One is that every investment is valued by taking a number from today and multiplying it by a story about tomorrow. Sometimes an asset is mostly numbers, sometimes it’s all story. But there’s always a story about future potential involved. And stories aren’t beholden to reason or logic – they’re just whatever people want to believe.
Are bonds overvalued? What is bitcoin worth? How high can Tesla go? You can’t answer those questions with a formula. They’re driven by whatever someone else is willing to pay for them in any given moment – how they feel, what they want to believe, and how persuasive storytellers are. And those stories change all the time. They can’t be predicted anymore than you can predict what kind of mood I’ll be in three years from now.
The other is that if an investment might have potential to go higher, somebody, somewhere, will test it to find out. People’s desire to get rich far exceeds the number of easy and obvious opportunities. So if you put up a sign that says “there might be an opportunity in this box” somebody will always open the box. Which is to say: we have to identify where the top is.
That’s why markets don’t stay within the limits of sanity, and why they always overdose on pessimism and optimism. They have to. The only way to know we’ve exhausted all potential opportunity from markets – the only way to identify the top – is to push them past not only the point where the numbers stop making sense, but beyond the stories people believe about those numbers.
Always been the case, always will be.
There are two things you can do about it.
One is acceptance that an insane market doesn’t mean a broken market. Crazy is normal; beyond the point of crazy is normal. Every few years there seems to be a declaration that markets don’t work anymore – that they’re all speculation or detached from fundamentals. But it’s always been that way. People haven’t lost their minds; they’re just searching for the boundaries of what other investors are willing to believe.
The second is realizing the power of enough. Being more like Jerry. A few years ago Chamath was asked about earning the highest returns and remarked:
I would really love to just compound at 15% per year. Because if I can do that for 50 years that’s just enormous. Just slow and steady against hard problems. Start by turning off your social apps and giving your brain a break, so you are more motivated to not be motivated by what everyone else is thinking about.
Maybe there’s more out there, but it’s fine to say, “You know what, I’m pretty happy with this level of risk and I’m fine just watching this game play out.” Not everyone can do it – and markets on average can never do it – but more investors can and should probably try.