They Say “Stocks Are Overvalued”. Should You Listen?
Articles “Proving” That We’re in a Bubble Get Lots of Clicks. Don’t Let Them Scare You.
There are quite a few popular post here on Medium that make these claims:
“Stocks are overvalued.”
“The next bubble is just around the corner.”
“It’s 1999 all over again.”
According to these articles, the best thing you can do as an investor is to…
Realize your stock market gains now.
Sit on your cash and wait for the crash. (Or perhaps on gold or real estate.)
Look at “the fundamentals”.
Because if you don’t do that, you’re not investing. Your merely speculating.
Of course, there is a kernel of truth in here:
Bubbles exist. People can destroy their gains by being “too greedy”. Which is to say, by acting based on wishful thinking that “stocks always go up”.
And, of course, such bubbles have historically happened, and compounded into a market-wide bubbles that destroyed the fortunes of many.
So if you have money in the stock market, you should be aware of that risk. You should be able to make a distinction between the value that a company really has and the value that you would like it to have, just because you’re invested in it.
And you should also be able to tell whether a company deserves the valuation investors are giving it, or whether this valuation is just wishful thinking on the part of the other investors. That they believe that they’ll find an even greater fool, who’ll pay even more for the stock down the road. Not because of anything the company is doing, but merely because of the competition amongst investors, and because nobody wants to “miss out”.
In that sense, you surely need to “watch your fundamentals”.
The problem is:
Nobody knows what these fundamentals are.
Or rather, the disagreement is precisely about what should be considered fundamental and what should not.
The thing is:
People have been crying wolf for years. The next recession is always “just around the corner”.
Take the popular posts of Tim Denning here on Medium. I’m using him as an example, because he is such a prolific writer. But he really is just one of hundreds.
I had been close to selling my positions back in July 2020 due to arguments like the ones repeated in articles like those by Tim. Articles that repeat over and over again:
“Every boom is followed by a bust.”
“Better safe than sorry.”
“Gains are nothing unless realized.”
Inevitably, the authors of such articles love to compare the current situation with the dotcom-bubble, the 1929 crash, or even the Dutch Tulip mania.
Anyone who reads such articles and still has money in the stock market must surely feel like the proverbial Lemming running towards his own demise.
Alas, Lemmings don’t really run towards their own demise. That story, as it turned out, had only been a gimmick invented by Disney in order to get more eyeballs. And in the case of these fearmongering articles, we’ve got to ask ourselves the same question:
Who is writing this stuff?
It’s people who crank out a new article per day on a wide array of topics. And who get paid for eyeballs — i.e. the number of people clicking on their headlines.
This applies not only to “top contributors” on Medium, but also to financial news sites and blogs:
Fear just sells very well, as the spammy ads prove that say “Your capital might be at risk!”
(Duh! Of course it “might be” at risk. That’s the whole point of investing — putting your money on the line in the face of uncertain knowledge about the future.)
These doomsday perspectives have sold well in 2016. They sold well in early 2020, and they will always sell well. Of course nobody wants to lose their money.
But what about the other risk? The risk that you sit on your assets, and don’t put them to use because you believe that the crash is around the corner?
Look at the statements made in some of these articles.
Let me quote from Tim Denning’s “The Warren Buffett Indicator Shows the US Stock Market Is Dangerously Overvalued by 200%: The 2000s Dotcom Bubble is tiny compared to the current one, according to data from the US Bureau of Economics Analytics.”
He writes:
Stocks are overvalued. No doubt about it.
Such a statement warrants a bunch of questions:
- How could the author know this for sure? It’s statement about the future, after all. How could any mortal possibly have “no doubt” left about a prediction? Is it not the very nature of predictions that there is always room for doubt and uncertainty?
- How could this possibly be true for the stocks of any single publicly traded company out there?
- The market as a whole obviously disagrees with this assessment. Otherwise the stocks wouldn’t be “overvalued”. So even if an author picks some form of seemingly “objective” measurement in order to arrive at such a conclusion, he’d still have a lot of backing up to do. Because he is basically saying “Everybody else in the world is wrong”. It’s a Copernican statement.
It seems to me that articles that make clear-cut claims like that are simply appealing to our irrational desire for simple answers:
They are, in that sense, in the same category as wellness blogs that claim that eating Manuka honey prevents you from catching a cold. Such claims are appealing, because they give us a sense of confidence. They let us skip all of the messy worldly data that is often confusing and contradictory, so we can feel as if we know exactly what is going on.
My first reaction, when reading such articles, was anger:
“How immoral of these people to spread such ideas! People who act on them will suffer the consequences, while the author of such articles is making money from them, no matter what.”
There are authors who have been claiming that the next crash was just around the corner, and that the best thing you could do is sell your stock now. And they said that in early 2020. Had you followed their advice, you would have missed out on ROI in the two-to-four-digit percent range.
When such authors, in spite of rising stock prices, continue to repeat their message, I would have expected at least something like…
“I’ve been predicting a crash since July (or whatever). The market has risen by x % since then, and some popular stocks by as much as y %. Anyone who followed my advice would have lost out on these gains. This includes myself. It hurts, of course. And I have struggled with the thought that I might have misjudged the situation, and perhaps should course-correct now to avoid even greater losses. But here is why, even after these months of new data, I am again coming to the same conclusions: …”
But what’s behind my anger?
An irrational belief.
The irrational belief that people who make their living by writing articles on the internet should give a damn about the effect their ideas have on the people who consume them.
This is an irrational belief, because that just isn’t how the system works. If you publish an article, Medium (and any other online publication) will show you how many people clicked on your headline. It will also show you how many people read your piece. These are the metrics that determine what you get paid, and how you rank in comparison with other authors. The actual value of the ideas that you spread, on the other hand, is not being measured at all.
It’s not only that it doesn’t have any effect on your paycheck. It’s actually all but invisible to you.
When we read articles on the internet, especially when they feature a name and a photo of the author, we seem to automatically assume that reading and article by someone is similar to talking face-to-face. In real life, when somebody shares his worldview with you, there is a human connection. The other person might have strong views. But they would, if their view proved to be wrong, or cause you harm, feel ashamed for it.
We believe that the internet gives us access to the same kind of intellectual exchange — just liberated from the constraints of our physical location and social network. But this isn’t actually true. On the internet, people can “drive-by-shoot” their ideas on you. They’ll just drop whatever it is that seems like a newsworthy stream of thoughts on you. And then they move on to the next piece.
“Who cares what I wrote 6 months ago?”
That is how it works.
And it makes sense under the circumstances:
As an author on the internet, going back to something what you wrote six months ago will not earn you eyeballs or clicks. Posting new stuff will. Especially controversial stuff, or stuff that triggers powerful emotions like hate (politics) or fear (finance).
It’s not the authors. It’s the dynamics of the Internet. Everybody is constantly looking for the next shiny thing.
So if you’re expecting advice that you can trust in articles that are trending on Medium, you will be utterly disappointed. It is almost a contradiction in terms. And being angry about “bad advice” or “authors who just want to make you click” won’t change anything.
My conclusion from all of this:
Anyone who really wants to harden their investment strategy against wishful thinking is much better advised to read a bunch of books on history’s stock market crashes.
The people who write books work for months and years.
They don’t crank out unfinished ideas or opinions.
And they are much more conscious that, once their book is published, it will be there for people to judge ten, twenty, fifty years from now.
Plus, a book gives you a lot more data to compare against the current situation. Some which will point towards a similary, and some which will point away from it.
Your takeaway from such homework will be nowhere as clear-cut as the claims made in the headlines of clickbaity articles.
But they will be much closer to ground-truth. And something to give you a firm foundation for decisions that will make or break your financial future. Decisions that you will be able to stand by in the face of distraction — and to adapt in the face of new data.
