1/ We need to talk about the difference between "gambling" and "investing". Every market cycle has its risks. When times are tough, I remind investors that they own assets and have a perpetual claim on the *forever* future of the business absent insolvency. But....
2/ In bull markets, a different risk shows up. And that is the seduction of gambling. Right now, our culture makes it easier than ever to gamble. There are TV commercials, websites, and right now as I watch the Giants-Dodgers baseball game, gambling imprints placed on the mound.
3/ With investing, we now live in the Robinhood culture where almost two-thirds of the company's funds come from behind-the-scenes deals relating to options contracts that are...free to the user. The culture is presently begging you to abandon discipline at all turns.
4/ The problem is, there is a dark underside to all of this. The distinguishing characteristic of gambling is 100% loss. Whether it is a sports wager or a bet on a financial derivative, it is easy to take on the risk of 100% loss while discounting the possibility of occurrence.
5/ Guess what, stocks lost about a third of their value on a random, single day in 1987. Something analogous to that will happen again in our lifetimes and...the higher the market valuations, the more justified such a rapture-like market event.
6/ If you own large blue-chips with valuations between 15-25x earnings, this is not a big deal. Maybe means you go a year or two without gains under such a scenario. But if you are gambling on derivatives or stocks trading at prices divorced from value, the outcome can be fatal.
7/ To paraphrase a Warren Buffett quote, your ultimate outcome in life is going to be determined by your strength at your weakest moment. Well, if your weakest moment leads to justified 70-100% losses, that is not good! Decades can be lost!
8/ As a result, I wanted to offer a reminder that moderation is a market virtue. Hold cash, blue-chip stocks, take care of your health and relationships, and keep gambling to under 1% of your net worth. I offer this PSA when bad outcomes can be avoided entirely.
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