Human nature causes us to look back on past seemingly irrational behavior and wonder how it could have occurred.
We could examine, for example, the period of the late 1920s when everyday citizens became obsessed with stock trading. In those months, it was not even slightly unusual to learn that one’s friends, family members, or neighbors had committed their life savings to trade on margin, based on a “tip” from a cab driver, or their barber, or his or her mailman. And, of course, we know how that ended.
Hearing these stories of everyday people taking insane risks, we’d muse, “how could any rational person have done that?” “That’s irrational, we’d exclaim. That was just pure madness!”
Or perhaps closer to “home” for us today, how about the great “dot.com” bubble of 1999-2000? Looking back now, we think: “How could otherwise levelheaded folks invest huge portions of their net worth in a stock that just emerged in the previous year or two and had no hope of turning a profit for decades? Not only that, they’d happily pay a multiple of the company’s total revenue per share to get “on board before it launches to the moon?”
As we know now, for every Google that emerged from that bubble, 50 dot.com darlings joined the trash heap of history.
And further, the inexplicable part is watching this madness; it would never even cross most folks’ minds that they were staring at a golden opportunity. There were fortunes to be made by fading this bizarre behavior.
Jesse Livermore became a legend by recognizing opportunity and acting upon it in 1929. In the market that followed, Livermore made over $100 million. That’s about $1.2 Billion in 2020 dollars.
Michael Burry and Mike Baum made $Billions by merely taking the short side of what they could see as “worthless paper” in 2006 and 2007 when the banking world went psychotic, packaging worthless bad-credit mortgages, and selling them to the public.
Examples are legion throughout history.
One simple yet profound difference separated these individuals from the frenzied masses. That distinction allowed each to take the all-important step toward legendary status.
Each could keep their head when all around them were losing theirs. Full stop.
Sounds easy. Yet let’s look around us in 2020. How many will take the other side of THIS madness rather than get caught up in it? We submit that the number is minuscule compared to the enormity of the “crowd” itself.
Human nature is to look back later and ask, “why were these folks so caught up in this madness?”
Brilliance, however, is to examine this insanity in real-time and to ask, “how can I benefit from others’ madness?”
Let’s examine tonight a few examples. Sunday, in the Weekly article, we’ll discuss the significance of each. Beyond those displayed earlier today, here are some mind-numbing facts about August 2020:
The above is just a sampling of the hundreds of warnings before all of us- in plain sight. 2020 will be examined by market students with the same reverence and awe that 1929 and the “dot.com” bubble receives by today’s intellectually curious pupils.
The trading legends have not just looked back on such anomalies, however. They haven’t even only recognized them in real-time as they were occurring.
Those later identified “market wizards” went far beyond both. They acted.
The above were just examples of what occurred in August 2020. In an article entitled “Occam’s Razor” in late January 2020, we highlighted the extremes that were screaming “TOP” just before the February crash.
In the Weekly article Sunday, we’ll discuss the implication of the extreme historical anomalies and several others. It is okay for each of us to now ruminate on the special historical place that August 2020 represents.
Thanks for reading, and Good Trading!
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