Human beings easily create illusions that, like Santa Claus, we later grudgingly reassess. This phenomena is particularly obvious in financial markets but shows up in less measurable forms in every sphere of human endeavor. Today’s essay is about a few contemporary illustrations of this timeless theme.
Our illusions are often achingly obvious in retrospect, be it a stock pick or a relationship. The trick is seeing the illusions in the moment. What’s always attracted me to speculators is the willingness to bet against today’s Santa Claus and be measurably right or wrong. I recall a conversation I had with George Soros a few weeks after Putin became Russia’s President.
What’s your assessment of Russia’s new President? I asked.
Not to be trusted, Soros said.
Four words. How did he know? With Soros, I’m not sure. For the rest of us, trying to force our thinking into coherent frameworks—be they about valuing securities or psychological health or ethics—seems to help. But only to a degree. Fighting illusions is a daily struggle.
The Stock Market
For the second time in my life I’m watching tech euphoria give way to reality. Even if you find the stock market boring, the phenomena of violent swings reveals something notable in human nature. The most popular index of technology stocks has fallen a cool 20+% this year. In the previous technology stock market collapse in 2000, technology stocks lost 80% of their value over 3 years.
Shockingly, even after this year’s rout, many stocks that don’t make money are still expensive. I am not a single stock investor, so don’t take this as a lesson to buy or sell. Still with certain stocks, investors are, by traditional measures, more hopeful than pessimistic.
Each of these stocks has a story. Air Bnb replaced hotel rooms with private apartments. They created a marketplace. Huge supply equaled lower prices. What’s not to like? Well, as Gary Larson said, “on the internet, no one knows you are a dog.” A place that looked fantastic on the screen turns out to be a dank shoe box. Could I get a refund, please? Nope. Inside the shoe box, a lightbulb goes off. A Marriott is like McDonald’s—they provide a standard, quality controlled product. That’s what you pay for. Uber tried a similar concept with taxis. Carvana tried taking Amazon’s business model and applying it to cars.
None of these companies make money, at least not yet. Air BnB is valued 50% higher than Marriott. The NASDAQ chart above reveals the last two years of commentary—breathless TV shows, bold headlines and hours of analyst research—was a distraction. Investors believed a reality that didn’t exist. It’s also worthwhile noting that after the last tech bubble burst it took 15 years and a lot of money printing before stocks regained those heights. This time, that doesn’t seem likely.
The Supreme Court
You could argue the stock market is mob rule. Why should we expect regular people to judge something as complicated as the stock market? A council of experts, on the other hand, shouldn’t be prone to such errors, particularly if they wear dark robes and sit in silence for much of the year.
I am not a lawyer but against the backdrop of recent decisions it doesn’t require being one to see the Supreme Court’s history of error is long. The last time I recall staring at any of these decisions was in high school history class. The top of the list is Dred Scott, which, to refresh your memory, just prior to the Civil War insisted that African Americans are, essentially, lesser beings. Some scholars believe the decision helped trigger the Civil War.
If you have not looked at the actual text, it is shocking. The Supreme Court asserted Blacks are an “inferior order … and so far inferior that they have no rights which the white man was bound to respect.” Elsewhere, the Court said African-Americans are an “inferior class of beings, who had been subjugated by the dominant race, and … remained subject to their authority.”
Other Supreme Court cases upheld forced sterilization, Japanese internment, Jim Crow laws, and criminalizing homosexuality. Defendants of the court might argue that this was the minority of cases, an institution can only move as fast as the society, and eventually the errors were corrected. The bigger point to me: small groups of experts are just as vulnerable to illusion as stock market mobs. That applies well to CEOs, boards of directors and Politburos.
Dictator Downside
According to recent polling by Carnegie, about 60% of Russians support the war. Of the 40% that don’t, many are now scrambling to figure out their lives. Where to live? What documents to apply for? How to earn a living?
These people are often the most sophisticated slice of Russia. They are the lawyers, doctors, university professors and intellectuals. As a group, they knew Putin was bad, but they failed to see just how terrible things could get. Right before the invasion, some told me Putin was bluffing. Now they are caught.
Russia will jail them or worse for speaking the truth and the West is criticizing them for not protesting more forcefully, thus the logic of tightening visa restrictions for Russians. This week, I watched the Russian documentary Kolyma about the far East region where Stalin’s labor camps were concentrated. To this day, a portion of the people swept up in this maelstrom think Stalin was a good guy. I wouldn’t have believed it myself until I saw the film.
The list goes on and on. We grow up accepting whatever we grew up with as normal. For those that grow up with some chaos—be it via alcohol, drugs, poverty, mental illness or any other of the classic disruptions—seeing the illusion rarely comes with the clarity of a stock market crash. Instead, in fits and starts one gets perspective. Just like with stocks or government, a framework for what is healthy goes a long way as does looking at what illusions about ourselves we hold dear.
Polls
In last week’s poll I asked what “enough” meant. Of those that responded, 42% said enough was health, family, shelter and work. But 54% said enough was that plus as much as $10 million in savings. For perspective, 99% of Americans have less than $10 in savings. I wonder if our quest for “more” is also an illusion that needs to be shattered. Maybe. It’s something I’ve been thinking about more.
Going forward, I have a number of topics I might write about. I am talking to younger people and seeing one of the things not “taught in school” is how to navigate a bureaucracy. That’s a possible essay topic. There is also the question of how much pressure the European Union will come under, something I’ve thought more about after spending two months there this year. No guarantees I will write about them, but I’m curious for your thoughts.
Investment Implications
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