Read on Twitter
Here are some thoughts on financial markets for the new year. The stock market mania is obviously widely talked about on Twitter, but hopefully these thoughts are still helpful.
1) I am seeing more and more stocks/other assets trading based on price rather than fundamentals. The beauty of this is that when things trade on nothing, they no longer get bogged down by valuation. Price on all the crazy stuff you see today can easily double from here..
... but at the same time, when things are untethered from fundamentals, you no longer have support on the downside. Things could drop by 50% overnight and no value manager would step in to stabilize prices.
2) The mania we see right now is still much more contained than what happened during the dotcom bubble. Most tech names actually have strong cash flow and fundamentals, and large cap outside of tech isn’t as richly valued compared to large cap valuation in the 90s...
... we also aren’t seeing large cap tech names trading at 100x revenue which had happened before. All these things suggest to me that the mania still have quite some room to spread.
3) In this kind of environment, prices of all things carry their own momentum and will grind higher and higher...until it gets to a point where there are no more incremental buyers and the bubble will collapse under its own weight...
... this type of technicals is also prone to everyone running for the exit at the same time on seemingly unimportant news.
4) It’s especially important now to stay disciplined and stick with your process. Don’t get carried away by the madness of the crowd.
5) Here are things I do to prevent making mistakes in the current environment..
a) Always “go to committee” on every trade/investment. What I mean is that you create a mock investment committee and defend all your investment decisions either through a friend or through a written process...
... writing your investment thesis down on paper leads to clearer thinking. My old boss always said clear writing leads to clear thinking. The writing process itself also gives you time and room to separate your investing from your emotions.
b) I have a trade execution checklist and I always go through them before every trade. One of the items on my checklist is an emotional temperature check asking myself how much am I motivated by FOMO at this moment. I don’t make any investment decisions when I feel left out
c) Lastly, I don’t execute any investment on one go. I alway execute every trade over three days. This gives you time to change your mind and not get carried away...The very act of making that first trade often clarify your thinking for you.
