There is an old stock-market adage that says markets can remain irrational longer than we can remain solvent. The quote is normally attributed to John Maynard Keynes.
Irrationality can cut both ways. Just because we think that a stock price is unjustifiably high, it doesn’t mean that it can’t climb higher. But the price is still unjustified. Meanwhile, an abnormally cheap share could fall further.
That is how stock market works. When there are more people buying shares, the prices can rise. When fewer people want to invest in shares, then prices fall. It is how the correct price for a share is discovered.
The discovery process can take time, which is why Benjamin Graham reportedly said that in the short term, the stock market is a voting machine. But in the long term, it is a weighing machine. The pithy statement sums up everything we need to know about what is happening in the market.
Right now, there is a lot of debate over the valuation of new-fangled investments such as SpaceX, AI companies and cryptocurrencies. The bulls claim that astronomical valuations are entirely reasonable because these are blue-sky investments without precedents.
The bears, on the other hand, claim that when something looks like a bubble, walks like a bubble and talks like a bubble, then it is most likely a bubble. However, when exactly the bubble will burst is hard to determine. It is not even worth trying to call. After all, market madness knows no bounds.
Consider the elevation of Elon Musk to trillionaire status. How on Earth can anyone be worth that much money? He would need to continually spend US$70 million a day for 40 years to get through that obscene pile of money. It is insane.
But guess what? Some analysts are more than happy to twist themselves into a pretzel to try to justify the ludicrous valuations of these companies. We should wish them luck.
When markets are crazy, it is important for us to remain grounded in sanity. It can be very tempting to join in the insanity. But when lunatics have taken over the running of the asylum, it is a good reason to stay away.
Warren Buffett has said that if we can’t value an asset, then we should not invest in it. That should always be our lodestar.
It can be quite easy to get caught up in the madness of the crowds. It is even possible that one day some of these fanciful technologies could become an everyday reality. We are not there, yet. But moonshots are high risk investments with the prospect of earning high rewards.
However, we don’t need to invest in moonshots to become wealthy. Simple compounding at between 7% and 10% is good enough. It is also a lot less risky than betting on something that might never happen.
