The 10 Most Important Characteristics of the YOLO Investor

The 10 Most Important Characteristics of the YOLO Investor

Phillip, a first-year student, was just 21 years old and still living with Mom when he bought his first shares.

His mother, who had taken several investing courses, had been trying to get him interested in investing for the last five years.

Initially, she was happy to see him invest in stocks. When Philip asked if he could borrow $5,000 to invest, she immediately said yes – no questions asked.

She later regretted it when she discovered he’d placed all the money in one stock: GameStop.

“I know I can lose all the money, but I’ll probably get it out before then. Besides, if I lose the money, I lose the money,” he told Mom when asked.

His interest in investing picked up during the first lockdown when both classes and his birthday party were cancelled. He spent most of his time reading the news and chatting on social media while doodling at the kitchen table in his mother’s apartment. Stocks hit the news with a plunge and a quick rebound.

He saw the V-drop shape and thought something like, ‘Hey, maybe stocks aren’t as boring as I thought. Mom’s onto something.’

That’s when he began investing.

First, it was a way to make a few quick bucks. Then he discovered there was a big community online of people just like him. He also realized that he got a kick out of it when he made some quick gains.

How did things turn out for Philip’s GameStop investment? We’ll never know, because Philip is a composite character of several people I’ve talked to.

Maybe he sold before the stock imploded. Maybe he lost most of it.

Philip is a YOLO investor (You Only Live Once), and people like him are getting a lot of attention in the stock market news these days.

It’s even a verb. You can YOLO in the stock market. These YOLOing YOLOers can influence how the market will develop in the future.

The fact is, there have rarely been as many private investors in the stock market as there are right now.

Private individuals now account for almost as much of the volume of the US stock market as institutional investors such as pension companies and mutual funds, according to numbers from Bloomberg published in this Financial Times article (sorry paywall).

Not only are private individuals flocking to the stock market, but this new investor, the YOLO, has emerged, and they’re not behaving like the rest.

YOLO investors arrived with the pandemic.

Like Philip, they were tied to a screen at home during lockdown, and many of them have gained access to a bag of money they did not have before, like the US stimulus check or other corona-related subsidies.

What else do we know about these YOLO investors?

1. They Gamble

The YOLOs invest short-term and aim to make their money multiply in a few days or weeks.

They approach the stock market as if it were a one-armed bandit, betting on hitting the jackpot. They go for profitable long shots, not incremental gains.

Saving for retirement is more distant to them than a space station.

They invest as if there’s no tomorrow – that’s the whole idea of you only live once.

2.  They Invest Borrowed Money

They use margin on the account, they borrow money from various sources (like “mom”), and they use leveraged products.

They’re simply not at all afraid of losing borrowed money. 

3. They’re Poorer

They have less money than previous generations of private investors.

How much do they have?

Typically between $1,000 – $5,000 in savings, according to the article from FT – and many have no savings at all. If they don’t have savings, they’ll borrow the money.

By comparison, the typical private investor during the dotcom bubble had about $50,000 to invest.

4. They Are Younger

They’re in their early 30s – and often much younger.

Compare that to the generation of private investors who invested in the dotcom bubble. They were about 50 at the time (so around 70 now).

The YOLO investors are so young that they were still playing with their LEGOs when the financial crisis raged. A serious stock market crash belongs to the dusty history books.

Which might be one of the reasons they don’t seem to fear a crash.

A 12-year-old bull market is an eternity if you’re in your 30s or younger.

5. They Use Social Media to Make Investment Decisions

They’re more likely to trust a stranger on social media than a financial expert on TV.

They grew up with social media, and social media is where they socialize and develop their worldview.

They’ll discuss stocks and private details about their financial position with strangers online, no problem.

They aren’t afraid of writing something like:

“I have $10,000… What should I invest in if I want the money doubled in a year?”

What’s astonishing about them is that they’re likely to do whatever a stranger with an alias tells them to do.

6. They Invest with an Activist Mindset

They invest in Tesla because they want less air pollution.

They invest in Beyond Meat because they cheer for Greta Thunberg.

They invest in GameStop to drive hedge funds out of their short positions.

They invest in cannabis stocks because they want cannabis products.

They invest in bitcoin to defy the government monetary policy (the eternal printing).

They invest because they want their money to make something happen in the world.

7. They Love All Tech

Their favorites are fintech, biotech, blockchain, all crypto, gaming, and Tesla.

They admire Catherine Wood from Ark Invest and the SPAC king Chamath Palihapitiya – they might even have one of them on a poster or a coffee mug.

8. They Use Commission-free Stock Trading Apps

They trade through commission-free apps on the fly.

They don’t need to sit themselves down in an office chair at a big desk with a steaming cup of coffee and a pair of reading glasses to enter a stock.

They grew up playing with a smartphone while eating cereal, and they’ll happily trade stocks on an app while taking the subway or chatting with a friend (or a stranger online). 

9. They Love Fractional Shares

On a platform like Robinhood, it’s possible to buy so-called fractional shares, which is a small part of a stock.

They love this stuff, because they don’t always have enough money to buy the whole thing.

For example, most of them don’t have $3,000 for a share in Amazon or $2,000 to buy a stake in Google.

10. They Don’t Care About Compounding

They invest now to get money now. They’re in it for the instant gratification.

Investing to get solid in retirement doesn’t rhyme with you only live once.

How will YOLO Investors Affect Your Stocks Going Forward?

When a large group of shareholders enters the stock market and when they behave atypically, it can affect the entire market.

Since “YOLOing” is a new phenomenon, none of us know exactly how they’ll behave going forward – they’re really a bit of a joker in this stock market game.

But here’s my best bet on what they’ll mean for you and your stocks:

A. Greater volatility.

When YOLO investors jump on a stock like a swarm of grasshoppers, the stock price could potentially rise to astronomical levels and implode afterwards, as we saw with GameStop.

B. More uncertainty.

We don’t know how they’ll react to certain events. They aren’t investing in their retirement funds, and they don’t think long term, so certain events might trigger them. These could be:

  • Taxes: What happens when they realize they have to pay taxes on their gains for 2020? Are they even aware? As they don’t have a lot of excess cash, tax liabilities in the spring might cause shares to plunge if they have to sell shares to afford paying them.
  • A correction: How will they react to a correction? Will they panic? Or stay cool? The fact that they have no experience with the financial crisis might mean they’re in for a surprise. On the other hand, many YOLOers began investing after that V-shaped plunge during the first lockdown – this might suggest that they aren’t afraid of stock volatility. However, they weren’t there for the steep plunge. They came in with the reversal and only enjoyed the ride up.
  • Reopening: What happens when all the covid restrictions disappear? They entered the market pushed partly by boredom. Will they sell all their shares and fly to Bali when the world reopens?

What should you do?

Now, more than ever, it’s really important to check the facts and the numbers on a company before you invest.

When volatility and herd mentality come into play, it’s vital to make sure there’s a connection between price (stock price) and value (value inside the company).

You have to go through a checklist (you can download mine here) and do some basic calculations.

My favorite way to check what a company is worth is using Warren Buffett’s owner earnings calculation, which you can learn about in my e-book right here.

Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.

 

Share Buyback: Three Things to Watch Out For

Share Buyback: Three Things to Watch Out For

What does it mean when a company announces share buybacks?

Is it a good thing or bad thing? Should you rejoice or worry about it?

The short answer is that share buybacks are good when they benefit the shareholder and bad when they don’t.

The next question is, when are they and aren’t they beneficial?

But first, let’s define share buybacks. What are they exactly?

It’s the company buying back its own shares from the stock market so they are no longer in circulation.

Why do companies do it?

It’s a way of rewarding shareholders. The consequence of share buybacks is that the share price usually goes up.

How’s that?

Imagine you have a cake that needs to be divided into ten pieces.

Let’s say you redivide it and split the same cake into eight pieces instead of ten.

To be exact: We go back to the original size of the cake, dividing the same amount into eight pieces instead of 10.

Now each piece is larger. Therefore, each piece should cost more.

Then surely, it must by definition be a good thing when a company buys its own shares back, right?

No. Not necessarily.

You need to look at it in a larger context and ask a series of questions.

You have to ask:

Is the Company Profitable?

If the company isn’t profitable, it’s a bad idea for them to start buying back their shares.

Running on a deficit is like having a hole in the bucket, and they need to focus on closing that hole before doling out money to shareholders.

Share buybacks are a way to distribute the year’s gains to shareholders. It’s an alternative to dividends. They shouldn’t distribute winnings if they don’t have any winnings. It’s that simple.

If you discover that a company buys back its own shares during a period when they are running at a loss, you should sell that company’s stocks (or avoid investing in them).

It’s a sign of poor management.

Do They Owe a Lot of Money?

If the company is over its head in debt, management shouldn’t buy back shares.

When they buy shares back, if they do so on borrowed money, they increase the debt burden.

They should instead spend that money on paying down debt.

What’s the problem with having a high debt burden?

Companies with a lot of debt are at greater risk of going bankrupt in a downturn or crisis than companies with lower debt.

It’s not much different from a person with a lot of personal debt. If the person gets fired, they’re at a greater risk of not being able to pay the bills and going into foreclosure than a person with low or no debt.

How much debt is too much? That’s a great question too.

My rule of thumb is that I only invest in companies that can pay off their long term debt in three years with free cash flow.

Is the Stock Expensive or Cheap?

If the shares are expensive relative to the value of the firm, it doesn’t make sense to buy back shares.

Why not?

Because they’ll pay too much for the stock. They’d be throwing money out the window.

A share buyback is just like an investment.

Let’s say that a company is actually worth 100 USD per share. If they buy shares back at 200 USD per share, they throw 100 USD out the window every time they buy one share back.

Remember that it’s also your money that the management mismanages. As an investor, you are a co-owner of the company. The management is just a deputy.

Why do stock investors ignore badly managed buybacks?

Many stock investors believe that the stock market is efficient, and if you believe that, it follows that any share price is therefore a reasonable level to buy the shares at.

In my e-book Free Yourself, I explain why the stock market isn’t efficient. You can download it here.

The Pros and Cons of Share Buybacks

Warren Buffett loves buybacks – provided they’re done right. His company Berkshire Hathaway does it regularly.

If it’s an alternative to dividends, what are the benefits of buying shares back relative to dividends? Why is Warren Buffett so fond of it?

The answer is simple: tax benefits.

When you receive dividends, you have to pay taxes. When the company buys back its own shares and the stock price goes up, you don’t pay capital gains tax (provided, of course, that you don’t sell the share yet).

The effects of compounding are hurt with dividends. In other words, your money can better enjoy the power of compounding with stock buybacks.

So what are the disadvantages of buybacks?

They only occur if the repurchase is done on a “false” basis, like in the three points above (done by unprofitable businesses with high debt burden and that are overvalued on the stock market).

Why does it even happen that management buys back shares even though the foundation isn’t in place?

It happens because the management has an interest in getting the stock price pumped up.

Many companies reward top management according to the performance of the stock price, e.g. with stock options and various bonuses depending on the stock performance.

They’ll only get paid if the stock reaches a certain level.

This means that many executives tend to make stock repurchases out of self-interest to get their bonus pay, and sometimes their selfish interests are so great that they ignore common sense.

In conclusion, there’s really no way around it. When a company reports share buybacks, you have to check if the company is profitable, has a reasonable level of debt, and whether it’s over or undervalued on the stock market.

You can learn much more in my free e-book Free Yourself right here

The Craziest Things Private Investors Say About the Stock Market

The Craziest Things Private Investors Say About the Stock Market

 

Try to notice the things people say to each other every day. In particular, pay attention to the phrases that you hear over and over again as automated responses.

People say things like: “Nothing is as bad as it seems.”

Or,

“What doesn’t kill you makes you stronger.”

They say these kinds of things, pat each other on the back and move on as if the problem has already been solved – instead of giving the issue the attention it deserves, figuring out the damage, and working out how to improve it going forward.

The truth is these kinds of catchphrases make us lazy and complacent.

The stock market has its own silly and irrational sayings that are as contagious as a virus.

In this blog post, I’ve collected the ten most damaging investor clichés.

1. “This Time It’s Different”

No, it’s not.

People say this to defend a frothy stock market bubble. It’s a way to avoid facing the fact that sooner or later, the music will stop.

This is said by people who really want to believe in fairy tales and ever-rising stock markets.

But stock prices don’t always go up. There’ll come a correction and at some point even a market crash. Just like rain after the sun. The seasons change.

2. “I’ll Buy Some Stocks on Sale Today.”

People say this (or write it on social media) on days where stocks drop 2-3 percent.

It’s obvious that the person doesn’t have the slightest idea of ​​how overvalued the stock market is.

Most stocks should be cut in half to be reasonably priced.

A banana isn’t on sale when it’s sold for 8 USD instead of 10 USD.

3. “The Stock Has Hit Bottom and Can’t Fall Any Further.”

Oh, yes it can (unless it went bankrupt and went to 0).

People who say this throw a quick glance at the chart and guess how the stock will move going forward. You can really get burned doing this.

Instead of reading the future in a chart, you need to look at the company itself, the product, the leadership, and the numbers, and determine from that whether it’s a wonderful company with future growth in revenue and profits.

There’s a term called falling knives. It describes stocks in decline. They’ll fall – and then they fall some more. If you try to catch them, you’ll cut yourself.

They might stop and rest before falling more. They may even stop, rise slightly – a so-called dead cat bounce – and then fall over the edge.

Unfortunately, this is the point where many novices say, “the stock has bottomed out and can no longer fall.”

4. “The Stock Has Had a Nice Return and Will Perform Well.”

Some people look at the stock chart and think it’s a reflection of some kind of truth about the company and how it’s doing in real life. They think the stock chart is testimony to what’s going on inside the company and a sign of how it’ll do in the future.

Just because a stock has risen, you can’t presume that it’ll continue to rise in the future.

You have to look at how the company itself is doing. Like I said before, you must open the reports and look at the numbers.

Rather than judging from the chart, try to be able to say something like, “The company has stable growth in revenue and profits, good competitive advantages, high cashflow, no debt. I think it’ll get over the crisis.”

5. “Everything Is Priced Into the Stock.”

The stock market is a huge auction with a lot of bidders. It’s a place where emotions can run wild.

Imagine an art auction where the auctioneer asks if there are any higher bidders.

You can almost envision a scene play out where two participants begin to bid each other up in excitement. We’ve seen it plenty of time in movies.

That’s exactly what’s happening in the stock market – with millions of people getting excited and bidding each other up.

Therefore, there isn’t always a correlation between reality inside the firm and the share price.

6. “It Looks Expensive.”

Here’s a person trying to assess whether it’s a good trade just by looking at the evolution of the stock price.

But you can’t tell if a stock is expensive or cheap just by looking at the stock price. Share prices can at times be completely detached from the reality of the company.

Like I say, you’ll need to compare the stock price to the reality of the company and the numbers in the annual and quarterly reports. You can learn more about that in my e-book here.

7. Shares in the Company Only Cost 5 Dollars, So I Can’t Lose That Much.”

If you invest 10,000 USD into a company that costs 5 USD per share or 2,000 USD per share, you risk the same amount of money, and theoretically they can both go to zero dollars per share.

You risk 10,000 USD no matter what the stock itself costs.

8. “I’ll Buy Next Time It Dips.”

What if the next dip is at a higher level than the price of the stock today?

It doesn’t always make sense to wait – not if you only base your decision on the stock price. It makes sense if you relate the stock price to the value inside the company to be able to estimate if the company has reached a fair valuation.

9. “I’ll Wait Until the Market Crashes.”

It’s called timing the market, and it’s impossible.

Some people believe that value investing is all about sitting on a lot of cash and waiting until the whole market crashes.

That’s not what it’s about at all.

It’s about keeping an eye on the companies’ valuations, figuring out what they’re worth, and buying when they’re on sale.

Even when we’re in a stock market bubble, there’ll always be companies that go on sale.

Sometimes the market sends individual companies into a whirlwind and they end up on sale, and sometimes it’s a whole industry that gets stirred up and shaken.

10. “Just Keep it, It’ll Make a Comeback.”

When people need comfort after a position has fallen, this is the cliché they tell each other. But there’s no law of nature that a stock will return to the same level it’s been trading at before, and there’s no law that it will increase at the same rate.

Instead of trying to put a band-aid on the loss with empty phrases, why not learn how to invest properly to make sure you’ll make sound investment decisions in the future?

You can follow a checklist to figure out what the company should cost. You get a good introduction to the method in my e-book right here.

 

 

 

Five Myths About Stock Investing That Can Hold You Back

Five Myths About Stock Investing That Can Hold You Back

The first time I spoke to my friends about investing, I received a very blunt and defensive response.

“It’s very risky,” said one of my friend’s sisters who was also at the birthday dinner.

I explained that I knew what I was doing, so it wasn’t that risky, but she wasn’t listening at all.

She interrupted me.

“You can lose all your money,” she said.

I couldn’t change her mind about investing being risky, and maybe I wasn’t meant to either.

She needed to justify why she wasn’t investing. She needed to look right in the eyes of her sister. 

Her statements were about her and how she wanted to be perceived – not about investing at all.

No one around the table was interested in hearing anything about the stock market, because they had each their peg to hang their decision not to invest on.

We can use myths as an excuse not to take action and invest. That’s why it’s so important to be aware of them and challenge them.

Here are the five most common myths:

Myth 1: You Need a Lot of Money

Some people think you need to be a millionaire to invest, but most millionaires became rich exactly because they invested in shares, property, their own firm, or something else.

You can easily buy shares for less than 100 USD (obviously it depends on the price of the stock, but there are stocks trading for less than 100 dollars per share).

Some will argue that the fees will swallow up too much if you invest only 100 USD, but you must remember that investing experience accumulates like money.

That’s why it’s important to get into the stock market even if you only start with a little.

Myth 2: It’s Too Hard

It doesn’t have to be complicated. There are easy ways to invest.

You can choose an index fund (like an ETF), and you can set up the investing platform so it automatically buys shares in the fund for the same amount each month.

There are several advantages to this:

1. You only have to set it up once, and it’ll take you around half an hour. You can go on and live your life, because your investing will be automated and take care of itself.

2. There’s a built-in diversification, meaning that you’ll invest in many companies with just one click. That’s a safe strategy. All the companies in an index won’t go bankrupt at the same time, so there’s no way you’ll lose all the money.

3. When you buy for the same amount every month, you get an average price for the stock, and this means you’ll avoid investing all your money at the top. This is called dollar cost averaging.

Myth 3: It Takes Too Much Time 

It’ll take as much or as little time as you want it to take.

If you choose the road of passive index funds, it’ll take you half an hour to set it up and the rest will take care of itself.

Some of us love investing in individual companies that we choose ourselves.

That’s called stock picking, and of course that takes more time. It’s more exciting for two reasons.

1. If you get good at it, you’ll see a higher return.

2. Understanding companies and following them turns into a hobby.

Myth 4: It’s Too Risky   

It’s only risky crossing the street if you don’t know the rules of traffic.

If you don’t know the basic rules, trying to go anywhere will be pretty complicated and dangerous.

It’s a really good investment to do some research, take a course, or read a book. You can download my book about investing right here.

We don’t send our kids into traffic without teaching them about the traffic rules. We don’t send them swimming without swimming lessons first.

It’s a great idea to gain some knowledge, but that’s not the same as saying that it’s too complicated.

Crossing the street is pretty easy, but not if you don’t know what the red light means.

Myth 5: It’s Boring   

You have no idea.

It’s anything but boring. It’s exciting. It’s addictive. It’s all-encompassing.

As a student once told me:

“I just bought my first stock, and I’ve spent 15 minutes watching it go up and down. It’s fun.”

Your Best Defense Against the Myths

If you constantly encounter the myths in your circle of friends, there is only one thing to do: ignore them and change the subject.

Don’t try to change anyone’s mind.

It can be quite tiring trying to convince others that you aren’t wasting your savings, and that you’re not addicted to gambling because stock investing isn’t gambling.

There’s no point in arguing, because sometimes people have made up their minds that investing isn’t for them, and they’ll defend it till the day they die.

The best thing you can do for yourself is to find someone at your level to talk to about shares and stocks with.

You’re welcome to join my Facebook group “Managing Money Freedom” right here.

How To Tell If You’re Addicted To Stocks

How To Tell If You’re Addicted To Stocks

This blog post is for fun – and then again, it’s dead serious. 

I remember a wonderful spring day when a friend I hadn’t seen for years was visiting Copenhagen. We had studied together in New York almost two decades earlier. 

We were sitting at a winery in Copenhagen, drinking a glass of Chardonnay before dinner while waiting for some more people to join us.

At a moment when she was on the phone to explain our exact wine-drinking location, I discreetly logged into a stock market app on my phone.

“You’re checking the stock market,” she said when she got off the phone, and she sounded completely appalled.

At that moment, I felt like one of the crazy characters in a Woody Allen movie. I could see myself through her eyes. I was like the crazy stockbroker who could only do two things: cheat on his wife and yell “sell” into a phone.

Well. Maybe it was a bit odd to check the stock market. We hadn’t seen each other for so long. She had a lot to tell me. New country, new boyfriend, new career, and a baby. We had to catch up on a decade or more. 

I wanted to enjoy the Chardonnay and the warm spring day, and I wanted to hear all about her adventures. But the market was falling, and that opened the possibility for some interesting option trades that I had been waiting to do.

If only I could sneak away for 15 minutes…

It’s so tempting to check on the stocks, and once you check, you can get sucked in.

Have you ever felt that way? Have you ever checked on your stocks at an inappropriate moment? 

Why does this even happen?

I’ll tell you why. When you check your stocks, you get a dopamine kick.

It’s similar to what happens when you check your social media, but much stronger, I would argue.

Seeing your stocks go up affects your primitive brain more than seeing someone like your post.

Some of us even get a kick when we see the stocks go down, because we know that’s when we make money. 

The line between checking and getting addicted to checking is a blurry line. 

How do you know that you’ve become addicted? Well, here are five signs to look for…

1. You Check the Market Right When the Exchange Opens – Every Day 

If you’re knocking at Wall Street’s gate even before it’s really open, and doing that every day, it’s a sign. 

It’s fine to check the stock market prices, but you should also be able to tolerate forgetting about it occasionally or doing it later. 

2. You Check Your Portfolio Even on the Weekends 

You checked the portfolio Friday at market close, and you know the market is closed on Saturdays and Sundays, but it’s just so nice to see those numbers on the screen. All those wonderful green numbers – or even the red ones. 

You’re actually looking forward to Monday so the digits start moving around again.

3. You Think There Are Too Many Official Holidays

You get annoyed that the market is closed on holidays, and you’d rather be at work than at home with the stock market closed. You just won’t verbalize it.

Speaking of work, you’ll check the stocks at work too. That’s when the market is open, so you have to right?

4. Life Outside the Trading Platform Feels Dull

You find it hard to focus on reading a book or watching a show.

Even social media seems boring compared with the numbers going red and green.

Some social events feel like a bore too. You’d rather get back to making money.

5. You Check Stocks In Bathroom  

Oh, I’ve been there. Remember FAANG stocks getting crushed in late 2018? 

I tried hiding from my kids on Christmas Eve so I could buy some Apple stocks that suddenly reached my target price.

I didn’t succeed because my kids were banging on the door and being impatient about Christmas and presents.

After that I promised myself NEVER to do that again.

The Road To Recovery

Did you recognize any of these signs?

If so, then you need rehab.

You have to learn that you can make sound investment decisions without constantly getting a stock market fix. 

In fact, your investment decisions will become sounder if you take a step back.

So how do you take a step back?

1. Enter Your Trades as Limit Orders in the Off Hours

You don’t have to enter your trades when the market is open.

In fact, it’s better not to, because all those numbers running up and down sends a signal to your brain that you should act on it.

You’ll be a better investor if you’re less updated. That’s something you’ll have to experience over time to know, but for now you just have to trust me.

2. Go Cold Turkey For 30 Days

Just like with a sugar addiction, you need to reboot yourself by stopping the actual intake for a while.

When I say cold turkey, I mean that you shouldn’t check the market at all in 30 days – not even when it’s closed.

You have to learn that nothing will implode if you’re not updated for 30 days. 

During those 30 days, you can arrange for someone to let you know if any of your positions fall more than 20 percent or if the market crashes.

After going cold turkey, you can easily go a day without checking. 

3. Force Yourself Into Another Neutral Addiction

Maybe now is the time to watch that Netflix series everyone is talking about? 

There are three kinds of addictions: negative, positive, and neutral. 

A negative addiction takes a toll on your health, your finances, or your relationships. 

This would be something like smoking, gambling, or having extramarital affairs.

A neutral addiction doesn’t harm anyone, but it doesn’t do any good either. This could be watching Netflix or checking your social media accounts. 

A positive addiction would be running or going to the gym. 

If you could find a positive addiction to replace your stock market fixation, that would be perfect, but it might not be realistic to replace that dopamin kick with chewing veggies.

So the next best thing is a neutral, pleasurable choice like a Netflix series. 

Afterwards, you can always take a cold turkey break from Netflix because you’ll have strengthened your willpower and ability to abstain. 

If you want to learn about solving intellectual puzzles and investing with a strategy, you can read my e-book Free Yourself here

Ten Crazy Signs of a Stock Market Bubble

Ten Crazy Signs of a Stock Market Bubble

How do you know if there’s a stock market bubble?

The thing about asset bubbles is that you only know for certain that they were there when they’ve popped.

But still, there are signs that you can look for.

What are those signs?

I’ll take you through the top 10 signs that are showing right now.

1. Individual Companies’ Stock Soaring

As Tesla’s stock reached new heights in January, Tesla’s founder Elon Musk became the richest man on earth. 

“How strange,” he wrote in a comment on Twitter, and a second later: “Well, back to work.”

Even he is astonished at what’s going on.

Tesla’s market cap is higher than Toyota, Volkswagen, GM, BMW, Daimler, Honda, and Ford combined, despite the fact that their combined revenue is 36 times higher than Tesla’s. On top of that, Tesla is struggling to make a profit. 

Tesla’s P/E has surpassed 1500. A reasonable level for an average company would be 15.

A P/E of that level means that you pay 1500 USD for 1 dollar of earnings.

2. IPOs Skyrocketing 

IPOs are more frequent in times when the stock market is doing well. That makes sense. Who would want to sell their life’s work in a depressed market? 

However, what’s unusual is the way the market receives IPOs these days.

Shares in Airbnb more than doubled on the first day of trading in December. They went from 68 USD per share to 148 USD per share.

Even new issues of small companies with no revenue might shoot through the roof. A lot of it is due to private investors gambling that it will shoot up precisely because it’s an IPO.

3. Bloggers and YouTube Stock Channels Exploding  

YouTube videos that promise “hot stocks to 10x your money” can get half a million views in days. 

Newbie investors quit their jobs to make Y0uTube videos about stock investing. They can make a better living off the ads from their videos – even if they have nothing more to say than to explain how to open an account and buy Tesla shares.

This tendency is a sign that people are searching for this information and that advertisers are willing to pay a lot to get some airtime with the stock-interested audience.

4. Your Cab Driver’s Favorite Subject Is His Stocks 

I remember some taxi rides before the financial crisis that puzzled me.

I was a news journalist, and I took a lot of taxis going back and forth from press meetings to the newsroom.

The cab drivers in 2007 and 2008 loved talking about flipping houses and how much money they made buying houses, renovating them, and selling them.

The barista, the hairdresser, and the cab driver have another favorite subject these days. They love talking about stocks where they made a quick buck.

They’re investing their savings, betting on a quick gain, and exiting. They aren’t investing for their retirement. They’re gambling and betting on a quick in-and-out to make money in a few weeks. 

5. Lots of New Trading Accounts  

Robinhood, a trading platform popular with teenagers, opened more than 3 million new accounts in 2020.

In my home country of Denmark, Nordnet, a platform that targets young people, gained 80,000 customers in 2020 and increased the total number to 200,000. It’s really impressive if you think about it. 

6. New Investors Talk About the Old School Having Lost the Touch

Warren Buffett had a tough time during the dotcom bubble. 

The number of attendees at Berkshire Hathaway’s annual meeting dwindled. One person even had the guts to take the microphone and ask if “he didn’t have enough brain cells to pick one or two tech stocks.”

Value investors are scorned whenever there’s a bubble. When you invest with reasonable valuations as criteria, you’ll miss out on some of the fun when the going gets exuberant. 

If you hear people say that Warren Buffett has “lost it”, you should actually pay attention. It’s a sign. The market is foaming with greed. There’s no longer patience with a reasonable approach. 

7. A Penny Stock Can Soar 6,000 Percent on a Misunderstanding

In January, Elon Musk said that he’ll stop using Facebook’s WhatsApp and instead migrate to the donor-based, open source messenger service called Signal.

Signal is not on the stock market, but another company called Signal Advanced is.

Signal Advance’s stock surged from 0.60 USD to more than 60 USD in a few days. It has since settled, but the fact that it exploded on a misunderstanding says a lot about both the frothy state of the market as well as the psychological makeup of Elon Musk’s and Tesla’s fan base. 

8. “This Time It’s Different” 

Whenever there is a bubble, there’ll be justifications and some kind of theoretical explanation of why gravity has stopped working.

It happened in 1929 (the excuse was modern inventions), during the dotcom-bubble (the excuse was the internet) and before the financial crisis (this time the excuse was that migration to the cities justified forever-rising real estate prices in certain areas).

It’s also happening now, with the main line of argument being that interest rates will never go up, and therefore there’s no alternative to investing in stocks. 

These arguments can sound as far-fetched as conspiracy theories, but their proponents are very verbal and insistent.

If you hear someone explain that “it’s different this time” or “times have changed”, pay attention. It’s one of the signs.

9. Shiller P/E Above 30       

The Nobel prize-winning economist Robert Shiller warned that markets can become irrationally exuberant. The Shiller P/E ratio measures the market’s level of sanity or insanity.

Right now it’s above 30 – which it has only been three times in history: During 1929, during the dotcom bubble, and now.

In 1929 it reached 30. Right now it’s at 34. 

Did you know that it took 29 years before the Dow Jones reached the same level it was at in 1929? That means you’d be almost 30 years older before your money was worth the same.

10. Buffett Indicator at All-Time High 

Warren Buffett says that the single best measure of where valuations stand is comparing the market cap to GDP.

The Buffett indicator takes the very broad index called Wilshire 5000 and holds it up against GDP. 

What does it show? Well, it’s never been higher. It should be around 50-75. If it reaches above 90, the market is in bubble territory.

It’s not only above 100 – it’s around 200.

It has never been that high before.

Maybe it’s not so strange that Warren Buffett holds around 130 billion dollars in cash (or cash equivalent).

What do you think? Is Warren Buffett being prudent, or has he lost the touch? 

You’ve probably figured out that I’m on team Buffett. Which one are you on?

Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.