I’m intrigued by people’s ability to believe in the impossible. And I take it as a warning to myself, for if others can believe in the impossible, then there’s every reason to think I can too. Which gives me pause.
In my lifetime, I suppose there have been many examples of this phenomenon playing out in real life. But lately my focus is the investment world. That’s where I spend a considerable amount of time and energy.
In the late 1990s, people who bought stocks believed in the impossible. They drove prices up to astronomical levels — far behind anything that could be supported by reasonable assumptions or objective data. I remember at the time thinking, this is crazy. Yet it continued, far longer than some people thought possible. Until it stopped. And the inevitable bursting of the bubble.
Some stocks still aren’t back to their highs from that era, eighteen years later. And quite a few companies that were highly valued in 2000 aren’t even in existence today. A lot of money was lost. Many household balance sheets and retirements were gutted.
Less than ten years later, we saw it unfold again. It was hard to believe. Hadn’t we learned anything? Apparently not.
Real estate values went through the roof. People were getting mortgages far beyond their ability to repay. Speculators were flipping properties like pancakes. Until it stopped. Until the bubble burst.
Bankruptcies ensued. Evictions spiked. Many homeowners and investors lost a lot of money. Some homeowners are still underwater (i.e., no equity in their homes). Banks had to be rescued.
And now, a decade later, we’re at it again, only this time it’s broader. It’s not only real estate. Or stocks.
We’re already seeing the worm turn in commercial real estate in certain areas and, to a lesser extent, residential real estate in certain markets. I suspect we’ll see much broader reversals before it’s all said and done.
In the stock market, some equities are priced at levels that could never be justified by expected returns. It’s only a matter of time before the correction wipes out massive amounts of paper gains, except, for some, they aren’t merely paper gains.
Many people have borrowed money to buy stocks. They’ll be on the hook for those debts irrespective of what the market does.
Others bought into the market late, paying high prices that they may not see again for a very long time, if ever. Paper losses have a way of becoming real losses.
Meanwhile, the latest fad, crypto currencies, quickly morphed into the mania phase last year. It’s hard to know exactly how this will play out, but it’s easy to see that quite a few people will lose a lot of money — mainly, people who believe in the impossible.
Belief in the impossible isn’t restricted to investment decisions of course. It plays out in every area of life, from health and work to politics and religion.
I suppose it’s sometimes easier to believe in the impossible than to face the reality. At the very least, it can sometimes put off the day of reckoning. It also can interject excitement into otherwise mundane and boring lives.
Some people say it’s good we have the capacity to believe in the impossible. The hope of miracles is beneficial, they say. I’m not so sure. It seems to leave a lot of carnage in its wake.
I like to delve into the reasons for our motivations. What causes us to believe in the impossible? What’s our motivations? What propels us to take risks that, from an objective standpoint, seem ridiculous?
More importantly, how and when am I susceptible to the same motivations? How can I avoid falling prey to the forces that prop up the world of make-believe?
From an investment standpoint, how can I profit from the mistakes of others? There are always two sides to every transaction. How can I ensure I’m on the right side of the trade?
There’s a lot to consider. The answers aren’t always easy to spot. Yet the temptations are always alluring, especially when the masses follow.
It’s in our nature to find security in the herd. Being strong enough to leave the herd when the herd has gone mad isn’t as easy as it sounds.
Yet that’s what we have to do at certain times, Vera. We have to be strong enough, and smart enough, to recognize the madness. To remain grounded in reality and not allow ourselves to be swept up by the false promises of the impossible. To be able to distinguish between hard challenges and the unobtainable. To be able to tell the difference between the impossible and the unknown.
The differences aren’t always apparent. And therein lies the challenge.