I survived Eight Financial Bubbles

Lessons learned from 1970's to 2020's investing

1. Gold Bubble (late 70’s) - I still remember being 12 years old delivering news papers at 6AM on my bicycle listening to news on the radio describe the price of gold going up every day. I told my parents I wanted to buy some gold. They ignored me, but I kept pestering them as the price continued to rise. Finally they relented. I remember listening to my father on the phone with a broker who quoted $800+ for an ounce of gold. That price was literally the peak of the bull market. We were those stupid people who would buy at the top after gold had gone up 400% in less than a year. Fortunately my father didn’t buy it because starting the next day, the price began to fall. It took 30 years for the gold price to get back to $800 . At that young age, I learned that when prices go straight up with excitement; they can then go straight down with panic.

2. US Savings and Loan Bubble (1980s): Savings and Loan banks were losing money so Congress passed laws to allow them to take more risk and hopefully make more money. One result of this was a real estate boom that eventually crashed. Attracted by easy money and low rates, my parents and their friends built condos on a ski mountain in New Hampshire. Despite never working on real estate before, they had fun and made a lot of money. So then they invested in building another condo development, but the banks started to fail and the bubble popped before the condos were finished. My parents and friends were stuck with unfinished and unsold condos. The lesson I learned from this is that easy money doesn’t stay around for that long, and so if you make some easy gains, walk away before the easy times end.

3. Japanese Bubble (1990): I lived in Japan in 1990-1991 during the peak of the Japanese stock market bubble. The Japanese economy and stock market had been booming for years, but after living in Japan for a year I came to see that their stock market and economy were over valued. I came back to the US in 1991 professing that the Japanese market would crash soon! Although I was right that the market was over valued, I was wrong about the crash. The market ending up declining gradually for over 20 years. I learned that although something is overvalued and in decline, that decline does not have to be a crash. Markets can decline slowly for many many years.

4. DotCom Bubble (late 1990s): Chairman of the US Central Bank Alan Greenspan in 1996 said the stock market was “irrationally exuberant”. Then prices proceeded to go up, often by more than 1000%, for 4 more years! I thought I was smart by not buying the riskiest internet stocks, but I did hold long term solid company stocks like Cisco and Intel which also eventually fell by 80% and still have never gone back to the March 2000 high price. This bubble taught me two important lessons. Just because something is getting expensive doesn't mean it can't get a lot more expensive and stay expensive for years. I also learned that in a bubble, even the long term leading well run companies can crash in price.

5. US Housing Bubble (2007): After the dotcom bubble, I thought I finally understood bubbles. People were saying the housing market was over valued and could fall by 20%, and I thought, “20%? Who cares? I lived through the dotcom crash of an 80% drop. 20% is nothing!” What I didn’t understand though was the effect a lot of debt can have on a drop in price. If a person puts $100 down to buy a house worth $1000, the home owner owes the bank $900 on his mortgage loan. Now if the price of the house falls 20% from $1000 to $800, the home owner still owes $900 for a house that’s only worth $800. This is worse than a stock that loses 80% of its value from $1000 to $200 because the home owner’s value went below $0 and that stock holder still has $200 in value! I had studied in school that debt increases risk, but this bubble showed me in real life how dangerous debt can be.

6. Bitcoin Bubble (2014): Now on my sixth bubble, I finally figured I knew it all. I decided I wanted to hold some bitcoin as the price rocketed from under $100 to over $1000 in a matter of months in 2014. Fortunately, I knew it would fall in price and I would wait. When it fell over 50%, I figured it was a good time to start buying at $500. I knew it could fall to 80% off the high, but after it fell over 50%, I figured it has only another 30% at most to fall. So I thought that was a good time to start accumulating, but there was an error in my math! Bitcoin fell by 50% to go from $1000 to $500, but then to get to 75% off the high its not another 25% it drop. The price falls another 50% to go from $500 to $250! Then it fell another 30% to hit $175! The 2014 bitcoin bubble taught me something I call “bubble math”; an 82% fall from the peak comes from three 50% drops!

7. Crypto Bubble (2017): In early 2017, at under 2 cents, I decided I liked the Stellar Lumens XLM token. In less than a year, its price went up 30x to a high of 90 cents! Not only did this one small high risk token become a huge percent of my crypto portfolio, it suddenly became a significant percent of my overall net worth! I wise investor reminded me that I needed to manage risk in my portfolio. He taught me that I should respect that a tiny new token is inherently more risky and volatile than larger and older investments. Did I really want that much risk in this one token that just went up 30x in less than a year? Thus the decision to sell some XLM would not be because I thought it would go down or that I didn’t like it, but the decision to sell some was simply prudent risk management. Just as I wouldn’t put a lot of money into a new risky investment, if a risky investment became large, its also a good idea to reduce exposure.

8. Everything Bubble (2021): Finally I road a bubble as well as possible. I was into my favorite investments when everyone hated them in 2019 and I began managing risk reducing position sizes on investments that were up 10x while friends, family, and uber drivers were buying in 2021. Then after we fell by 80% I managed risk again, by moving out of dollars and stable coins back into my favorite tokens and other investments. The only thing I learned from this bubble was that it seems I finally know what I am doing . . . but, I know enough to stay humble and on my toes. The next bubble may teach me new hard lessons!