Keeping Your Head

Keeping your head when everyone around you is losing theirs—an old stock market adage. Really, what this is saying is that you should be rational when everyone else is being irrational. Good advice for today’s markets.

People have lost their heads in:

• AI

• Data centers

• Private equity

• Private credit

• Yield-enhanced ETFs

• Maybe uranium

And a bunch of other stuff. Lots of bubbles and mini bubbles out there. Not to say that you shouldn’t invest in the bubbles, but it is a game of musical chairs, and you don’t want to be out of luck when the music stops playing. We used to play music chairs in elementary school. Always a fun game, and a metaphor for so many things.

If you are rational, you will be:

• Diversified across asset classes

• Seeking to minimize volatility

• Staying out of trouble

That last one is the Hippocratic oath of trading—first, do no harm.

Don’t Chase Frenzies

To keep your head when everyone else is losing theirs, you need experience. You need to have seen a few cycles. I can see echoes of the dot-com bubble in the AI bubble. History doesn’t repeat, but it does rhyme. I can see echoes of private credit in other credit bubbles in the past. If you’ve seen it all before, you’re less likely to get caught up in the current thing and will view it skeptically. 

Now, having said all that, if I had bought Nvidia (NVDA) on the day that ChatGPT was released—if I had had the presence of mind to do that—I would have been pretty happy. But I didn’t “get it.” And by the time I got it, all the easy money had been made. I’ve always said that there is more money to be made in the stock market by believing in things rather than being skeptical, but if you’re slow, the last thing you want to do is show up late to the party. There are still people out there who are “discovering” NVDA for the first time. They are the caboose, and you never want to be the caboose.

I know someone who works at a data center, who worked there before the whole AI craze kicked in. Let’s just say she is doing great. That is the best kind of luck: being in the right place at the right time and falling ass-backwards into money. There are a lot of imitators in the data center game, and some of these people are not too smart and do not know what they are doing. They are getting caught up in the frenzy. 

There were a lot of people like that in the housing bubble, too—you saw them in The Big Short. There is a whole class of people that smells money and heads off running in that direction. I tend to do what I have always done: I’m diversified across asset classes, with minimized volatility, and my returns have been good to great. I have always been happy. I don’t need that kind of excitement in my life.

Some people do. This exists nowhere in the world—the gambling instinct. It is a purely American phenomenon. Real estate. Ethanol plants. There is a period when there are supranormal returns, and it attracts a lot of imitators. I tend to stay far away from these situations, unless I have a great deal of foresight.

Think Long Term

I have this image in my head of me, sitting with my legs crossed in the middle of a crowd of people running around like maniacs. Everyone likes to say they invest like Warren Buffett, when actually they do not. Buffett did about 25% a year simply by doing slow boring stuff, like candy companies and insurance. And having impeccable timing.

I am not doing 25% a year, but it is respectable. And I do really slow boring stuff. The last few years, I have been plowing money into global small-cap value, and it is starting to pay off. That’s a 10-year bet, and Buffett was known for thinking really long term.

People say they invest like Buffett and then pay $180/share for Nvidia or chase rare earth stocks around. Buffett never got caught up in the new thing. He said he didn’t understand technology. It took him a few years to get his head around Apple, but it ended up being one of the best investments in the history of Berkshire Hathaway.

So, stop running around. Stop being crazy. Try to think out longer than one week, or the next earnings report, or the next 24 hours. Start to think in terms of decades—can I hold this thing for the next 10 years? If the answer is no, then move along to something else. I’m not saying I’m Buffett—he and I do a lot of things differently, but the one thing we have in common is a cool head and a long time horizon.