I Am Back: Exposing the Bullsh*t Market

I took a six-month break from writing because to be honest, it was beginning to feel like a chore. Publishing content on a fixed schedule wasn’t much fun and became a distraction from the main event: investing.

Nor do I think it was great for you – great insights don’t happen on a tidy schedule. Pretending otherwise just dilutes the few good insights I do have and lowers the quality of what you are reading. Going forward I plan to write consistently, but not on a schedule – only when I think I have something worth telling you.

Right now, that something is the financial insanity around us, of which I was reminded by two funny stories that I recently came across. The first was a multimillion-dollar banana; the second, Bitcoin selling for a huge premium to… Bitcoin.

But first, a little detour into the history of behavioral psychology.

In 1962, psychology researcher Solomon Asch conducted the famous elevator experiment. In it he had a group of actors pretending to be regular people walk into an elevator together with the unaware subject. All the actors would face the back of the elevator, as opposed to the usual practice of facing the door. The subject then succumbed to silent peer pressure and would also face the back to conform to the group.

The current markets are working in much the same way. As more and more participants face the proverbial back of the elevator, others feel an immense pressure to conform. The longer this goes on and the fewer people there are remaining who are still facing the front, the greater the pressure.

Since being “right” is frequently defined by the herd as whether recent market price movements have validated an investor’s stance, the dwindling group of people acting rationally in the markets appears to be more and more wrong and out of touch with reality simply on the basis that the growing majority has adopted a different view for an increasing length of time.

Back to the multimillion-dollar banana.

The other week I came across a Wall Street Journal article titled “Someone Just Paid $6.2 Million for a Banana Duct-Taped to a Wall.” The auction was conducted by Sotheby’s and the buyer was a wealthy crypto investor. When asked what he planned to do with his newly acquired “art,” he responded that he planned to eat it.

Brushing aside thoughts of how much this man would be willing to pay me for a whole fruit basket, I was reminded of a famous MIT “hack.”

Students snuck into a museum and positioned a tray with a plate, a knife and a fork as one of the exhibits. They then observed whether discerning art-connoisseurs would raise the alarm to museum staff at the appearance of this impostor. Not only did they not, but it was clear from the approving nods of the visitors that the mere fact that these everyday items were validated by being placed in a museum caused the observers to twist their perception. Had they seen the same items in a cafeteria (their actual origin), the response would’ve been much different.

Moving on from the weird to the extreme, we have a company called MicroStrategy (ticker: MSTR). It only has one strategy – buying Bitcoin hand over fist. The company, now approaching the $100B in market capitalization, is mostly a fund of Bitcoins with a relatively tiny software business attached on the side.

Whatever you think of the value of Bitcoin (and opinions range from $0 to $10M+), the market has been relatively rational in valuing MSTR at roughly the market value of Bitcoin. That is, until earlier this year, when the premium between the market capitalization of MSTR and the market value of its Bitcoin holdings exploded parabolically.

So, in essence, people are paying a vast premium for the dubious privilege of holding a Bitcoin fund masquerading as a company at a huge premium. It’s hard to find a rational explanation for this, especially given the recent availability of Bitcoin Exchange Traded Funds (ETFs).

It feels anticlimactic to finish by observing that many financial indicators are flashing red warning signs. You can see this in historically narrow credit spreads for both “high” yield and investment grade bonds. You can also see it in very high equity valuations, whether measured by high Price-to-Earnings ratios on elevated earnings or by metrics such as Market Cap to GDP. I mention this lest you think that the craziness is confined to some corner of the market and everything else is normal.

It's not. Don’t draw false comfort from the fact that it has gone on for a long time and use that as evidence that it will continue into the distant future. That’s not how financial markets typically work in the long term.

At some point in the future, we are going to be looking back on the craziness in today’s markets with the same disbelief and contempt that people have looked back at the markets of the late 1920s and 1990s. As in, “How could people have been so swept up by crowd psychology to ignore the facts and all the warning signs??”

I don’t know whether that reckoning is weeks, months or years away. I do believe that those who don’t pay attention to all the warnings will be doomed to repeat financial history in ways not altogether pleasant for their wallets.

Happy Holidays to you and your family! May we all take this time to reflect on and be grateful for the things that truly matter—things that are rarely found in financial markets.

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About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.

Note: An earlier version of this article was published on the Behavioral Value Investor Substack