2024-11-03
1 小时 20 分钟You're listening to Tip.
Building long term wealth relies on the ability to compound wealth for decades to come.
It doesn't really matter if you're trying to track the index or outperform it.
If you want to generate wealth rather than destroy it, you must reach the finish line while also maintaining capital along the way.
If we use inversion to look at one of the most surefire ways to prevent ourselves from crossing the finish line, I think Avoiding Bubbles will be near the top now this is why I've always been fascinated with John Kenneth Galbraith's excellent book, A Short History of Financial Euphoria.
The book just focuses on a few very, very simple objectives.
Number one, it tells you what a euphoric episode looks like in quite a bit of detail.
Number two, it goes over several euphoric episodes in history using John Kenneth Galbraith's own framework.
And number three, it just highlights many of the biases that are embedded in our own psychology that basically guarantee the continuation of euphoric episodes into the future.
Now, while I was reviewing my takeaways from the book, the concept that I just couldn't stop thinking about was risk.
Mainly risk is always present and the market just fools us all into thinking that risk is absent during these times of peak euphoria.
Now this feature of open markets shows me that we must intentionally think about risk at the exact time when we don't actually want to spend any time thinking about it.
Putting myself in the investors shoes during events like Tulip Romania, the South Sea Company Bubble, or the Bank Royale, I can't help but think about the difficulty many market participants had in not being invested in the bubbles as they started forming.
The FOMO involved back then is the exact same type of FOMO that we get in today's events such as GameStop.
Sure, some investors in GameStop did it out of their desire to stick it to Wall street, but I think that was probably the minority.
I would say that many investors in GameStop bought the stock simply because they thought the stock price will go up and that they didn't want to miss out on any of that action.
This is the same type of behavior that has existed now for over three centuries, and I bet you will continue to see it exist as long as the stock market functions.
But as the book outlines, participating in these bubbles often leads to immense amounts of pain, both monetarily speaking and psychologically speaking.
So any investor owes it to themselves to understand how bubbles work, why they form, and the bias behind participants.
This is one of the best ways to help you get to the finish line even if you won't cross that finish line for multiple decades into the future.