Don't Bet Against Human Irrationality
Editor's note: The clock is ticking on today's speculative mania, but it's not time to sell yet...
As masses of amateur traders pile into the market, it's normal to wonder if the bubble is about to pop. Of course, the trading frenzy won't last forever. But according to True Wealth Systems editor Steve Sjuggerud, you shouldn't sit on the sidelines and wait for the end...
Steve believes we've entered the final phase of today's Melt Up – the blow-off top at the end of this decade-plus bull market. But that doesn't mean you've missed the boat on making spectacular gains. In fact, the biggest boom could be around the corner...
Today's Masters Series comes from a combination of the February and May issues of Steve's True Wealth Systems advisory. In it, he reveals one of the most important pieces of the retail-investor story... explains what past Melt Ups can tell us about today's market... and details why investor euphoria could lead to triple-digit gains from here...
Don't Bet Against Human Irrationality
Dave Portnoy's band of traders was just the start...
Portnoy wasn't a hedge-fund manager. He wasn't steeped in the world of finance. He was just a guy... albeit a successful businessman.
Over the past 17 years, he has built a profitable media and sports-betting company called Barstool Sports. But when the sports world ground to a halt during the pandemic, Portnoy took on a new passion.
He started day trading, branding himself as "Davey Day Trader." And if you asked him, he was the best trader in the world...
"There's nobody who can argue that Warren Buffett is better at the stock market than I am right now. I'm better than he is. That's a fact," Portnoy said in a Twitter video last June.
If you follow Portnoy at all, you know his hubris is at least partially in jest. But the unbridled optimism he half-jokingly shows is a hallmark of the stock market Melt Up in place today.
Portnoy didn't express his outspoken opinions behind closed doors. Millions of his followers watch his day-trading videos on a daily basis. And during the post-pandemic rally, he became the poster child for the "little guy" succeeding on Wall Street.
Portnoy helped inspired hundreds of thousands of new traders to create their own accounts. These new traders always pile in before a Melt Up peaks. And the new wave of investors joining in 2020 was just the beginning...
Today, interest in stocks is spiking even higher. That fervor has gripped the headlines in the past few months as several stocks soared hundreds of percent in a matter of days.
And it's not hedge funds that have been driving them up... It's retail investors, just like the ones Portnoy has inspired.
GameStop (GME) rallied more than 1,500% from the start of the year to January 27. I'm not going to wade too far into the details. I'm sure you know the story by now... It started as a joke on the online community Reddit, then quickly morphed into cries of inequality and the need for social justice.
But for us as investors, something much more important has come out of the GameStop story...
The media coverage around these massive moves has been attracting fresh meat to the market. It's bringing in a new band of traders, just like Portnoy's big personality did last year.
This is what a market frenzy looks like. New traders think that these kinds of life-changing gains happen regularly. And they want in.
Many in the media have used this new batch of traders to prove we're in a market bubble. And while it's partially true, if that belief moves you to sell everything, then you've made a grave mistake.
The truth is, this is another sign that we're in the last inning of today's Melt Up. The clock is ticking...
What I'm seeing today tells me the Melt Up could end sometime this year. We can't know if it'll be next month or months away. But the decisions you and I make today will likely be the most important in our investing careers.
Now, everything about this may make you want to get out. It's likely you're thinking something along the lines of... "Well, if we're near the top, I'll just sit on the sidelines until the next bust."
We can't know the future. But we can study the past. And history shows that sitting out a Melt Up is a huge mistake.
To get the most out of a Melt Up, you need to stay in for as long as you possibly can... while still getting out before the market crashes.
Of course, every Melt Up is different. But by scanning the globe and seeing them play out throughout history, we can learn a lot.
Melt Ups always involve mass euphoria. Folks begin to make irrational moves – and the market rewards them for it. That leads to even more irrationality. Soon, prices are outside of the scope of logic. And the biggest gains pile up at the very end... until it all unravels.
So while Melt Ups are always different, they also always have a lot in common. And here in the U.S., our best example – and the Melt Up we've tracked closely so far – is the dot-com boom.
We know things won't play out exactly the same way this time around. The dot-com boom gives us our best look at what's possible, though. And we'll use what we've learned from it to plan our investments for this unique moment in time.
As I've said previously, I believe we're in the last stages of a Melt Up today. It's what I refer to as the "Final Surge."
I call it that because it's the short window of time at the end of the Melt Up where investors make the biggest and most irrational gains. It's a "Melt Up within a Melt Up," if you will. It's where the good times turn great – and everyone believes they'll last forever.
Just look at the chart below to see what I mean. This is what the Melt Up in the Nasdaq looked like last time around...
This was an incredible rally. The entire Nasdaq Composite Index – which comprises hundreds of companies – soared 200% in a year and a half.
It's a move that would be hard to believe if we hadn't lived through it. But it did happen. And that's not the craziest part...
The craziest part is what happened at the very end. Roughly half of those gains took place during the final few months... the Final Surge. Take a look...
Again, half of the overall gains came in the final quarter of the Melt Up. That's the Final Surge.
Now, it's possible that this kind of boom won't happen this time around. But making that bet would be betting against human irrationality. And it would be betting against it right now, just as things are getting crazier by the day.
Just look around, and you'll see signs of euphoria everywhere...
As I said earlier, the GameStop craziness from January brought attention to the stock market like we haven't seen in years. Average Joes jumped into stocks headfirst... chasing the "easy money" that Reddit traders were making at the expense of Wall Street.
This is what you see during a Melt Up, though. Easy money infects investors' thinking. And soon enough, they can't make rational decisions. The craziness starts to feel normal.
I've seen it personally. My friends ask me about stocks and bitcoin regularly. I can tell from how they ask that they aren't interested in learning... They're simply driven by greed. They see others profiting, and they want in.
This batch of craziness is proof that the Melt Up is fully underway. And it tells me that we've entered the Final Surge.
Good investing,
Steve Sjuggerud
Editor's note: Steve says the Final Surge is where you can make the biggest profits... if you put money to work in the right places. But to get the most out of this highly volatile market even after the Melt Up ends, you need a system by your side...
That's why Steve put together a special presentation detailing the investing tool that he says is behind some of his most stunning predictions. It's a unique strategy that shows him the ideal time to buy and sell for the biggest gains, while avoiding the biggest losses. This system has led Steve to 43 double- and triple-digit winners in the past decade... Click here for the full story.