You Don't Really Want This
Lottery winners – or victims... Be careful what you wish for... Government freebies backfire... 'Please God, just one more bubble'... Stealing wealth from the future... This can only end one way...
Bud Post won $16.2 million in the Pennsylvania lottery in 1988...
Winning the lottery probably felt like a dream come true. But it quickly became his worst nightmare.
His girlfriend sued him for a third of his winnings – and won. Then his brother allegedly hired a hit man to kill him, presumably in hopes of inheriting the money.
Bud put his share of the money into failing family businesses, lost it all, took on big debts, went broke, and wound up in jail for shooting a gun over a bill collector's head.
Post's story is one of many...
A British couple, Martyn and Kay Tott, won a $5 million U.K. lottery but lost the winning ticket. Their claim was determined to be legitimate – but the inquiry took seven weeks, well after the 30-day deadline for claiming the prize had passed. They never had the money in their hands even for one second, and it made them miserable. Kay told the Daily Mail of the ordeal:
It drains the life from you and puts a terrible strain on the marriage. It was the cruellest torture imaginable.
A New Jersey woman won the lottery twice, in 1985 and 1986, for a total of $5.4 million. She said folks recognized her and began harassing her for requests of financial assistance. She admitted some years later that she had lost all the money gambling in Atlantic City.
Part of the lesson here is "easy come, easy go."
When you receive a large amount of money you didn't work for, you feel like you have nothing to lose by spending it. Virtually everyone who wins the lottery gambles, spends, or otherwise quickly gets rid of it.
It's as though the human soul simply can't tolerate gain without suffering.
But the other lessons here are perhaps even more significant.
One is, 'Be careful what you wish for, because you just might get it'...
This reminds me of a few lines from a 1984 song called "Heaven Knows I'm Miserable Now" by The Smiths...
I was happy in the haze of a drunken hour
But heaven knows I'm miserable now
I was looking for a job and then I found a job
But heaven knows, I'm miserable now
When getting what you hoped for leaves you unhappy, perhaps you have no idea what you really want.
Worse still, many of us know that something will make us miserable – and we still want it anyway...
I'm not thinking about drugs and alcohol (like in the first line of the song). I'm still thinking about easy money, no matter what its source... including when it arrives through financial markets. You don't want that.
It's hard enough to hang on to money you've earned. Hanging on to a big gain that arrives quickly and effortlessly only makes it harder.
The fact that a wonderful life-changing boon can arrive in a way that's bad for us suggests two things. It's not merely that we're bad with easy gains... but that the very thing that we believe will liberate us actually has the greatest potential to imprison us in misery and loss.
It's normal to want to make your life easier...
After all, we don't have infinite time and energy. The easier one task is, the more time we can devote to others. Back when everybody had to scrape at the earth for a meager sustenance, this wasn't a problem.
But in the modern world, things come easier than they did for primitive humans. We can get what we want faster. That's often a good thing, but it comes with a price. Not knowing what's good for us – and confusing it with what's bad for us – is a bigger problem than ever.
The problem of getting things without effort is all around us nowadays. It's why government freebies of all kinds tend to generate the opposite of their desired effects.
As a prime example, welfare programs don't tend to help people become self-sufficient. They help them to become dependent on someone else for some or all of their livelihood, which weakens their own ability and motivation to create a better life for themselves.
Investors are no less prone than others to the allure and foibles of easy money...
You can see it when speculation-ridden bubbles take over financial markets. People tend to become much less risk-averse when assets' prices soar. They view further market gains as a given and see anybody who doesn't want to participate as stupid.
People do dumb things under the spell of easy money. Rajat Soni, a 32-year-old bond analyst from Toronto, recently moved his entire pension fund into shares of MicroStrategy (MSTR) – the software company run by bitcoin guru Michael Saylor, which sells debt and equity and buys bitcoin.
MicroStrategy shares have risen roughly 2,900% since it began buying bitcoin in August 2020, including more than 600% over the past year. It's just typical human nature to believe a big, fast gain will be followed by more of the same.
The higher MicroStrategy goes, the more confident Soni will get. He'll be most confident of further gains right at the top... before bitcoin crashes, taking MicroStrategy with it. The longer that takes to arrive, the more confident he'll get.
Right now, the company's stock trades at a market cap of nearly $100 billion, roughly double the value of its 450,000 bitcoins. The only way MicroStrategy won't blow up is if bitcoin never has another crash. Given the cryptocurrency's volatile nature, that hardly seems likely.
Bitcoin is up about 150% over the past year and about 550% since November 2022. Those big, fast gains have emboldened bulls, who talk about the inevitableness of bitcoin's further rise. They're less interested in talking about the numerous times bitcoin has crashed during its short history.
Not enough folks in financial markets understand long-term compounding...
Stocks are a great way to build wealth. Buy a great company at a fair price, then hold your shares for decades. Small gains will build on themselves into huge ones if you can stick with them and avoid catastrophic losses.
But most people don't want to hear about that. They just want big, fast, lottery-like gains, just with the respectability of calling themselves "investors" rather than gamblers. They want bubbles.
I'm reminded once again of a bumper sticker allegedly seen around Silicon Valley after the dot-com boom went bust in the early 2000s. It said, "Please God, just one more bubble."
Everybody who has a business to sell wants to get the highest possible valuation, and bubbles are characterized by high valuations. So in the context of a Silicon Valley startup's founder needing to cash out, the bumper sticker isn't totally crazy.
Sellers benefit from high prices. But wanting asset prices to soar into bubble territory is totally irrational if you plan to be a consistent buyer of them. There is no better way to virtually guarantee mediocre if not disastrous returns from stocks than to buy them when everybody on Earth is deeply in love with them... such as after two straight years of 20%-plus gains, the situation we find ourselves in today.
Wanting to buy stocks in a bubble a lot more than in a bear market is crazy. And both attitudes are clearly two sides of the same coin. Everybody is too focused on short-term performance, and too few folks have the patience to maximize the process of long-term compounding.
The meme stocks put that tendency on full display, as well as the tendency to hang on to losing bets. Remember the social media hashtag #ApesNotLeaving, indicating AMC Entertainment (AMC) shareholders' iron conviction to hold the stock in anticipation of another rapid 1,000% run.
When they saw AMC and other meme stocks rise hundreds of percent in a few days, they put in more money with complete confidence that gains would continue.
If they followed through on their hashtags and held their shares, they're ruined now... AMC is down 99% from the meme-stock highs of 2021.
We're too confident not merely about what we do with our money, but we're also way too confident about whether or not making all that money quickly is good for us.
Putting all this together...
I promise you, no matter how good it feels, soaring asset prices are not good for investors...
It feels great to watch your brokerage account rise in value day after day as stocks soar. That's a normal feeling. I don't expect it to make anybody feel bad.
The problem is that, as history has proven again and again, high asset prices lead to lower returns. A soaring asset bubble pulls returns forward in time, stealing wealth from the future. Right at the moment when most folks are most confident about further gains is when prudent long-term investors have learned to start worrying about buying overvalued assets.
And as asset manager and bubble historian Jeremy Grantham has found, throughout centuries of history, every financial bubble ever has ended not in a mediocre performance for the affected asset... but in a disastrous one.
Bubbles end in crashes. They don't end any other way. Participating in them is much more dangerous than it feels.
I'm telling you this now because asset prices are high, and just about nobody wants to warn you of the heightened risk. Nobody wants to be out of step with the current bullish trend.
It's OK for stocks to go up over time. That's what's supposed to happen. But it gets perilous when they go up faster than their earnings.
If a business grows about 9% and its stock price rises 34%... the share price has gotten ahead of the value of the business. A correction will have to ensue eventually.
Right now, that's happening to the entire S&P 500 Index. It's up 55% from the beginning of 2023 to the end of 2024. And yet the index's earnings rose roughly less than half that amount (21%) during the same period.
That means more than half the market's gain is due to investors paying higher valuations. That can't go on forever. Sooner or later, it'll correct itself.
Had the S&P 500 only increased by the amount of its earnings growth in the past two years, it would be about 22% lower than today. If the market traded at its long-term average price-to-earnings ratio of about 15, it would trade about 49% below today's level (based on 12-month earnings through September 2024).
That's without any loss in value to the underlying businesses, a recession, inflation, or other economic forces negatively affecting the index components' earnings power. Obviously, if the S&P 500 companies' earnings started shrinking or if the economy hits a speed bump or if some geopolitical issue shocks the world, things could get even worse.
The trouble with my analysis is that the S&P 500 is clearly not trading based on any rational assessment of the intrinsic value of its underlying businesses. At a cyclically adjusted price-to-earnings ("CAPE") ratio of nearly 38, we're in mega-bubble territory.
History suggests that there's no way this episode ends with anything but a brutal bear market...
I can't tell you when the market will correct back to a more reasonable – or merely less insane – valuation. But it will mean taking the S&P 500 down at least 50%.
According to economist and portfolio manager John Hussman's historical studies, it would be pretty normal for stocks to return zero or less over the next 10 years, and for the bear market to take them down about 75%.
But it depends on which history you look at. Scott Garliss, a friend of mine and founder of BentPine Capital, points out in a recent LinkedIn post that bull markets since World War II have averaged 1,324 days, but that the current one is just 829 days old. Based on that, he sees 495 days and 21% of upside left in the S&P 500.
So while I'm bearish on long-term returns, I won't make any predictions about when those returns will start to falter – only that you shouldn't expect stocks will rise forever without a large correction.
And you should understand that the rising itself when it has gone this far is bad for your portfolio. It's bad for your long-term returns.
It's not just because bubbles always crash that soaring markets are bad.
It's because they pull too much future return forward to the present, leaving little for investors to look forward to later on.
Bubbles are insidious because you feel great all the way to the top, when you should have been preparing for lousy returns. And after they burst, you feel lousy all the way to the bottom when you should have been scooping up bargains.
Nobody ever said investing was supposed to be easy.
As the late, great Charlie Munger once said, if you think it's easy, it means you're stupid.
I'd rather be smart and careful. I'm sure you would, too.
New 52-week highs (as of 1/16/25): Antero Resources (AR), Alpha Architect 1-3 Month Box Fund (BOXX), Constellation Energy (CEG), CF Industries (CF), Coterra Energy (CTRA), CyberArk Software (CYBR), EQT (EQT), Comfort Systems USA (FIX), GEO Group (GEO), Intuitive Surgical (ISRG), JPMorgan Chase (JPM), Kellanova (K), Kinder Morgan (KMI), Cheniere Energy (LNG), Plains All American Pipeline (PAA), and Vistra (VST).
One housekeeping note before we get to the mailbag... The U.S. markets and our offices will be closed on Monday for Martin Luther King Jr. Day. Following this weekend's Masters Series, we'll pick back up with our regular fare on Tuesday.
In today's mailbag, feedback on artificial intelligence, which Digest editor Corey McLaughlin wrote about yesterday... and a reply to a piece of mail about nuclear waste from yesterday's mailbag... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"As long as AI does not make your brain a pile of mush... It is just another tool in my toolbox. Nothing else, but a tool." – Subscriber Don
"Replying to [subscriber Thomas M.'s] letter about storage of spent nuclear rods... The technical work was completed. Just Google 'Yucca Mountain'. I know engineers who spent a good part of their career on that project. The issue is not technical. The problem is purely political. [From a New York Times article in 2011]...
[A Government Accountability Office] study found that Energy Secretary Steven Chu's decision to terminate the Yucca Mountain repository program was made for policy reasons, not technical or safety reasons, and officials speaking for Chu in 2010 did not cite any technical concerns or safety issues related to the Yucca Mountain site.
"Maybe now that nuclear energy is en vogue it will be easy to open." – Subscriber Scott G.
Good investing,
Dan Ferris
Philadelphia, Pennsylvania
January 17, 2025