Signs of delusion and madness

One of the signs that you have entered into a mania phase is when people have trouble absorbing non-conforming information.

“Confirmation bias” is a psychological behavior where individuals disregard any information which conflicts with their current beliefs. While that bias has always been problematic for investors, in recent years, it has worsened.

There are currently many signs of exuberance in the market from retail traders. Most notably has been the surge in speculative “call option” buying. As shown by, despite the recent correction, retail traders got even more aggressive.

But, as Charles Mackay penned, such is what you would expect:
“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find whole communities suddenly fixate upon one object and go mad in its pursuit. That millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

As Mackay notes, there is a long history of bubbles going back to the 1700s. The table below shows the history of bubbles and what they all had in common.

As shown below, the rush for investors to pile into SPACs (Special Purpose Acquisition
Companies), or more commonly known as “blank check” companies, aligns with the long history of investor speculations.

As David Robertson pointed out: “Bubbles can be hard to navigate because of their insidious ability to prey on human weaknesses. Longterm investors get lured into making short-term wagers. Risk management discipline gets discarded for a shot at spectacular gains. It is all so tempting and looks so easy.”

Jeremny Grantham captured this point perfectly: “And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy. As I like to say, there is nothing more supremely irritating than watching your neighbors get rich.’

So, the trouble with bubbles is they prove very tempting opportunities to do the wrong thing. Many investors will take their chances and disregard the warning.

Grantham explains the challenge:
‘For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.”

“This time is different” is the clarion call that goes up during every mania as traditional valuation measure are deemed outdated. In this respect, 2020 was no different. Professor Robert Shiller, the Yale economist who famously compared the 1990s stock market to “irrational exeberance.” By all measures, the market is more expensive than in the 1990s and 1929.

“Men, it has been well said, think in herds; they also go mad in herds, while they only recover their senses more slowly, and one by one.” – Mackay.