Euphoria, or At Least I Got a BMW Out of It
In the cubicle next to mine was another parent of young kids. Like me, he was upward-striving, hard-working, and completely fooled into believing that this time, it was different. The year was 1999 and the internet was the end of the old economy.
My friend wanted a BMW. To get it, he was speculating with every dollar he saved on IPOs (initial public offerings). He had doubled his money, or something like that, every day or hour. To my horror, it worked. He bought the car and also the really cool custom wheels!
I thought, what is wrong with me? I only earned 20% in my 401(k), and it took me an entire year! He got a BMW over night, or so it seemed. What am I doing wrong? Why am I contributing to this 401(k)? For a measly matching contribution?
Within a few months we were both laid off as the massive parent company (formerly known as Lehman Brothers) let go two out of every three people in their Denver office. The dot-com crash gave us yet another reason to set off on our own.
That time it was not different.
I almost believed what my cubicle-mate was telling me: that car looked good. Turns out, that's all he had left. At least he spent it on a car! Think about that for a minute: a car was his best investment. Poor guy.
Stock markets over-shoot
I fear for you when you say you want higher returns, and when you have some neighbors who have higher returns, and you heard there is a way to get higher returns. This time it is not different. Stocks will over- (and under-) shoot again.
I remember another story about a stock broker sued in 1999 because his client got a 29% return and her neighbors earned 80%. I remember my cubicle-mate who at least had the awful sense to spend his winnings on a sports car before they evaporated like Enron.
In a rapidly upward-trending market, we have a tendency to lose "our adult sense of danger," as Nick Murray puts it.
Let's think about it like climbing a mountain. A month ago, we climbed Camelback Mountain with 10 ten-year-olds, their brothers, sisters, and parents in tow. Four of them ran up the steep and hot incline and I, as if I were still a kid, ran with them. We made it to the top and one of them (only 8 years old) nearly passed out from heat exhaustion. Every ounce of water, fruit, and sugar I had went into his body. We all returned safely down the hill.
But what a view it was from the top! And the top was the most dangerous part of our trip. We were farthest from safety and only halfway through our journey. Similarly, stocks are like that. They are most dangerous when they feel the best--when we feel euphoria, or that "I just conquered a mountain" high.
The next time the markets take us on a roller coaster, we'll have to work hard to remember that this time it is NOT different. This too shall pass.