Learning from Bubble Tops

If my readers agree with everything I say, I am probably doing something wrong. This blog isn’t for people to reaffirm what they already believe; if you carry this kind of mindset, you will not grow as person or as an investor. I hope that I can change people’s views on certain topics and vice versa. There is so much room for growth if we keep an open mind, stay objective, and learn from our mistakes.

I remember reading something along the lines of “the smart person learns from his own mistakes, but the wise person learns from the mistakes of others.” As an investor who is still relatively young, I try to learn from the mistakes of others. I wasn’t even born when gold and silver bubbled over in 1980. When the internet bubble popped in 2000, I was more interested in playing video games than tracking the market. Obviously since I didn’t directly experience these events, I am at a disadvantage. But I also believe that not directly experiencing these events gives me an advantage because I can analyze these events through a clear lens. If I made a lot of money during the gold bubble, I may be biased. The same goes for if I lost my shirt going long gold at the very top.

As it stands, I can just observe things like price action, investor sentiment, debt levels, and money supply objectively. That’s why you won’t hear me say things like: “Gold is going to $100,000 because the dollar is going to 0 and there will be rampant hyperinflation!” Instead I say things like: “Gold has lagged the money supply, national debt, and stocks over the past 30 years so it is likely undervalued.”  These are two different approaches to looking at things.

That being said, I’m still trying to figure out why lightening up on silver at these levels is so crazy. It’s interesting, because when I was buying at $9 after a 50% correction in 2008, I looked to my left, I looked to my right, and no one was with me. Over 50% of my net worth is still in silver and silver-related shares. Trust me, I believe in the silver story. But I also believe that you should not press the long side on an asset that has risen 170% in 7 months. And if this is the parabolic move to $100 that people are expecting, then I will not wait until $100 to unload my position; I will be unloading on the way up. I am not going to sacrifice 400%+ gains because I want 600% gains. This is just not my investing style.

There is absolutely no way anyone can say the price action in silver is any different from other bubble tops such as the top in the Nasdaq, the top in the Nikkei, or the top in gold in 1980. At tops, the perception surrounding an asset changes. People lose perspective. People predict 5% corrections instead of 10-20% corrections. There is a frenzy. Instead of getting caught up in price action, we should try to learn the lessons of history. Price and time- these things tell a story. It is exceptionally hard for people to think rationally when prices are moving so drastically. Try to stand apart from the crowd and think things through with a clear head.

People think I’m jumping up and down over this move in silver, but I’m not. Gold is trending in a much more constructive way for the long-term oriented investor. I always thought that gold and silver would become bubbles at more or less the same time; now I’m starting to think silver will become a bubble first. It may not be this year or next, but the bubble in silver looks like it will pop first. Most of the people who comment or email me tell me they like this blog because I’m objective. Well look, I’m being objective here: the rally in silver is very extreme. The action in silver is very bubbly, but I am not calling it a bubble yet. I’d rather just lighten up and take it from there.

Each of you has the freedom to do whatever you want with your capital. You can go long here on leverage if you want. As for me, I’m content taking some profits. If I’m wrong, I’ll commend all the people who predicted a further parabilic rise in silver for making a good call.

Learning from Bubble Tops is a post from: Expected Returns

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