Stop Being "Dumb Money"

In one of my recent X posts I wrote this:

"For the past 100 years the same thing have been happening again and again. Rich people buy cheap stocks at the time when nobody wants to be in the shit market. The hype starts, stupid investors pile in, the hype gets bigger, really stupid investors pile in, then the grandmas and the shoe shine boys pile in.

Then a rug pull.

The stupid sheep sell out of panic and leave the market for the next 20 years. Rich people buy the cheap stocks. New hype cycle begins with new suckers. And so on and so on for 100 years."

So, does it mean the market is about to crash? If the market is getting to that boiling point, doesn't it make sense to sell now, before the inevitable rug pull?

No.

What? have you gone mad Tom? What are you talking about? You are warning us about a rug pull and telling us not to sell?

Allow me to blow your mind.

You see, most people completely misunderstand my warning. Read it again, and think again, what am I warning you about?

It’s not the crash itself that kills retail investors, it’s what retail investors do to themselves, during the crash.

When a market crash happens, it doesn’t discriminate. Billionaires, hedge funds, your neighbor, everyone sees their portfolio value drop.

The difference is how each group reacts.

Rich people? They know the rules of the game. They see the crash as an opportunity to pick up assets on sale. Imagine going to a store and seeing a sign that says, “50% off everything!” Would you walk out and wait for the prices to go back up?

Of course not. Yet, in the stock market, that’s exactly what retail investors do.

Retail investors, on the other hand, tend to panic. They see their hard earned savings evaporating on paper, and fear takes over. The natural instinct is to stop the bleeding, to sell everything and sit in cash.

It feels safe, but it’s a death sentence for your financial future.

The market crash itself doesn’t define your success as an investor, your actions during the crash do. Selling locks in your losses. Let me repeat that for the people in the back: selling locks in your losses.

Take 2008, for example. The market tanked, and many retail investors panicked and sold their portfolios. But by 2013, the market had fully recovered. By 2020, it had hit all time highs. Those who held on not only got their money back, they made a fortune.

Those who sold? They missed out entirely and likely never got back in.

In 2020, the market plunged during the COVID crash as fear gripped the world. Retail investors sold in a panic, locking in losses. Meanwhile, the rich and savvy were quietly buying stocks at rock bottom prices.

By 2021, the market had roared back to record highs, fueled by unprecedented stimulus and optimism about recovery. Those who had sold in 2020 missed one of the fastest recoveries in market history.

Then came 2022, and the narrative shifted again. Rising rates and fears of a recession triggered another sell off, and once more, retail investors bailed while smart money held firm or added to their positions.

Fast forward to 2023 and 2024, and the markets are up significantly again, with tech and AI stocks leading the charge. The same pattern repeats: the impatient and panicked lose, while the calm and collected win.

This is why I say the crash itself isn’t the problem. It’s the panic selling, the emotional decision making, the fear of temporary pain that leads to permanent damage.

It’s not about predicting; it’s about staying in the game.

And yet, I have the same conversation with investors every day: "But Tom, wouldn't it be better to sell just before the crash and get back in right after? The market right now is CLEARLY about to correct and if we get out now we will not get burned, and will be back when things recovered riding the wave?"

I get it. You think you’re the exception. You’re going to sell at the top, avoid the crash, and buy back in at the bottom. Good luck.

Let me hit you with some facts: the market’s best days often come right after the worst ones. If you sell during the crash, you’re almost guaranteed to miss the recovery. Research shows that missing just the 10 best days in the market over a 20 year period can cut your returns in half.

Let's go back to the late 90's.

The story goes that in the late 90s, tech stocks soared to the moon, fueled by internet hype. Eventually, the bubble popped in 2000, leaving many investors licking their wounds.

The trouble is, the late 90s bubble did not end in 1998. It kept going, climbing another few hundred percent before finally peaking in March 2000. So if we truly are replaying the 90s, we might not be near the top yet.

It might be tempting to look at a PE ratio of 30 on a major index and conclude that a crash is imminent. But there is a reason these rallies tend to persist longer than bears expect. AI is not some passing fad. Just as the internet was a genuine revolution, artificial intelligence has real world applications that are already generating billions in revenue for major companies.

Yes, some of the smaller AI players might be speculative fluff, reminiscent of pets.com from back in the late 90s. However, the big players are seeing tangible results. That can sustain the narrative that we have only scratched the surface of AI’s potential. The key question is whether valuations can keep rising without a meaningful correction.

You see, the mania can feed on itself. The more AI transforms business, the more retail and institutional money will flow into the sector, reinforcing elevated multiples.

The markets can remain irrational much longer than you can stay solvent.

Peter Lynch famously said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

The problem is that most investors don't quite realize how different this market is compared to 2000.

The difference is that many dot com hype companies had no real earnings, while today’s AI giants do. That does not guarantee that certain stocks are not overpriced, but it does hint that we might not see an identical meltdown scenario.

The current bull market we have seen for the past 2 years, actually kicked off right around ChatGPT’s release in November 2022.

Since that point, the SP 500 has climbed 60% percent. Impressive, surely, but well below the average bull market gain of 114% we have in the U.S. stock market.

Historically, bull markets tend to be long and steady, while bear markets veer toward the short and steep variety. This current one, lasting 800 days, is about 200 days shorter than the typical bull market (1,000 days on average), which means it could still have substantial room to run if history is any guide.

Tech can keep running higher if the economy remains stable, if interest rates do not spike, and if AI continues to deliver. There is risk, no doubt, but the “this is 1999 all over again” crowd might have to wait if they are hoping for a swift collapse.

Comparisons to the 90s are helpful to a degree, but do not assume a crash is right around the corner. We might get an extended mania phase. We also might see a more robust earnings foundation.

So wait, if we can't say for sure that this is "the top" and if there is no way to time the exit point, and if long term the market will be back to new highs even if we do nothing and just stay invested, WHY SELL?

Congratulations. You finally get it.

I bet most of you don't even remember how Alan Greenspan delivered his infamous “irrational exuberance” warning in December 1996.

The market essentially ignored him for more than three years, doubling again before it finally broke.

That is why you might see a lot of analysts warning about a bubble, but the index marches onward. Could it end next month Could it keep going for another year. No one knows for sure.

The economy is growing at around 3 percent. Inflation is down from its peaks. The Federal Reserve has not signaled an urgent need for massive rate hikes. Corporate earnings might be stretched, but they are not outright tanking. Money flows into ETFs also reflect a preference among investors for simple, broad equity exposure.

All of these factors can reinforce the bull run. On the other hand, if something spooks investors, we can see that money rotate out just as quickly.

There is no way to get out on time if it happens.

Tom Lee for example sees signs of short term traders taking leveraged long positions, which can magnify a rally or exacerbate a dip. Some might interpret that as the blow off top indicator, but so far it hasn't happened.

Yes, valuations are high. Yes, many stocks look pricey. That can last a while if the macro environment remains favorable. People forget that the market can defy logic longer than your trade margin can handle.

Screaming that it has to correct might not help your portfolio if the correction does not arrive in a timely fashion.

Yes, I do see the potential for a short term pullback, maybe a mild correction that shakes out weak hands. But as long as fundamentals remain moderately strong, the SP 500 could continue trending up.

The real danger is in assuming that you are at the top because the market appears overvalued, and saying it must crash immediately. History shows that overvalued markets can float in the stratosphere for an extended period before reality sinks in.

If you expect a recession, watch for a spike in jobless claims or major changes in the yield curve. If those signals remain quiet, the rally may persist longer than conventional wisdom allows.

 Now look, I am not ignoring the elephant in the room, I know about the yield curve.

Some people point to the yield curve inversion as an ironclad sign that a recession is inevitable. Yet initial jobless claims remain tame, and inflation does not appear to be spiraling out of control again, though it has ticked up in small increments.

The Federal Reserve has stabilized rates, reminiscent of the environment in the late 1990s when the Fed kept policy steady, fueling further gains in risk assets. Many parallels exist, but that does not guarantee an identical outcome.

The 90s ended in a bubble burst. Could we see that now Possibly. Could we also see a scenario where the economy muddles along for another year or two, letting overvalued stocks drift even higher Yes, that too.

If you are a trader, you can go with the flow while keeping an eye on major catalysts. If you are an investor, maybe you keep some dry powder for a correction, but you do not panic out of your positions.

It all boils down to strategy, time horizon, and risk tolerance. If you are a long term bull on AI, you might accept the rollercoaster ride, expecting that in five or ten years, these valuations might look justified in retrospect.

If you are a cautious investor who only buys bargains, you might sit on the sidelines for a while, waiting for a downturn that may or may not arrive soon.

Neither approach is necessarily wrong, but you had better know why you are doing it.

Chasing or shorting purely because of headlines is a recipe for regret. The market is a complex beast. You either adapt or get trampled.

You might think all this uncertainty is unnerving, but welcome to investing.

Aswath Damodaran, often called the "Dean of Valuation," once said:

"Investing is not about being right all the time; it's about being comfortable with being wrong and uncertain."

At the end of the day, we have a market that is undeniably expensive, insiders who are not exactly screaming buy, a tech sector that might be building the next big bubble or simply continuing a multi decade outperformance, and an SP 500 propped up by stable economic data.

Anyone who claims to know precisely how this ends might be fooling themselves.

Remember that markets thrive on confusion. Every time it looks too obvious that a crash is coming, the market does the opposite. Whenever it feels too easy to make money, a curveball arises.

By acknowledging the nuanced reality behind insider selling ratios, tech mania parallels, and the SP’s valuations, you put yourself in a better position to react sensibly rather than chasing headlines.

Thanks for reading, and may your holiday season be as rewarding as you hope the stock market will be.

-Tom