March 11, 2021 | Losing Faith

“Love your blog,” says Phil from Hamilton, worming his way into my graces with a slurpy MSU. “My life has changed dramatically since the day a good friend pointed me towards it.  I am a devout follower and I thank you.”

Okay, but Phil’s Garthonian devotion is being shaken by current events. The world, he notes, is nuts. Up is down. Risk is safe. Caution is loss.

In the recent & ongoing real estate climate, where despite EVERYTHING people still ignore any logic and dig themselves further into a debt-slathered grave, why should those that so devoutly follow your tidings not employ a “if you can’t beat them join them” mentality?

If human behaviour/idiocy (in this context “FOMO”) can apparently be so depended on, with a government that shows little inclination of stemming this behaviour, why should we responsible people not get in on the action?  Or is it already too late?

I read all your posts and agree with all of your points, but what if human behaviour/idiocy finds a way to surpass even all these?  Am I missing something that could actually curb the current house-buying craziness? I fully expect an eviscerating but would love to know what points and/or assumptions of mine are wrong.

Actually he’s not wrong. Logic is but another victim of the virus. All around us souls are making decisions based on emotion and groupthink. Reason would dictate that swallowing big debt when rates are low and destined to rise is a really bad idea. Rational people would not be competing for houses at any price when they’ve never cost as much before. After all, we don’t buy anything else that way. In the midst of a pandemic, a recession, economic crisis and job uncertainty putting all your money into one asset and hiking living costs seems rash. Believing an indebted nation won’t goose taxes, that your boss will never want you back at work or that rural properties, lacking stores, hospitals or transit, are suddenly mainstream seems rash. Emotional. Reactive.

And we haven’t even mentioned GameStop yet. Or Tesla. The kiddies on Reddit. Bitcoin, or the dog crypto. The Hoodies. Meme stocks. And the ludicrous NFTs. After an entire year of Covid (the sad anniversary is today) never have we seen such FOMO swelling assets or speculation making people crazy. Combine that with pandemic-induced YOLO, governments throwing money around irresponsibly and the viral destruction of our societal work ethic, and we’ve ended up here. The everything bubble.

Time, Phil, for a small refresher on the science of behavioural finance. The premise (and it’s true) is that people do things primarily for emotional reasons and are unable to overcome personal biases. That leads to herd investing. Asset inflation (or destruction). And distorted markets. Like now.

In the last few days, Oxford prof Greg Davis warned that Covid has really messed with our heads, so that emotional investing has hit a new peak with people piling into inflated assets – just because everyone else is.

 “We currently have the perfect ‘storm’ for emotional investing.  Following the Coronavirus crash in the first quarter of last year when stock markets saw big falls, we are now in a bull market, with markets around the world rising.  Optimism is higher because of hopes around the vaccine roll-out and stimulus programmes.  However, there are huge economic problems ahead around unemployment and huge public spending deficits for example, so we should expect the unexpected in the markets over the coming months.

“The rise in the value of Bitcoin has also led to a crypto-assets ‘gold rush’, with retail investors piling into an incredibly volatile asset class that most don’t understand. The pandemic means many investors are currently highly emotionally sensitive and have a shortened emotional time horizon which increases the appeal of get-rich-quick gambles.”

There are always reasons to invest your money, buy a house or take a calculated chance. Lately a lot of those gambles have paid off. But with each tick higher in price, risk augments. Phil (and everybody else) should be aware certain biases make us do weird things that in the absence of a crowd, we would never.

For example, ‘disposition bias’ compels people to hang on to losing investments until they (maybe) recover because they fear admitting to a mistake (GameStop). So they gamble that the pooch won’t go lower. Equally, ‘confirmation bias’ makes us put weight on information we agree with (‘interest rates will never rise’) and discount what this pathetic blog (and economics) says. ‘Recency bias’ leads us to believe what happened recently (like WFH or romping suburban house values) will last forever. And ‘familiarity bias’ seduces us into investing in stuff we know about (like houses) even realizing this may lead to dangerous debt and a seriously unbalanced life.

So, Phil, you can follow your brain. Or your pants. But never both. Amen.

Garth Turner March 11th, 2021

Posted In: The Greater Fool

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