A quote from Warren Buffett to provide caution

Tim Denning

Feb 2·6 min read

This time in history makes me nervous.

The financial markets have become the wild west. The 2008 crash looks overhyped compared to right now. The 2000s Dot Com Bubble is nothing more than a dinner party joke compared to right now.

An article titled “Profits? We Don’t Need No Stinkin’ Profits!” explains the current phase of stock markets better than I ever could.

The less profit a company makes and the more cash it burns, the better it does.

The GameStop story is another simple example of the stock market madness. A group of Reddit pirates had enough of traditional finance. They rebelled by using social media to pump the price of GameStop’s stock. Their enemy, the hedge funds, tried to use their financial brilliance to fight them. They placed trades (shorts) betting the stock would go down. Reddit investors pumped the stock further, which took out their short trades. Hedge funds lost money. The war was won on the battlegrounds of GameStop.

Tesla is another stock clearly doing backflips at the circus. Their stock price has surged more than 695% in recent times. Tesla is worth more than the top seven carmakers combined. Tesla produces far fewer cars, though. This is madness.

Elon Musk demonstrates the odd times we live in. “Tesla Stock price is too high imo [in my opinion],” said Elon last year. The market responded and gave him his wish. Elon tweeted about GameStop too. All he had to do was say “Gamestonk!!” with a link to the Reddit investing group for the stock price to go up. Hours later the stock was up more than 60%.

I think Elon is a smart guy. He’s playing a practical joke on us, designed to help us rethink the crazy stock market we’re drowning in.

Where does the hype money needed to buy stocks come from?

We are clearly in uncharted territory.

The US Government has created trillions of dollars out of thin air. Unlike the last recession, they’re not even trying to use fancy labels like ‘quantitative easing’ to hide their experiment. The Chairman of The US Federal Reserve, Jerome Powell, was questioned publicly by 60 Minutes in an interview.

Interviewer: Where does it come from [money]…do you just print it?

Jerome Powell: We print it digitally. As a central bank we have the ability to create money — digitally — and we do that by buying treasury bills, or bonds, or other government-guaranteed securities — that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve Banks.

Neel Kashkari, who is the President of the Federal Reserve Bank of Minneapolis, woke us up further in an interview he did with 60 Minutes.

“There is an infinite amount of cash at The Federal Reserve. We will do whatever we need to do to make sure there is enough cash in the banking system.” It’s hard to read that quote and not ask yourself a lot of questions.

If money is infinite then why does the US even need debt? If there are infinite US dollars, then we can all sit at home in our pajamas and let the Federal Reserve pay our bills, right? Of course not. Seeing the people running our financial system say this stuff makes me fearful.

Thinking money is infinite is a disease caused by delusion, not a practical strategy for long-term prosperity.

How to think about stocks

Be fearful when others are greedy and greedy when others are fearful — Warren Buffett

This quote guides me during these strange financial times. I am seeing all sorts of craziness. Teenage Tik Tok influencers are even financial gurus now. They pumped up a dud cryptocurrency’s price by 95%.

There is even a Tik Tok influencer who uses astrology to predict the price of Bitcoin. All of this madness changes how I think about stocks and the broader financial landscape. Here are few practical tips you can borrow.

Lock in profits

What you are living through is a crazy time in financial markets. These times will change. History shows us reality eventually sets in.

I have sold my stocks and locked in profits. Many other investors I know have decided to sell some of their stocks and take profit. Either strategy is helpful to limit your downside.

Quietly mute the amateurs

All the stock pushers only make the situation worse. Stocks have invaded our social media channels. The solution is to mute their content. If you don’t consume videos designed to pump stocks and take your money, then you’re less likely to be affected by them.

Sit on the sidelines

It’s okay not to be investing money in stocks right now. Many average investors like me seem to suffer from FOMO. It feels like many people are putting part of their paycheck into stocks to profit from these times.

That’s all well and good until the market finally corrects. You are living through a financial experiment. What is occurring in financial markets has never happened at this scale. It’s expected based on global events, but that doesn’t mean it’s okay.

I’m happy on the sidelines. When everybody is winning, I like to be fearful. I like to invest heavily when there is panic from a recession, so I can capitalize on discounts. Other times, I like to do nothing.

Excess money is comfort food for your overworked brain.

Get a good night’s sleep

I invest to get a good night’s sleep, not to get rich. Investing can stress you out a lot. You can end up glued to your phone, watching markets go up and down, and seeing your self-worth change accordingly. The aim of life isn’t to be a millionaire. The aim of life is to enjoy it while it lasts. It’s hard to enjoy life when you are stressed out by investing.

Most investing is gambling in disguise. Gambling leads to losses. Losses create unnecessary stress.

Look at this simple stat

I am no expert in reading financial graphs. One simple metric to look at is the price to earnings ratio of a company or an entire country’s stock market. This gives you an indication of whether prices are high or cheap. You obviously can’t bet your life on this stat, but it helps get a clearer picture. This quote says it all:

“The US stock market has only been this highly valued twice before: during the Dot Com Bubble in the late 1990s and before the 1929 market crash signaling the beginning of the Great Depression.”

Watch the inside investors

This is a pro tip us normies can utilize. There is a metric called “The Insider Transaction Ratio.” This statistic tells you how many insiders of public companies are buying or selling stocks. If lots of major shareholders of big companies are selling their stocks, then it can be a great indicator of stock prices going down and systematic issues.

Retail investors fall for the hype. Inside investors have the data to make different decisions.

Now is the time to be fearful. Greed in an upside down market like this will see you lose most (if not all) of your money. From Elon Musk pumping stocks, to teenage Tik Tok influencers hyping cryptocurrencies that have no value — now is the time to be careful. Now is the time it’s okay to be fearful.

After the madness comes reality.

Investing your hard-earned money when prices reset can save you from the devastation most retail investors experience during wild west market cycles. There is nothing wrong with paying off debt or investing your money cautiously until the ego of the markers and those who sell it to us like snake oil, calm down, and come back off cloud nine.