AAR16 - How to Avoid the Hype

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2:17Dave Ahern:Greetings, everyone, and welcome back to At Any Rate. My name is Evan Rate, and we're here to help you make sustainable financial changes without breaking a sweat. And tonight, we have the classic, the patient, the beautiful, Mr. Dave Ahern. Hey, how you doing, Evan? I don't know that classic or beautiful would be terms I would use to describe myself. but I suppose, thank you. I would just recommend taking the compliments and moving on. I think that's the only choice you have. So something that's been coming to mind a lot lately, I had a fantastic conversation on my last episode with John Dugoy, and he was discussing a lot of the overconfidence that occurs in the stock market and overall finance.

2:58Dave Ahern:He also has a fantastic book called Bullshift, and he discussed a ton about many of the biases and especially overconfidence biases that we have nowadays. And for me personally, that resonates pretty heavily around just the general hype that exists in the stock market, in the finance industry. What's some hype that you personally see out there? Because obviously we have very different points of view and parts of the finances in the stock market that we see. So what do you see on your end of the aisle? Well, I think the thing that's probably the most common right now has got to be around AI. There is a lot of conversation about AI and companies that are associated with AI.

3:39Even tangentially, you'll see companies that you would think don't have much to do with AI. A perfect example is I was reading about a company called Zoetis, which is a animal pharmacy company. They make medicines for companion pets and livestock. And they were talking in their latest 10 or their quarterly report about ai and how it was impacting their business now that's not necessarily the most i guess common link to ai that you would associate with nvidia obviously that's kind of a no-brainer palantir no-brainer but something like zealotus not so much but it doesn't mean that they aren't using it but it just it just kind of illustrates the the hype around AI and in today's day and age with social media particularly, and then the news, somebody like CNBC who loves to talk about financial news, if you go on there, the majority of what they talk about is hype and noise.

4:37And the reason why they do that is because it gets them eyeballs. Their revenue model is advertising. And the more eyeballs they can get on the ads, the better it is for them. So therefore, they talk about things that are exciting and things that are bullish. And the stock market is infamous for that. And that's unfortunately sometimes why a lot of people feel like it is a casino or that you're gambling because there's so much hype and there's so much hoopla around particular things that may or may not end up being true or coming to pass. But because of that, there seems to be a lot of enthusiasm.

5:18And there's, oh gosh, Robert Shiller was a famous economist from the 70s and 80s. And he talked a lot about irrational exuberance. And that is a term that you'll see bandied around in the stock market whenever things start to get air quote frothy or bubbly. And we are kind of seeing some of those signs right now. and whenever you go on social media particularly the the x machine you'll see lots of enthusiasm around ai and other particular companies and that's something that you just kind of have to be aware of and also be careful of if that concept has been around since the 70s or i'm sure before

6:02Dave Ahern:as well before the term was coined but what's the general i guess kind of outcome of of the status of the market being termed that? I think the biggest way that you can kind of interpret it is that everything is going up and to the right and people get super excited. And then that is when people pile into the market, which in turn drives the market up higher and higher until there's an inflection point, something that causes the stock market to turn. And this is nothing new. This is all part of the game. and it's been happening since we've had a stock market here in the United States, which is in the 1780s.

6:44And this time is not different. Every time, rinse and repeat. The dot-com bubble, what happened during the 2007, 2008 great financial crisis a few years ago, right after the pandemic, everything was super frothy, then it crashed, and then it came back up again, and then it crashed again. So these are normal cycles in the market. But if you're not used to that, or if you're just getting in late because you see that everybody and their brother is investing in the stock market, a good barometer is if you go to places that you don't normally, if you hear people talking about the stock market in places you don't normally hear.

7:23For example, if you're taking an Uber from work to home and your Uber driver is talking to you about Bitcoin, chances are you're in a bubble. And so when those things start to happen, that's when you have to start, you know, you have to be careful and you, it doesn't mean that you can't invest in some of those things, but you have to be very judicious and cautious about how you do it because that's when the hype is the, the, the most manic is when most retail investors get burned the worst. Yeah.

7:55Dave Ahern:And that, that hype for me being a 26 year old, only having been, you know, actually fully invested in the market for around six years or so, five or six years, all I've really known for the most part has been positivity. I mean, I've seen some downturns during COVID and then after COVID and about 2022 and everything, but those were relatively short downturns. And they were also downturns where there was a pretty clear cause to it. A worldwide pandemic is kind of an obvious impact to that. And so it has felt pretty obvious to me when there have been downturns why there's being a downturn and other than that it's just been been really really good overall and so a lot of what i've known is hype also obviously growing up with social media for me watching a ton of youtube and everything and when i was first getting into the stock market that's where i absorbed a lot of content that's not necessarily where i learned the most valuable information but that's where i was absorbing a lot of content at the time and all of that is is so so focused on extreme hype about what's happening in the market at the moment extreme hype about a specific company about a specific cryptocurrency and and it's all positive positive positive or even super reactionary negative hype of of one day the market takes a small downturn and it's oh my god this is a huge indicator this means this this is going to be happening over the next five months, prepare for this, blah, blah, blah.

9:22Dave Ahern:Just a ton of short-term reactions or just seeing, hey, the market's been going up, you better get on this now because all it's going to do is keep going up endlessly forever, forever. So since I've only been actually fully invested for a relatively short amount of time, how have you seen hype change and how it's absorbed through society over time? Because I know you said that the hype itself has existed for as long as the market itself has existed but how have you seen it how it spreads and how people actually absorb that information change over time if you look back over time if we just take for example the last you said you've been investing for the last five or six years so even even since 2010 27 207 209 you know those those time frames the The hype cycles have shortened.

10:20With the amount of information that we have available now because of the explosion of the Internet, you have to may shock people that are listening to this, but there was a time where the Internet didn't exist or it was not utilized. Not possible. I know it's impossible, right? Even back when the iPhone is a relatively new invention in the grand scheme of things, And the internet doesn't predate that by a whole lot, at least as far as like general acceptance and usage by the general public. And so what has happened since really since the internet has become a thing is that we have seen, you know, it's like an accordion.

11:03You see everything compressing. You can see the time cycles that used to take maybe decades or even five or six years to play out. Now can happen in matters of months, if not weeks, before things can kind of bounce back and relapse. And some great examples of that more recently are a few years ago, Netflix dropped 20 % in one day because the internet, when they reported their quarterly earnings, they reported that they had seen a drop for the first time ever, according to the company, a drop in monthly subscribers. and that was one of the important KPIs or key metrics that the company and analysts and investors watched to see how successful Netflix was.

11:53And coming out of the pandemic, they saw a downturn. Obviously, they had seen a huge upturn during the pandemic and they saw a downturn. And so the market reacted very negatively to that and it dropped 20 % in one day. Bill Ackman, who is one of the more famous younger investors today, owned the company. He got out right after that happened. What's happened since then, the company has returned like 430 % since that time. So they've had a huge return since that time. And that all happened in a very, very short amount of time. And even more recently, a few days ago, NVIDIA reported their quarterly earnings.

12:32And the market reacted very negatively to what happened in their report, even though they only, I say only, the largest company in the world only grew at 55 % for the quarter. And that was not quite as much as the market expected. And so everybody was like, it's over. The AI bubble's bursting. It's over. And it was just death, doom, and despair. And the company lost 10 % overnight. And the next morning, it recovered all that and more. So you see these wild swings now, and a lot of that is due to the fact that there's so much information available instantly on the internet, and we as investors are emotional beings.

13:16And so when we see something, a perfect way to think about this, if you don't know anything about NVIDIA and you own the company, if you hear bad news, you would be crazy not to react to it. And that's what happens is that people react to that. They overestimate their knowledge or their ability to prognosticate where a company is going to go. And when you think about the stock market, it's a very complex living being that has lots of moving parts, like gazillions of moving parts and all of us humans involved in it. And so you're going to see lots of wild swings. And that's how the hype cycle now is built everything up so high that if things don't meet expectations, instantly it turns.

14:05And that is what some people wait for that. And some people invest on betting that that hype will continue. And to your point about people that haven't seen these more extended cycles, during the 90s, that was considered, the 90s were considered what they call a lost decade. and that's because the market didn't really do all that great over the 10-year period. And then it led up to the dot-com bubble, which burst. And then we've seen some cycles since then. But in your time, in the six years, we've really only seen the COVID and some short little bursts here or there. But to your point, most young people that are your age and younger have never seen a bull market.

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17:32Dave Ahern:Yeah, it can be scary to think about, but all you can do is prepare as best you can. and it's it's it's interesting to hear about who the hype ends up affecting because in my mind it's almost like you have to be in in the goldilocks position sort of where if you are if you're not paying attention i guess you don't want to be in the goldilocks position in hindsight you if you aren't paying attention whatsoever then you kind of let the market do do what it does and those short-term reactionary whether it shoots up or shoots down don't really affect you much because if you just sit there buying and holding, then those short-term changes don't matter to you.

18:08Dave Ahern:And if you're really, really tuned in the market and you have a very in-depth understanding of stocks and stock movement and factors that affect it and what is just hype and short-term reactionary movement, then you're also going to be able to come out on top of it. But almost if you're in that in-between level of education that you quote-unquote know enough to be dangerous and you're paying attention to things, you're a little tuned in, you understand some ratios or something, when you see those wild movements it's so easy to feel like you're you're predicting something and you're you're reading into something that nobody else is able to read into and that's when you are the one left holding the bag and you're the one who's who's stuck making those reactionary movements while the people who were being yoda quote-unquote and just sitting there and buying and holding and making the more long-term educated decision decisions are the ones that then end up coming out on top so with that in mind who do you feel like is ends up being most susceptible to this hype and is most likely to come out the worst and how could people go about not being that person i would say probably the the financially illiterate and i think you kind of nailed it on the head the people that know enough to be dangerous those are the people that will get burned the worst and the reason why they say that is because the way we are wired is most of us overestimate our abilities and most of us think we know more than we do and when you go into a situation like investing it's very common to for us to think we know way more about this company or the stock market than we actually do.

19:50And we think, I'll give you an example. So it's not related to the stock market, but I read something a few days ago that 80 % of drivers in Sweden think they're above average drivers. Well, that's impossible. That math is not math. And the stock market is exactly the same. The vast majority of people that get into the stock market that either know nothing or know a little bit are the ones that are the most dangerous to them because they will fall for hype. They will listen to, I want to say a shuckster, but they'll listen to people that maybe aren't going to give them the best advice. And the incentives for that person to be excited about something is they may be very heavily invested in a particular business or an etf or something and they're promoting it trying to have other people buy it up which causes the price to keep going up and up and up meanwhile they're turning around and selling it because they're making these huge profits and then people who don't know any better are the ones it's called bag holding they're the ones left holding the bag when all the air goes out of the hot balloon.

21:11And that's what happens to people. And it's sad to see. And it happens, unfortunately, almost every single time. And the best way to prevent, I guess, to prevent this or to avoid these situations is, there's probably a few things. But I think the first thing is understanding this bias that we have to understand and feel that we know more than we do, the best way to counteract that is to say to yourself, I don't know anything. To quote Game of Thrones, you know nothing, Jon Snow. Approaching it with that point of view will help you immeasurably because if you go into a situation where you think you know more than you do, you're gonna be overconfident.

21:58You're gonna maybe make poor choices. But if you go into it with a little more cautious viewpoint, you're going more likely to maybe take steps to try to either learn more about a particular thing or find better sources of information before you choose to make a decision. Or you can always just not invest. You don't have to swing at every pitch. This is something that Warren Buffett has taught us over the last 60 or 70 years. There's no harm in not investing in NVIDIA. if you're buying individual stocks, you can have fantastic returns without investing in the hottest, shiniest things. And typically, those are the things that, yes, they will do great, and they will do great sometimes for a very long time, but other times they will not.

22:46They will do great until they don't. And then if you aren't getting out when everybody else is, you're going to be left holding the bag. GameStop a few years ago, that was a prime example of that. and so understanding what you know and what you don't know and trying to find better sources of information and then just choosing what you want to to invest in and the last thing i'll say is understanding who you are as an investor that i think is probably the biggest i guess not hurdle but it could be the thing that trip people up the most is they they go into the stock market thinking they're going to be the next warren buffett i have a newsflash story i'm not turn to be Mr.

23:27Downer boy, but you're not. I'm not. Evan's not. We're not. You're whoever you are. You can invest your way. Warren chooses to invest a certain way, and that works very well for him. And we can mimic some of the ways that he invests, but we can't be Warren Buffett. And walking in thinking you're going to be the next Mike Jordan is going to lead you to a lot of heartache. So the next thing is just figuring out what you're comfortable doing. Buying individuals Financial stocks is a gig I like. It works for me. Evan, not so much. And that's okay. There's lots of different ways to invest. You just need to figure out what works best for you and then try to follow that path.

24:07But try to do it as judiciously as you can. It's easy and understandable to get excited about a shiny object. But always try to look at the other side before you pull the trigger on something. What could go wrong with this? Charlie Munger used to talk about inverting. So think about what could go wrong with this. How could me buying this company go badly or buying this ETF go badly? And I think if you start asking yourself those questions, you'll put yourself in a better place to avoid falling for some of the hype.

24:43Dave Ahern:Yeah, I've been disappointed with myself not being Michael Jordan many times before. So I resonate with that very, very strongly. but yeah for me the mindset that I tend to have and this has gone with both investing this has gone with pretty much any big decision that I make is I always assume that for lack of a better term that I'm stupid I assume that there's there's at least one if not hundreds of things that I haven't taken into account and so if you if you're looking at an investment for example and you're investing in individual stocks and you feel like I've got I've got a great picture of everything I see everything I need to see, I understand everything I need to understand, I would always assume that there's at least one other thing I need to go find.

25:25Dave Ahern:There's one other piece, one other factor, one other tidbit that I'm missing that I haven't seen yet. And the more that I think that way, the more things I uncover, the more work I put into things, the more diligently I research things. And again, that goes with many other decisions that went with home buying as well. I always assume, well, there's one other factor that I haven't taken into account. There's one other equation I haven't run as to trying to determine whether it's a good decision or not, or one other financial factor that I haven't taken into account yet. And the more that I assume that there's something that I'm missing, the more that I find and the less that I end up missing.

26:05Dave Ahern:But I can imagine, I've had these kinds of discussions with friends of mine who aren't as in-depth in the financial space. It's just, it's not for them to, at least at this point, their life to put quite as much time and effort into it as some of some of the others of us do so for people like that who are maybe getting into finances a little bit more how would you balance trying to avoid overhyping and assuming that they don't know everything and and trying not to be overconfident about things or dive in headfirst or dive in too deep while still staying motivated because i know that the hearing a lot of this can feel it can feel very negative it can feel very down, it can feel very well, then what is going to be good or how do I end up doing the right thing?

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