Ignorance Is Bliss

Quick one today. I just want to write something down because I’ve been chewing on it for a while and it’ll probably be useful for me to get it out of my head and onto a page.

I was listening to The Compound and Friends podcast a few weeks ago and Batnick brought up this Paul Graham idea about how experts can be wrong specifically because they’re experts on an earlier version of the world.

He also talked about the 1950s, how investors who’d been scarred by the Depression literally could not believe that stocks yielding less than bonds was a real thing. They had decades of experience telling them it was wrong. The experience was the problem. The regime changed and the people with the best historical pattern matching were the most confused by it.

I haven’t been able to stop thinking about it because I’m pretty sure I’m that guy.

I’ve spent a lot of time over the years reading investing books and trying to study the greats. Buffett, Druckenmiller, Marks, all the usual suspects. And when you go down that road long enough you inevitably end up deep in bubble and crash history too. Tulips, 1929, Nifty Fifty, Japan, dotcom. I know the signs and patterns. Concentration at the top of the index, retail euphoria, everyone convinced the old rules don’t apply anymore.

And all of that reading did make me a better investor (I think). It gave me a real framework for risk. Kept me from doing dumb stuff when things got heated.

It also probably cost me a bunch of money over the last few years but let’s not dwell on that. (We’re going to dwell on that.)

What happened is I’ve been too skeptical of the US market for a while now. Not just big tech, kind of the whole thing. I’d look at valuations/market conditions, convince myself the whole thing was about to fall apart, and either pass, keep it small, or sit on cash waiting for the pullback that was always six months away. I found plenty of stuff to do overseas and in smaller value/GARP names and some of that worked well, but the broad US market? I was mostly just watching from the sidelines telling myself I was being disciplined.

Disciplined is a generous word for it. Scared is probably closer.

And the frustrating part is the market didn’t go up on nothing. It’s not some situation where stocks were floating on hopes and dreams. Earnings have been legitimately great. There’s a massive AI investment cycle underway where companies are spending absurd amounts building out real infrastructure, funded from their own cash flows. Whether all of that spending turns out to be perfectly allocated I have no idea, but it’s real economic activity backed by real money. That’s a different animal than what my brain keeps trying to compare it to.

I think what Paul Graham was describing is exactly what happened to me. I learned the historical patterns so well that anytime I see something that rhymes with a prior setup my brain just fills in the ending. Market’s concentrated? Must be a top. Multiples look elevated? Bubble. Everybody’s excited about new technology? Must be 1999. Except sometimes it isn’t 1999.

The historical record can only tell you about stuff that already happened, and sometimes the new stuff matters more than the rhymes.

Could it still end badly? Obviously. I’m not going full perma-bull here. There are parts of this market I still wouldn’t touch. But I do need to look at the scoreboard, and the scoreboard says I’ve been predicting nine of the last two crashes. Not exactly a great hit rate.

The Nifty Fifty is a good example/case study. Most folks know the cautionary version. Polaroid traded at something like 90x earnings at the peak, dropped over 90% in the crash, eventually went bankrupt. But if you actually go back and look at what happened to that group over the following decades, a bunch of those names worked out fine from those prices. McDonald’s. Coke. Philip Morris. You overpaid and the business bailed you out over time. The lesson everyone took away was never pay up for anything. The real lesson was more like… don’t pay up for the wrong businesses. Completely different takeaway. Funny how the second version barely gets mentioned.

When you look at who actually compounded real wealth over long periods, it’s never the people who called every top. Buffett didn’t make his money being the smartest macro guy in the room. He just owned good businesses for a really long time and got aggressive when everyone else panicked. He sat through some ugly drawdowns. Didn’t matter. The businesses kept compounding underneath.

It’s been the same for me. The wins came from doing the work on individual names and having the conviction to size them. Not from macro calls. Every time I’d look at forward estimates I’d convince myself there was no way companies could actually hit those numbers, and then they’d go and hit them. Over and over. That skepticism felt like discipline at the time. In hindsight it was mostly just wrong.

I still think parts of the AI trade look bubbly. I’m not abandoning all skepticism here. But the internet had bubble dynamics too and then went on to change basically everything about how the world works. Plenty of smart people called the dotcom mania correctly and then spent the next twenty years on the wrong side of the biggest wealth creation event in history. They were right about the bubble. Didn’t help.

I think at some point being the skeptic just became my default setting and I didn’t totally notice it happening. Caution always sounds smart. That’s what makes it tricky. You can spend basically any point in the last decade worrying about valuations and sound perfectly reasonable doing it. But sounding reasonable and making money aren’t really the same thing, and I’m trying to remember that going forward.

Anyway. No clean takeaway here, mostly just rambling. Back to regular stuff soon.