"Risk comes from not knowing what you're doing." --Warren Buffett

RISKS WITHOUT REWARDS (September 29, 2024): In this U.S. Presidential year, far too many investors have been acting like seals and not the Presidential kind. They have become so accustomed to repeating the same tricks, piling over and over again into funds of U.S. large-cap stocks, that they aren't considering the risks they are taking relative to the rewards. You can get away with this kind of mindless approach with assets which are undervalued, since undervalued assets regardless of their so-called "reasons" will eventually rebound to fair value and you will do reasonably well. However, whenever assets are at or near the highest ends of their historical ranges, especially when they are wildly popular and overowned, you are going to come out behind even after decades of faithful Boglehead behavior.

It is time for investors to stop pretending that they have a divine right to come out ahead by brainlessly buying dangerously overvalued assets. By the time they realize their mistakes, they will lose half of their money or more. They should instead be primarily invested in U.S. government debt including U.S. Treasuries, I Bonds, and TIPS. Those who own "boring" U.S. government debt will have just about exactly 117 dollars near the end of 2027 for every 100 dollars that they have now. Those who are too lopsidedly invested in the shares of large U.S. companies, many of which are trading at four, five, or six times their historical average levels relative to profits, sales, and book value, will be far behind "boring" U.S. Treasury investors. This will be true not only three or four years from now, during which time the biggest losses will likely occur, but even thirty or forty years from now. This is proven by the historical record following previous bubble peaks which I will now describe in detail.

The Boglehead myth has recently been more thoroughly researched and decisively debunked.

If you invest in anything when it is underpriced then you have the wind at your back. The long-term upward trend will eventually work in your favor. However, if you buy something which is at the 99th or 100th percentile of overvaluation then you will be behind in real terms even after several decades. Edward McQuarrie researched the entire history of the U.S. stock market dating all the way back to 1793 to determine whether U.S. Treasuries or U.S. stocks achieve greater returns, and discovered that their total long-term performance has been nearly identical:

In the Long Run, Stocks Outperform Bonds, or Do They?

The best-known modern period of severe underperformance by U.S. equities had occurred from the September 1929 stock-market top to the August 1982 bottom. During this interval of nearly 53 years, the S&P 500 lost 38 percent after adjusting for inflation:

If this is backdated further to the previous century, then the period from June 30, 1851 through June 30, 1932 was accompanied by a 21% net loss for U.S. stocks in real terms during this 81-year span:

Of course you can also select numerous periods of time when the S&P 500 Index has impressively outperformed, especially if you begin from a starting point of notable undervaluation. Where you end is a function primarily of where you begin, not which asset you own. There is no magic which will cause you to "always be ahead in the long run," which is one of the most irrational and misguided conceits of Boglehead investors. Since we only live to be 100 years old or less, rather than 10 thousand years, it very much matters where we are in the cycle.

We are either at or near the 99th to 100th percentile for many U.S. equity valuation measures.

U.S. stocks, especially large-cap shares which have been by far the most popular with investors, have never been more overpriced in their entire history relative to current and future earnings than they have been during 2024 according to most reliable measures of valuation. Here are two charts which highlight their dangerous current levels:

The CNN Fear & Greed Index has rarely reached or exceeded 72 in its entire history:

The most important executive orders are the all-time record insider sales by the highest-ranking officers of U.S. companies.

In 2024 we have experienced all-time record insider selling by the top executives of large U.S. companies. This is not a coincidence; those who know the most about valuations and future profits are well aware that their companies' shares have never been more overpriced and will likely never be as overpriced again in their lifetimes and probably not in their children's lifetimes. That is why the total U.S. dollar volume of such selling is roughly twice the previous all-time record and is far above the average level of selling. Top executives have also done the least U.S. dollar volume of total insider buying in history during 2024:

Corporate Insiders Are Dumping Stock at the Fastest Rate in More Than a Decade

More aggressive investors who are aware of current record overvaluations, and who understand the risks they are taking, may choose to sell short.

It is possible to sell short assets which are at a high multiple of fair value including QQQ, or to purchase bear funds which do this including PSQ if you are less comfortable with short selling. It is essential to understand the potential risks and rewards with any kind of investment before taking such action. In addition, whenever you establish any position, you should always begin with a tiny percentage of your total liquid net worth and only add 125 dollars per trade for every one million dollars of your total liquid net worth. Many investors dangerously overtrade by doing amounts which are far too large, which will almost always give you a mathematically inferior average price.

Unlike long positions where you must surrender your U.S. Treasury bills to purchase those longs, short sellers can hold their Treasuries as collateral which will count almost as much as cash. You will also be paying the lowest dividends in history.

One little-appreciated advantage of selling short is that if you establish any long position then you have to give up the U.S. Treasury interest to make such a purchase. If you buy SPY, for example, then you are giving up 4.75% which you could get on 4- or 8-week U.S. Treasury bills, or similar yields on funds such as the Vanguard Federal Money Market Fund VMFXX, to get 1.18% in dividends which is the current 30-day SEC yield for SPY. It makes no sense to surrender 3.5%, because then you have to make 3.5% in capital gains just to break even, and that's not counting the fact that U.S. government debt is free of state and local income tax. If you are selling short and you use U.S. Treasury bills as your collateral, then those will count as 94% cash positions by SEC regulations. In other words, having 100 thousand dollars in U.S. Treasuries has the same marginable value as 94 thousand dollars in cash. You will thus be able to continue to collect interest so that if nothing happens in one year you will come out ahead compared with those who have long positions in the same securities. Since the SEC dividend yield for QQQ is 0.58% while short-term U.S. Treasury bills are yielding a blended average of 4.58%, the annualized net increase in your account per year will be exactly 4% if you are short QQQ and its components are unchanged in value.

U.S. Treasuries overall in October 2023 sported their highest yields since 2000. It makes much more sense to purchase assets which are at 23-year lows than to buy shares which have never been more overpriced since the beginning of the U.S. stock and Treasury markets in the late 1700s. Current U.S. Treasury yields have declined moderately from their 2023 peaks but remain well above their long-term historic averages. Investors have been shunning a guaranteed 4% to 5% annualized since, just as had been the case at previous bubble peaks including 1929, 1972, and 1999, they are overconfident about gaining 20% or more each year with large-cap U.S. stocks.

The behavior of the U.S. dollar index has been ignored by most investors even though it has been one of the most consistently reliable signals since it began trading at the start of 1972.

Only a small percentage of investors track the behavior of either the U.S. dollar index or the greenback relative to other global currencies. Historically the U.S. dollar tends to complete important peaks and thereafter make lower highs whenever U.S. stocks are set for significant uptrends, as we had most recently experienced when the U.S. dollar index completed a two-decade peak on September 26, 2022 and on earlier occasions before stock-market surges such as March 4, 2009 which was two days before the S&P 500 had ended its bear market on March 6, 2009 at 666.79. Symmetrically, the U.S. dollar index will often bottom and begin to form higher lows whenever U.S. equities are set for meaningful declines, as we had seen on numerous occasions including the important double bottom for the greenback in March and July 2008.

During the past several years the U.S. dollar completed a historic bottoming pattern in early 2021 before rallying to its highest point in more than two decades on September 26, 2022. This was followed by a two-year correction which either just ended or is approaching its final downward intraday spikes. There is no guarantee that the U.S. dollar can't drop further, but I expect to see it powerfully rally to its highest point since 1985 by 2027 or 2028. The next several months should also be accompanied by a generally rising U.S. dollar which will imply significantly lower prices for almost all other assets except for U.S. government debt.

Investors and most analysts have recently become as aggressively bullish toward gold and silver and the shares of their producers as they had been equally and staunchly bearish two years ago.

Investors consistently want to buy high and sell low, and this tends to be even more true in the precious metals sector where important tops and bottoms occur more frequently than they do for U.S. equity indices. Fortunately, just as with insider buying and selling, the U.S. government requires those who trade actual metals such as gold, silver, and platinum to register either as commercials, non-commercials, or small speculators. Commercials are those who own physical metal including miners, jewelers, and those who produce finished products from these metals. Non-commercials are hedge funds and others who manage money for other people. Small speculators are ordinary investors.

Commercials have rarely been more bearish toward gold, silver, and platinum than they are right now, only favoring palladium.

Historically, commercials gradually go net long whenever a particular asset is most likely to rise in price, and to gradually go net short whenever anything is most likely to decline in price. Not coincidentally, this trading approach is almost identical to my own method, partly since I based it upon long-term insider and commercial behavior. Recently the ratios of commercial short to commercial long positions for gold, silver, and platinum are near the highest-ever extremes of their multi-decade activity, meaning that those who are the most knowledgeable about precious metals are the most concerned about upcoming price declines and have been intensively hedging their inventory. This stands in stark contrast to most analysts and the media who have recently been especially bullish.

You can find the traders' commitments for silver, copper, and gold at the following link where it is updated each Friday at 3:30 p.m. Eastern Time:

U.S. Government Traders' Commitments for Silver, Copper, Gold, and Others

Here are the traders' commitments for palladium and platinum:

U.S. Government Traders' Commitments for Palladium, Platinum, and Energy

With gold, commercials were most recently long 76,713 and short 416,419 contracts. Silver commercials showed 29,339 longs and 111,171 shorts, while platinum commercials had been long 15,715 and short 45,255. Palladium commercials were long 10,572 and short 3,941, the only one of the four precious metals with a high long-to-short ratio rather than the other way around.

To a somewhat lesser extent than we have experienced with insiders for large-cap U.S. stocks which have sold about twice as much as their previous all-time records, the executives of gold mining and silver mining companies have been recently selling gold mining and silver mining shares at their most aggressive pace since August 2020.

Just during the past several weeks we had insider sales for Royal Gold (RGLD) numerous times, in addition to Newmont Mining (NEM), Hecla Mining (HL) earlier in September 2024, and Apex Silver Mines (APXSQ). In spite of gold frequently achieving all-time highs, the shares of mining companies have been repeatedly struggling to surpass their recent highs and are far below their peaks from the summer of 2020 when gold was more than five hundred U.S. dollars per troy ounce lower than it is now. We have also experienced more frequent intraday highs occurring near the opening bell which is consistent with a topping pattern.

The bottom line: Investors are far too heavily laden with low net dividends and high downside risk for popular large-cap U.S. equity favorites when they should be embracing U.S. Treasuries which yield 4% more with zero risk and no state or local income taxes. Cryptocurrencies remain irrationally popular in spite of having been in downtrends for more than a half year and having no proven long-term intrinsic value. Real estate is eagerly desired for the precise reason that it should be avoided since valuations are roughly double fair value in the U.S. and had reached triple fair value in Canada before modest declines in real terms during the past 2-1/2 years. Gold and silver have thousands of years of proven intrinsic value, but these and the shares of their producers have become perilously trendy in recent months primarily because "they're going up so don't miss out." Commercials and top corporate insiders have rarely been more bearish toward precious metals except for palladium since their euphoric peaks in January 1980. If you are able to handle the uncertainty of selling short QQQ or buying PSQ then this can be a worthwhile speculation, while the vast majority of your total liquid net worth should be invested in U.S. government debt until valuations eventually become more compelling elsewhere.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Friday, September 27, 2024. Each position is listed as its percentage of my total liquid net worth.

I computed the exact totals for each position and grouped these according to sector.

The order is as follows: 1) U.S. government bonds; 2) shorts; 3) bear funds; 4) precious metals; 5) coins; 6) miscellaneous securities.

VMFXX/TIAA(Traditional)/bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/BPRXX/Savings/Checking long: 37.56%;

17-Week/52-Week/26-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long/20-Year: 23.48%;

TLT long: 11.54%;

I Bonds long: 11.23%;

PMM long: 0.01%;

XLK short (all shorts are once again unhedged): 34.66%;

QQQ short: 24.50%;

SMH short: 1.53%;

AAPL short: 0.15%;

GDXJ short: 0.11%;

SARK long: 0.83%;

PSQ long: 0.04%;

PALL long: 1.44%;

Gold/silver/platinum coins: 7.64%;

FXY long: 0.72%.

“Don't panic. The time to sell is before the crash, not after.” --John Templeton

CRACK CRUMBLE CRASH (May 17, 2021): There are all kinds of theories about why U.S. stocks reached all-time record overvaluations in 2021: the Fed, coronavirus, zero commissions, near-zero bank interest rates, and widespread popularity of trading. While these all have kernels of truth the real reason U.S. stocks are so overpriced is that investors poured more money into U.S. stocks during November 2020 through March 2021--just five months--than during the entire remainder of the bull market which had begun in March 2009:

Investors Have Put More Money into Stocks in the Last 5 Months Than the Previous 12 Years Combined

In addition to cleaning out their bank accounts and selling "boring" bonds so as to "not miss out" in the U.S. stock market, investors have borrowed all-time record amounts of money via margin loans as you can see from this chart of margin debt vs. GDP since 1959:

Downtrends have already begun for key leading sectors.

In any major bear market certain sectors tend to begin declines ahead of most other sectors. These tend to include small-caps (IWC), semiconductors (SMH), emerging market (EEM), and biotech (BBH). All of the above sectors had peaked weeks ago and have formed several lower highs since then. We also experienced the highest-ever ratios of insider selling to insider buying in U.S. dollar terms, a complete reversal from March 2020 when we had enjoyed the highest ratio of insider buying to insider selling since March 2009.

Notice the stark inversion from March 2020 to May 2021:

March 26, 2020: Executives Are Buying Stock in Droves, Giving a ‘Strong’ Signal That the Comeback Is for Real

May 14, 2021: Billionaires Are Selling Mega-Sized Stock Blocks After Surge

The following chart highlights how insider selling relative to insider buying has soared in recent months:

The media and analysts have shifted from expectations of essentially no inflation at the beginning of November 2020 to permanently-surging inflation by May 2021.

A half year ago the media, if they bothered to mention inflation at all, was about how it wouldn't be a problem for several years--if ever. In recent weeks inflation has been cited as one of the key factors in the global financial markets. It is almost certain that the media, along with most analysts and advisors, are just as wrong now as they were a half year ago but in the opposite direction. There is a long-term rising trend for inflation and interest rates worldwide which began in March 2020 but now that almost everyone is preparing themselves for higher inflation we are almost certain to move the opposite way for at least several months. Here is a refreshing contrarian viewpoint on this critical topic:

Greasing the Slide Toward Deflation

The insiders and commercials are clearly pointing the way forward while almost no one is paying attention to them.

Insiders of companies which would benefit from rising inflation, such as non-precious-metals commodity producers, industrials, and the shares of major global exporters, have experienced their highest insider selling in decades. At the same time we have all-time record traders' commitments in inflation-loving currencies such as the Canadian dollar in which commercials--who are the insiders for futures trading--have never been more aggressively net short:

Current Traders' Commitments, Canadian Dollar at Record 5-11-2021

It's a long way to Tipperary, not to mention the bottom for nearly all asset classes.

From its dividend-adjusted zenith of 104.99 on March 10, 2000 to its 17.22 bottom on October 10, 2002, QQQ plummeted 83.6%. With even greater net inflows by average investors and all-time record selling in 2021 by top corporate insiders it is likely that the current bear market for QQQ will end up experiencing similar or greater total percentage losses within three years or less. Hardly anyone is protecting themselves against such a possibility, which might even be the most probable scenario, by hedging, selling short, or even moving to a greater cash allocation. For the first time in history more puts were sold to open--that is, to make money betting on the stock market not declining much in percentage terms--than bought to open as a form of portfolio insurance. We have also experienced all-time record levels of small speculative call buying in 2021.

The total volume of short selling relative to market capitalization reached an all-time record low below 1.5% at the beginning of spring 2021:

The total percentage losses for unproven asset classes like cryptocurrencies and NFTs can't even be estimated, but the top-to-bottom declines for most of these will probably exceed 99%. Investors are far too easily swayed by well-known personages like Elon Musk rather than carefully considering the intrinsic merits of such speculations.

The bottom line: increasing negative divergences are pointing the way lower for U.S. equity indices in both the intermediate (3 to 6 months) and longer term (2 to 3 years) with periodic sharp upward spikes that are typical in all severe bear markets.

As the media have been maximally bullish and investors have smashed all previous net inflow records in their anticipation of higher asset valuations for U.S. stocks, corporate bonds, cryptocurrencies, real estate, collectibles, NFTs, and just about everything else, insiders and commercials and those with the most knowledge have never been more aggressive sellers. Do you think the world's wealthiest and most-experienced investors will be those who triumph over the next few years or the masses who have no idea what they are doing? There's a reason that the rich get richer and the poor remain poor. Otherwise we'd have mostly wealthy neighborhoods and a few scattered pockets of poverty rather than the other way around. It's not different this time.

Resist the temptation to become a rhinoceros, I mean a Boglehead, and remain heavily in cash.

It's time to hit an inside-the-park home run.

While you're patiently waiting for global assets to collapse you might enjoy watching a comedy I wrote in these euphoric times:

Inside-The-Park Home Run

Disclosure of current holdings:

Each time QQQ has been near or above 340 I have gradually increased my short position in that fund which had plummeted 83.6% from its January 10, 2000 top to its October 10, 2002 bottom including all reinvested dividends and will likely experience a similar top-to-bottom loss by 2024 or sooner.

Here is my asset allocation with average opening prices adjusted for all dividends: 57.0% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 18.4% short XLK (112.7737); 16.8% long TLT (148.59); 12.3% short QQQ (296.3402); 7.4% short TSLA (494.9721); 4.5% long GEO (7.898); 1.9% short ZM (293.16); 1.4% long GDXJ (44.6462); 0.9% short AAPL (125.5481); 0.6% short IWF (223.0119); 0.5% short SMH (170.7813). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” --Paul Anthony Samuelson

INVESTING WHILE INTOXICATED (January 17, 2021): We have experienced all-time record levels of speculative call buying, penny-stock chasing, massive percentage increases for marginally-profitable companies, IPO eagerness, and numerous other multi-decade and even multi-century records which in many cases have surpassed rare bubble extremes from periods like 1928-1929, 1972-1973, and 1999-2000. Far too many investors have embraced the perceived certainty of ever-rising asset valuations, resurging inflation, a slumping U.S. dollar, endless summer for cryptocurrencies, record-low spreads for high-yield corporate bonds over U.S. Treasuries, the second real-estate bubble of the 21st century, and other myths as though they were certainties. The most remarkable feature today is how few people recognize it as being both phenomenally extreme and completely unsustainable. All similar bubbles in past centuries have ended with nearly identical collapses and this is not going to be the first-ever exception to that rule.

The large-cap Nasdaq collapses of 1973-1974 and 2000-2002 are likely to be repeated along with severe losses for many other fluctuating assets.

From its March 10, 2000 peak of 105.12 to its October 10, 2002 bottom of 17.24, adjusted properly to include all reinvested dividends as StockCharts.com does, QQQ plummeted 83.6%. I expect a similar percentage decline, plus or minus several percent, within three years or less. This will likely be accompanied by notable percentage losses for high-yield corporate bonds, real estate, cryptocurrencies, art, and nearly all fluctuating assets. It won't be a smooth path down and there will be many rebounds along the way. Robinhood investors and Bogleheads will both suffer severe losses for somewhat different reasons.

Bogleheads are overreliant upon the glory of past decades.

John Bogle himself decried the existence of those who took his excellent idea about index investing and badly distorted it. John Bogle sold all of his aggressive-growth shares in 2000 and also unloaded most of his stocks shortly before his passing in 2018 because he astutely recognized that there is sometimes far too much risk in the financial markets. It's too bad that most of today's Boglehead investors haven't considered that if you had been invested in the U.S. stock market near the end of August 1929 then by August 1982--which was 53 years later--your portfolio would have lost an average of about 60% after adjusting for inflation depending upon exactly what you owned. The only true periods of dramatic outperformance for the U.S. stock market, not counting the bubble behavior since March 2020, were the incredible eight-year rally from August 1921 through August 1929 and the more recent huge bull market from August 1982 through March 2000 with a few minor bear markets along the way. Even with its huge gain in recent years, if you are long a basket of Nasdaq stocks which you have owned continuously since the peak on March 10, 2000 then you are only marginally ahead after adjusting for inflation.

People are repeatedly underinvested whenever bull-market gains are about to be greatest and dangerously overinvested near the beginning of all major downtrends.

Nearly all long-term analyses of the financial markets underrate the rarity of the atypical outsized gains of the above two periods of 8 and 17-1/2 years. They usually have an agenda, open or hidden, of creating an illusion that "stocks always go up in the long run." Actual records by brokerages and mutual-fund companies illustrate clearly that most people prior to these two major outperforming periods had historically very low allocations to risk assets; in August 1982, for example, only 13.2% of total household wealth was invested in stocks versus roughly five times that amount by early 2000. So the vast majority of investors got little benefit from the two huge bull markets of the past century while there was massive participation on the downside in 1929-1932 and 1999-2003. With everyone nearly fully invested today we are set perfectly for a massive aggregate loss of wealth over the next few years.

Safe-haven assets have quietly completed important bottoming patterns.

VIX, a measure of implied volatility, has been steadily making dozens of higher lows since the final months of 2019. The U.S. dollar index, a little-followed signal which has accurately forecast nearly all major market turns of the past half century, probably completed its lowest point since the second week of April 2018 at 90.209 at 6:30 a.m. on January 6, 2021, having made numerous higher lows during the past 1-1/2 weeks. The U.S. dollar index topped out on March 4, 2009, exactly two days before the S&P 500 began a historic surge higher, and the U.S. dollar index also completed a key peak on March 20, 2020 just before the March 23, 2020 bottom for many U.S. equity indices. In July 2008 the U.S. dollar index completed a key double bottom just before the S&P 500 suffered one of its worst-ever percentage collapses. It is probably no coincidence that the January 6, 2021 bottom for the U.S. dollar index preceded by a half week the 319.99 after-hours top for QQQ registered at 5 p.m. on January 8, 2021.

The most-experienced investors are among the few who have embraced the U.S. dollar and U.S. Treasuries.

The third of the "Three Musketeers" safe-haven trio, TLT and other long-dated U.S. Treasuries, likely completed important bottoms around noon on January 12, 2021. Top U.S. corporate executives have set new all-time records for the ratio of the total dollar amount of insider selling relative to insider buying in the U.S. stock market. These very-experienced investors have been increasingly accumulating the safest havens while they are still significantly undervalued. In every bull market the most-capable participants buy first, followed gradually down the food chain until the least-knowledgeable novices are piling in near the top. In a bear market the savviest investors get out earliest, followed all the way down the line until the least-experienced traders end up setting all-time records for net outflows near the bottom of the cycle.

Real estate worldwide is completing its second major bubble of the 21st century.

The 2005-2006 real-estate bubble featured subprime mortgages and liar loans. The 2020-2021 real-estate bubble is notable for record-low mortgage rates and the easy availability of credit and zero down payments. The most important similarity between 2005-2006 and 2020-2021 is that the ratio of U.S. housing prices to average household income in both cases surpassed twice their long-term level in many neighborhoods. Much of this data including the detailed Herengracht study which began in 1628 and Case-Shiller backdating to 1890 spans centuries (and even millennia, since real-estate prices have been recorded throughout written history). In 2005-2006 one heard frequently about how "foreign buyers" would enable real-estate prices to be perpetually elevated; by 2010-2012 many of these buyers had become sellers. Today you hear repeatedly about how people "from away" are eagerly buying but no one mentions how those with no long-term connection to a place are much less likely to hold on during periods of falling valuations. No asset which is more than double its fair value can sustain such a high price regardless of whether it's real estate, stocks, commodities, or anything else.

Intraday behavior highlights eager opening-bell buying which characterizes nearly all tops.

If you look at intraday charts of most risk assets in March 2020 then you will quickly discover that the least-experienced investors who were panicking out of the market nearly all did so near the opening bell, especially on Mondays when investors had been worrying all weekend about how much lower the market might retreat and had placed massive market orders to sell. Near bubble peaks in March 2000 and again in recent weeks we have repeatedly experienced the highest prices of the cycle near the opening bell when the least-experienced recent investors are most excited about how much money they're going to make. During the final months of 1999 and the early months of 2000 I heard many people openly predicting--in person and on the internet--how much money they would make in the stock market, with an infamous survey in February 2000 registering the average investors' expectations of 30% annualized gains in the stock market for the following decade. Recently similar absurd extrapolations have become commonplace.

Many of today's investors were in high school or younger during the 2007-2009 and earlier bear markets.

The huge surge of new investors in less than one year, just as in 1972-1973 and 1999-2000, have mostly never experienced a bear market. Many of them were in school when the last bear market occurred so it seems emotionally distant. Now they'll have a front-row seat to the carnage which will affect so many of them directly.

It's not just the newby investors who are convinced of invincibility but many long-time baby boomers who should know better.

If you look at the comments below and on my other essays on Seeking Alpha then you will quickly discover that those who are most optimistic about future risk-asset valuations are not just those who have never personally experienced bear markets. Many investors who lived through the huge collapses of 1999-2003 and 2007-2009, and who may have lost significant percentages of their net worth during those bear markets, have convinced themselves that "because of the Fed" or "since you have to put your money somewhere" or "with all of that cash still out there" or "since assets have to climb in the long run" that they're going to come out ahead even if they enter or hold their positions near their most-overvalued levels in history. All major market tops and bottoms must be accompanied by widespread delusions that a current unsustainable over- or undervalued extreme can persist indefinitely. The biggest percentage losses have always occurred whenever there was the highest level of overconfidence in future gains while the most dramatic percentage gains have happened in an atmosphere of maximum pessimism.

All post-bubble collapses have nearly identical chart patterns as Charles Mackay pointed out in "Extraordinary Popular Delusions and the Madness of Crowds" which he first published in 1841.

QQQ's pullback from its March 10, 2000 zenith of 105.12 to its May 24, 2000 intermediate-term intraday low of 63.03--with both numbers properly adjusted for dividends by StockCharts.com--was just about exactly 40%. QQQ reached 319.99 at 17:00:01 Eastern Time on January 8, 2021 which if we round off to 320 implies an upcoming bottom, perhaps in the second quarter of 2021, near or below 192. This is nowhere near what its ultimate bear-market nadir will be in 2022 or 2023 but is merely a projection for its first significant decline. Usually bear markets have their second-largest percentage losses near the beginning and their largest percentage declines near the end with lots of bounces and other unknowable fluctuations in between. Hardly anyone would likely agree with this price target with the vast majority of forecasters expecting continued QQQ gains in 2021 and beyond.

Participation in recent weeks has been concentrated in the least-reliable and most-dubious sectors of the financial markets.

The most-speculative sectors in the financial markets today have enjoyed by far the greatest increases in both participation and percentage gains, thereby encouraging many others to climb aboard these highly-uncertain assets. Penny stocks, cryptocurrencies, and out-of-the-money call options have become the darlings of recent months to an extent not even approached during past bubble peaks. Here is a chart of participation in penny stocks during the past decade:

The disappearing Trump mystique provides an emotional excuse for "huge" asset losses.

Most of the irrational increases for risk assets occurred since Donald J. Trump was declared the winner of the 2016 U.S. Presidential contest. Whether this is fundamentally meaningful or not, Trump is associated in many people's minds worldwide with wildly-overpriced assets. Now that Trump is out of favor, and soon to be out of office, this mystique has reversed. Many will subconsciously tell themselves that since Trump has gone there is nothing to prevent asset valuations from declining dramatically.

The most noteworthy aspect of the current asset bubble is how--as with every bubble peak in history--so many perceive it as being normal and sustainable when it is neither.

A few people in the media and on chat sites including Seeking Alpha have mentioned the rarities of the current situation and sometimes use the word "bubble" but most investors are convinced that nothing extraordinary is going on. A century from now, and perhaps two or three centuries from now, the current mania will be analyzed as to how it could have been created in the first place and why so many more people piled in near the top rather than prudently reducing risk. The 1929-1932 bear market might still remain as the premier historic collapse but 2021-2023 will provide some serious competition and will likely be much more closely scrutinized partly since data and analyses from the current century are far more numerous and pervasive than a bear market from a previous century of mostly mass print media. Most people have been investing while inebriated with the liquor of potentially unlimited gains, not realizing the severe hangover which is approaching.

When in doubt use the Martian test.

Suppose that you had just arrived on planet Earth from a trip to Mars where your internet connection had been broken. What looks absurd and what looks normal? If you are living through a period where the value of cryptocurrencies gradually climbs for months then you begin to accept it as being typical regardless of how high it gets. If you were thinking about selling on the way up but you didn't sell and the price climbs higher, you keep getting positive psychological feedback telling you how smart you were for waiting longer. Eventually you won't be able to sell at any price, no matter how high, since you've gotten so many pats on the back attesting to your brilliance in doing nothing. Many of the recently-minted rich from being fortunate enough to hold bubble assets have proudly declared that they're not selling a single share, thereby ensuring that they will end up poorer than when they began. I personally know several people who had suffered this fate in 1999-2003.

The bottom line: today's investors are like small animals blissfully eating by a pond, not recognizing that they are surrounded by hungry alligators.

One of the most important principles of investing is that if you are long anything and a massive concentration of inexperienced investors are joining your trade while insiders and commercials are heavily selling then you must get out regardless of what might happen in the long run. That is why I bailed out of GDXJ with an average price of 62.50 - 63.00 in the morning of July 27, 2020. Similarly, if you are short or in cash and investors are making all-time record net outflows while insiders are buying at their most intense pace in eleven years, as had occurred in March 2020, then you must buy aggressively even if you don't see any light at the end of the tunnel.

Disclosure of current holdings:

I have gradually increased my short positions in XLK, TSLA, and especially in QQQ while increasing my long position in GEO and more than quadrupling my now-substantial long position in TLT. I closed out all of my long positions in value shares; while I like many value sectors long-term I expect substantially lower prices sometime during the next half year.

Here is my asset allocation with average opening prices adjusted for all dividends: 65.7% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents); 18.5% short XLK (112.5968); 11.5% long TLT (154.68); 10.2% short QQQ (292.8835); 9.6% short TSLA (491.9117); 3.0% long GEO (8.76); 2.4% short ZM (293.16); 0.9% short AAPL (125.5481); 0.6% short IWF (223.0119); 0.5% short SMH (170.7813). It doesn't add up to 100% since short positions require less cash; there is no margin involved.