2 min read

#2105: Get ready for the whine

This week, I published Can you hear the FIRE alarm?

The FIRE* movement is an early retirement strategy that recommends extreme frugality and a 4% withdrawal rate. In a normal market for average retirees, that may be realistic. But today, anyone starting their FIRE years with that rate—especially if they are younger than average to do so—is in grave danger.

The current market is more over-valued than at any other time in history. Trading activity is at an all-time high while, I suspect, the average level of expertise is at an all-time low. By most accounts, the prospective returns for the general market will be negative.

That will start with a big correction. When it happens, there will be all kinds of attempts to cut the blame out of the mirror and paste it somewhere else.

Here are a few related articles that I read this week.

When genius fails...

In August 1720, the London stock market was roaring upward, chasing the South Sea Company's future value. Since January of that year, shares in the firm had gone up 8-fold. Sir Isaac Newton, already a wealthy man, bought and sold into the rising tide, "in the hopes of turning a comfortable fortune into an enormous one."

Newton bought one time too many. He ended up losing the equivalent of $4 million in today's dollars.

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble.”

Warren Buffett

...pride often cometh first.

In 2014, Chamath Palihapitiya bought 1.4 acres in Lake Tahoe for $1.6 million. But he paid in bitcoin. Today, the opportunity cost of that purchase is $126.4 million.

In the short-term, bitcoin is a silly frenzy for millennials that can't keep their wallets in their pants. But in the long-term, what if we end up using bitcoin as a world currency? The increase in the exchange rate would be phenomenal.

"The market value of all the existing bitcoins today [in 2016] is approximately $15.4 billion. If [bitcoin eventually came to represent 1/3 of the US M2 money supply, there would be] $4.3 trillion of demand. The market value of bitcoin would expand by 279x.

― Horizon Kinetics, "The Thesis for a Defensive, De Minimis Investment in Bitcoin", 2016

Palihapitiya is a big believerSFW in the long-term potential of bitcoin. So I'm surprised that he didn't do the math in 2014.

* FIRE stands for Financial Independence Retire Early.