"The Madness of Men: Why Bull Markets Tempt Us to Lose Sight of the Road"

By: NICHOLAS GENTILE, CFA, INTERIM PRESIDENT & CHIEF INVESTMENT OFFICER

“Great, but why didn’t we make more?” is a common client question during a bull market. Investors, seeing headlines about large gains in certain parts of the market, shift their frame of reference to those returns rather than what is appropriate to expect given their allocation. A diversified portfolio that generates 4% when the stock market is down 10% is a cause for celebration, but when that same portfolio generates 6% when the stock market is up 10% is a cause for consternation.

Speculative manias have existed as long as there have been financial markets. It is not a phenomenon unique to America or even to a certain type of investor. Something in the human condition causes an abandonment of reason when the promise of easy riches appears, especially when one’s neighbors are already profiting.

A popular anecdote involves Isaac Newton, one of the most brilliant mathematical minds in human history. Newton was an early investor in the South Seas Company, a public-private partnership that had a monopoly on British trade in South America in the early 18th century. In early 1720, the Company purchased Britain’s national debt in a scheme financed by stock sales. The price rose from £128 in January to an eye-watering £1,000 in August as the frenzy swept the nation. Newton, shrewdly managing his investment in the years leading up to the craze, could not help his sense of missing out on riches, and invested significantly during the mania. The bubble inevitably popped, and shares were trading back around £100 by the end of the year, ruining thousands of investors, including many of the British elite. Newton himself is estimated to have lost between £10,000 and £20,000, the equivalent of millions of dollars today. Newton is claimed to have said that he “could calculate the motions of the heavenly bodies, but not the madness of men.”[1]

Stories like these abound from every example of financial speculation, many of which we discussed in our last entry. While these serve as excellent lessons for investors and reinforce the importance of sticking to a prudent long-term plan, there is a sense that the forces driving today’s market activity are somewhat different.

One cannot help but feel a sense of desperation emanating from the younger generations today. An underlying trend in the American experience is that each generation becomes better off than their parents. Today, that dynamic may be broken. A 2024 Pew Research study found that only 39% of those 18-29 believed that the American Dream was still possible for people to achieve.[2]

This finding is understandable in part due to social dynamics as well as the growing rift between the haves and the have-nots in the American economy. On the social side, our CEO and Supreme Knight, Patrick Kelly, speaks and writes often about the epidemic of loneliness plaguing young men in the United States. The societal ills that exist upstream and downstream of this trend are many and part of the Knights’ mission is to provide a sense of hope and fraternity for young men looking to find their place in the modern world.

For the financial part, the term “K-shaped” is often used to explain how one segment of the economy can thrive while another languishes. In terms of personal finance, holders of assets, typically older generations, have experienced tremendous wealth gains as the housing and stock markets have risen to all-time highs. This wealth-effect drives further spending and investment which has supported the overall economy to date. Meanwhile, those without substantial assets have languished, burdened by student debt, persistent inflation, high rent costs, and other limitations on their ability to save. These dynamics contribute to a growing risk-tolerance in younger Americans, perhaps due in part to a sense of nihilism, and perhaps due to a need to make enough money in a short time to bridge the chasm to financial stability until the divide grows insurmountable.

This theme echoes across different parts of American life. We see it in the explosion of gambling on professional sports. A viewer cannot watch an NFL game or a MLB World Series game without endless references to spreads, odds, and parlays. We see it in the parabolic stock moves in companies without profits or even revenues. We see it in its purest form in crypto. There, especially in “alt coins,” greed, gambling, and speculation is democratized to anyone with a credit card and fueled by leverage available on a 10x, 20x, or even 50x basis. As an aside, the quote “no one is an atheist at 50x leverage” was a clever turn of phrase by these incredibly risk-tolerant individuals.

On October 10th, President Trump announced plans for 100% tariffs on Chinese imports. This prompted a risk-off move across financial markets which dramatically impacted the crypto world. In 24 hours, over $19 billion of leveraged crypto bets were liquidated across 1.6 million accounts. Money imagined to be the ticket to financial freedom evaporated in an instant, leaving many back where they started, ready to start betting again to achieve their vision of the American Dream.

These stories and trends reinforce the importance of working with a financial partner, like KoCAA, to establish a roadmap to achieve a desired level of return within the boundaries of a tolerable level of risk. A young man desperate to achieve financial stability may feel it necessary to leverage his $1,000 by 50x on an alt coin and knows that he risks ending up with nothing. But, an investor that already has assets, whether that be an institution or a person approaching retirement, must put on blinders, run their own race, and avoid the madness of men.

[1]Newton's financial misadventures in the South Sea Bubble | Notes and Records: the Royal Society Journal of the History of Science

[2] Can the American dream be achieved? Americans have divided views | Pew Research Center