Long-Term and Short-Term Players: Bubbles Are a Misunderstanding About Time Horizons

Long-Term Players vs. Short-Term Players This distinction does not make one side good and the other bad in any absolute sense. The difference is simply that some focus on the long term and others on the short term. The real danger is thinking you are making decisions as a long-term player when you are actually playing the wrong game on the wrong battlefield. -- Before making a decision, you must first be clear about whether you are taking a long-term or a short-term approach to the matter. If you call yourself a long-term player, keep talking about value investing, and normally buy shares and leave them untouched, but then buy the hottest stock of the moment, you have lost your bearings. You are playing the wrong game. Short-term players are playing a game of hot potato. They know the music will eventually stop, but with so many people playing, each person’s chance of being left holding the potato at that exact moment is small. They understand perfectly well that the point is to pass it on quickly once it reaches them. But if you pay no attention to who is playing, hold on instead of passing it on, and indulge in wishful thinking about the future, aren’t you putting yourself in danger? -- Morgan Housel offers an explanation of financial bubbles in roughly four stages. Pay attention to the different logic guiding long-term and short-term players. The first stage is real results. A company has a solid product or has just made a technological breakthrough, and people are optimistic about it. Its share price rises steadily for a time. To the long-term players who have held it all along—the “value investors” in stock-market terms—the price is fully justified. But even the best company has a finite value. Once the share price rises far enough, long-term players will consider it fully valued. Given your margin of safety, you stop buying at that point. Yet you find that the price keeps rising. Why? Because it is no longer the long-term players driving the price up, but the short-term players. A rise has momentum: energy that has just built up does not disappear immediately, and the trend will continue at least for a while. Short-term players do not care whether the price is reasonable; they just want to ride the wave. If you only day-trade, buying in the morning and selling in the afternoon, upward momentum is all you need. The arrival of short-term players creates a positive feedback loop. The stock gets hotter, its upward momentum strengthens, and that attracts still more short-term players. It is like winning a battle: people naturally start flattering you. “Your Majesty, you are extraordinary—so wise and mighty! We absolutely should fight another battle.” These people do not care about your sustainable development. They only want the gains from the next victory, even if there is only one left. ----- The second stage is a change in your circle. To continue the ruler analogy, most of the people around you are now treacherous courtiers and opportunists. Everyone is excited. You feel stronger by the day, and some enemies surrender before you even attack. By this point, short-term players already dominate the share price. You can no longer even hear the long-term voices. Everyone around you says you can strike wherever you choose, and in fact you do seem to grow stronger with every battle. The momentum is with you. Everyone is waiting for your next piece of good news, and good news always seems to bring more good news. In the stock market, when short-term players dominate a stock, its trading volume rises sharply. Whether they understand you or not, every speculator now wants to come over and shake your hand. As the ruler, you look at the people around you and sense that they do not really love you; they seem to be using you. You feel uneasy. ------ The third stage is that long-term players are misled. Suppose you are a value investor focused on big data, and you are very optimistic about a particular big-data company. Its share price multiplies several times in just one year, far beyond your valuation. Initially, you think this is crazy. It feels too hot to touch, and you plan to stay away. But it keeps rising. Unable to understand what is happening, you start questioning yourself. Perhaps your calculations are wrong? Perhaps you do not understand the big-data business deeply enough, and other investors know something you do not? You are genuinely optimistic about big data, and if you want to buy a big-data company, this one seems the strongest. Since everyone is so enthusiastic, you follow them in. It is like the ruler finding that even the honorable people who once criticized and questioned him have returned to praise him. They say: “I used to advise the ruler against fighting. I thought it would cause problems. But there have been no problems, and our country really is advancing unstoppably. I should stop holding us back. I, too, support continuing the fight.” Now even the ruler believes he previously underestimated himself! All that remains is to go for it! And so the bubble reaches its peak. What the long-term players really do not understand is that the short-term players are not playing the same game. ------- The fourth stage is that the bubble eventually bursts. If the company keeps producing bits of good news, the bubble may last longer. But problems will eventually appear. Once a bubble starts to break, it bursts in a very short time. One general pattern in share prices is that falls are always faster than rises. It takes time for a good company, brand, or story to grow and gain broad acceptance. But people’s impressions can turn bad in an instant. It took six generations for Qin to unify the realm, yet the dynasty collapsed only fourteen years after unification. Short-term players move fast. They are impatient and highly sensitive. Long-term players have confidence: when you suffer a setback, they encourage you, try to help you through it, and wait a little longer. Short-term players, by contrast, came to make a few quick trades and leave. Expose even a small problem, and they immediately abandon you. You do not even need a major problem: once they think the upward momentum is gone, they leave on their own. They are rushing to find the next stock with momentum. ----- The key to Morgan Housel’s model is that we cannot look only at a stock’s price trend. We also need to know who is trading it. A high price dominated by short-term players is unsustainable. Nor are short-term players necessarily irrational. Getting in and out quickly while there is momentum is a reasonable move. In fact, opportunists are more rational than honorable people: the latter still have ideals, while the former know exactly what they want. A bubble may burst at any moment, but if short-term players react fast enough and can get off the ship in time, they can still profit from the voyage. --- So before making a decision, you must first be clear about whether you are taking a long-term or a short-term approach to the matter. If you call yourself a long-term player, keep talking about value investing, and normally buy shares and leave them untouched, but then buy the hottest stock of the moment, you have lost your bearings. You are playing the wrong game. Short-term players are playing a game of hot potato. They know the music will eventually stop, but with so many people playing, each person’s chance of being left holding the potato at that exact moment is small. They understand perfectly well that the point is to pass it on quickly once it reaches them. But if you pay no attention to who is playing, hold on instead of passing it on, and indulge in wishful thinking about the future, aren’t you putting yourself in danger? ---- #得到 #萬維鋼精英日課 (Dedao · Wan Weigang’s Elite Daily Lessons)