Author Topic: Why is everyone obsessed over expensive things?  (Read 2225 times)

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6730
  • Location: A poor and backward Southern state known as minimum wage country
Why is everyone obsessed over expensive things?
« on: April 27, 2021, 09:19:12 AM »
In economic theory, demand for things goes down as the price goes up. That seems not to be the case for things we can mentally frame as "investments". As I review the posts on this board, it looks like the "investments" everyone is getting excited about are things that are getting more expensive, not less expensive. Specifically:

1) Cryptocurrencies
2) Housing, especially in unaffordable bubble markets
3) Speculative trash stocks like AMC and GME
4) Bonds yielding only 1.5% with the potential to lose 40% if interest rates rise

One would expect rational Mustachians from planet Vulcan to shift their spending and investing to things that have not gone up in an unsustainable trend. They would invest counter-cyclically, unless everything had gone up, in which case they would invest defensively. FOMO and the justification of prices by pointing to past prices would not be a thing.

My two questions are 1) Why are we performance-chasing instead of being more rational? and 2) What kinds of things are rational to buy / invest in today?

My answers to the second question:

1) Equities Indexes. Don't fight the Fed in a year earnings are going to increase 30% or more. Vanguard ETFs remain super cheap for the value we get.
2) Financials. Forward PE of 14.4, 79.5% predicted earnings growth, low default rates, healthy consumer balance sheets, widening spreads, and pent-up demand for loans.
3) Long options when the VIX drops under 16. Protective puts could allow a higher stock allocation with less risk than a bond allocation.
4) Apparel, which is 2.5% cheaper than it was 12 mos ago, or Services Less Energy Services, which is up only 1.6% in the past 12 mos. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
5) UK stock market, with a forward PE of 13.2. Euro stocks with a FPE of 16.4. Emerging markets in Europe and Latin America with low-teens forward PEs. https://www.yardeni.com/pub/mscipe.pdf

Why aren't we excited about these cheap things? How many of us have instead leveraged to the eyeballs in housing, bought internet collectible money with our remaining savings, gambled on HODL stocks, and held bonds in our 401(k)s while dreaming of early retirement?

wenchsenior

  • Magnum Stache
  • ******
  • Posts: 3798
Re: Why is everyone obsessed over expensive things?
« Reply #1 on: April 27, 2021, 09:29:48 AM »
Who is this 'everyone'?  I'm not chasing or interested in any of the things you list. I suspect there is selection bias on the investment thread...  most of the board isn't chasing anything b/c most people here invest in index funds and don't pay much attention to any particular sector.  The few people who DO invest in sectors (hot or not) tend to want to talk about it, so they post.

bacchi

  • Walrus Stache
  • *******
  • Posts: 7095
Re: Why is everyone obsessed over expensive things?
« Reply #2 on: April 27, 2021, 09:38:22 AM »
Why? FOMO.

Aka, too much social media.

Morning Glory

  • Magnum Stache
  • ******
  • Posts: 4881
  • Location: The Garden Path
Re: Why is everyone obsessed over expensive things?
« Reply #3 on: April 27, 2021, 10:11:40 AM »
Thanks for posting. I don't think it's everyone. I know a few people IRL who have a small allocation in crypto but nobody with serious money in it. I know some older people who invest in individual stocks but they tend to go for blue chips and dividend aristocrats, not speculative plays.  I don't know anyone who is buying bubble housing or trash stocks.

The bonds are an interesting observation. I think conventional wisdom says to hold a certain percentage of bonds to guard against volatility. This extremely low interest environment has never happened before, and I don't think many people are aware that bond indices will drop in value when interest rates go up.  I actually just found out about it because I was thinking about changing my asset allocation as I move into the preservation stage. Even Collins says to have 10-20% bonds during retirement, just not in the accumulation phase. I decided to hold off after reading a couple of articles about it.  Most people do not manage their own 401Ks and instead have either a Robo-Advisor (that was the default option at my old employer) or a target date fund, both of which automatically increase the percentage of bonds based on the participant's age.

On your suggestions:
I think the decline in apparel is part of a long-term trend away from expensive clothing as a status symbol. That's my unscientific opinion formed from spending a lot of time around college kids. I could be wrong though, you never know what the next generation will be into.

Financials will benefit from rising interest rates, and they have no place to go but up right now.

UK stock market sounds like a smart long term buy: they are in a huge recession right now that they can hopefully climb out of but it will take time (my dad is British and doesn't have much hope). It could potentially be like buying the US market in 2008, but I wouldn't bet the farm on it.

I've never messed around with options trading or VIX. I don't know anyone IRL who does either.  I don't do crypto except what I got for free from coinbase earn.

windytrail

  • Stubble
  • **
  • Posts: 224
  • Location: Seattle, WA
Re: Why is everyone obsessed over expensive things?
« Reply #4 on: April 27, 2021, 10:25:39 AM »
Still dumping it all into VTSAX, VXUS (taxable acct) and target date funds (retirement accts).

Still not buying cryptocurrency or meme stocks.

Still renting and not buying a home.

Sold my taxable bonds several months ago and slowly building savings up to 10% of my net worth in a high-yield savings account. This will serve either as a home down payment in the future or for buying on sale during the next market drop.

nereo

  • Senior Mustachian
  • ********
  • Posts: 17580
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Why is everyone obsessed over expensive things?
« Reply #5 on: April 27, 2021, 10:52:45 AM »
One would expect rational Mustachians from planet Vulcan to shift their spending and investing to things that have not gone up in an unsustainable trend. T

This community has changed substantially from where it was just a few years ago. There was even a thread on it about four years ago until it became so acrimonious that the mods locked it up.  Four years later I think we've drifted even further towards a more consumeristic, higher-spend median.  That doesn't mean those exceptionally rational Vulcan minds are gone, only they are largely drowned out by posters wanting to self-justify six-figure budgets as 'normal'.



clarkfan1979

  • Magnum Stache
  • ******
  • Posts: 3358
  • Age: 44
  • Location: Pueblo West, CO
Re: Why is everyone obsessed over expensive things?
« Reply #6 on: April 27, 2021, 11:07:20 AM »
Humans are drawn to expensive things for social status. Our old brain thinks that if we have more social status we are more likely to survive.

The average "investor" or "consumer" is programmed to buy high and sell low. Based on herd mentality, humans feel more comfortable when everyone else is doing something, which makes it more expensive.

Very intelligence people have a hard time understanding this concept in real time. I have bought many different houses, cars and stocks on the cheap when they were in low demand. Others will often state that I'm making a mistake. After I celebrate my "win", I am told, "you got lucky"

How many times do you need to "get lucky" before you are allowed to take credit for your actions?

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6730
  • Location: A poor and backward Southern state known as minimum wage country
Re: Why is everyone obsessed over expensive things?
« Reply #7 on: April 27, 2021, 11:12:15 AM »
One would expect rational Mustachians from planet Vulcan to shift their spending and investing to things that have not gone up in an unsustainable trend. T

This community has changed substantially from where it was just a few years ago. There was even a thread on it about four years ago until it became so acrimonious that the mods locked it up.  Four years later I think we've drifted even further towards a more consumeristic, higher-spend median.  That doesn't mean those exceptionally rational Vulcan minds are gone, only they are largely drowned out by posters wanting to self-justify six-figure budgets as 'normal'.

Maybe these divergences from practices and values are what happens to any cult once the leader stops speaking. MMM only posts occasionally now, although his recent Beware post might have been pushback against meme stock mania and crypto.

Also, "everyone" was obviously too strong a word. Investing is boring and therefore the speculators will always generate more social media and financial journalism stories. This means information suggesting we should do the wrong things is always more abundant than information saying we should do the right thing. That's another reason to kill your cell phone before it kills you.

ice_beard

  • Bristles
  • ***
  • Posts: 251
  • Location: East Bay, CA
Re: Why is everyone obsessed over expensive things?
« Reply #8 on: April 27, 2021, 11:23:05 AM »
I've been banging on the keyboard about buying oil companies since last August and along with them I was buying regional banks.  I too am a cheap bastard and am looking for deep value bordering on speculation and I suspect I'm not the only one here.  I'm also still buying VTSAX regularly and making our 403b contributions every other week. 

The community has changed a lot and the people who post the most aren't always representative of the population at large. 
« Last Edit: April 27, 2021, 11:26:55 AM by ice_beard »

PDXTabs

  • Walrus Stache
  • *******
  • Posts: 5160
  • Age: 41
  • Location: Vancouver, WA, USA
Re: Why is everyone obsessed over expensive things?
« Reply #9 on: April 27, 2021, 12:00:15 PM »
I'm 99% Equities Indexes, but it is rational to chase expensive things higher if you believe that they are in the beginning of their irrational rally.

tooqk4u22

  • Magnum Stache
  • ******
  • Posts: 2846
Re: Why is everyone obsessed over expensive things?
« Reply #10 on: April 27, 2021, 12:34:43 PM »
Everything is expensive right now because of the fed and treasury.   Pick your poison. Simply put to answer your question TINA (There Is No Alternative) and people are bored and flush and want to get rich quick and have nothing better to do with their money at the moment.


My answers to the second question:

1) Equities Indexes. Don't fight the Fed in a year earnings are going to increase 30% or more. Vanguard ETFs remain super cheap for the value we get.
Vanguard may not charge much for these, but that doesn't make the investment cheap.  Equities are very highly valued right now, maybe not ridiculously so but at 21x 2022 SP500 estimates not cheap.  But yeah, don't fight the fed, well at least until their posture changes 9 months earlier than expected. I think earnings will be strong this quarter and next but then will plateau and rates will rise a bit more than expected.  But still, probably best place to be.

2) Financials. Forward PE of 14.4, 79.5% predicted earnings growth, low default rates, healthy consumer balance sheets, widening spreads, and pent-up demand for loans.
This is only cheap relative to the broader market, they have run up quite a bit. 

3) Long options when the VIX drops under 16. Protective puts could allow a higher stock allocation with less risk than a bond allocation.
I like this call and would really like it if at the 12 ish level. 

4) Apparel, which is 2.5% cheaper than it was 12 mos ago, or Services Less Energy Services, which is up only 1.6% in the past 12 mos. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
So much noise that I really can't formulate a view and for that it may make sense.

5) UK stock market, with a forward PE of 13.2. Euro stocks with a FPE of 16.4. Emerging markets in Europe and Latin America with low-teens forward PEs. https://www.yardeni.com/pub/mscipe.pdf
Covid one thing but UK still has a whole lot of uncertainty around Brexit that I suspect has stymied the UK recovery, but could be a play. 

Why aren't we excited about these cheap things? How many of us have instead leveraged to the eyeballs in housing, bought internet collectible money with our remaining savings, gambled on HODL stocks, and held bonds in our 401(k)s while dreaming of early retirement?

I will add that bonds are not just about return, they are about stabilizing which to your point is a risky proposition right now but that can be managed somewhat by staying away from long duration but the shorter you go then you lose to inflation.  But losing 1-2% is more stabilizing than losing 5-20%.

« Last Edit: April 27, 2021, 12:36:59 PM by tooqk4u22 »

DadJokes

  • Handlebar Stache
  • *****
  • Posts: 2361
Re: Why is everyone obsessed over expensive things?
« Reply #11 on: April 27, 2021, 01:22:02 PM »
Supply and demand apply more to consumables than investments.

People are obsessing over inflated investments because they think that the investments will keep climbing.

bacchi

  • Walrus Stache
  • *******
  • Posts: 7095
Re: Why is everyone obsessed over expensive things?
« Reply #12 on: April 27, 2021, 01:42:52 PM »
I will add that bonds are not just about return, they are about stabilizing which to your point is a risky proposition right now but that can be managed somewhat by staying away from long duration but the shorter you go then you lose to inflation.  But losing 1-2% is more stabilizing than losing 5-20%.

Exactly. A comparison between VTI and VGIT (intermediate treasuries) shows what can happen in a down market (March 2020). If I'm withdrawing, I want to be withdrawing from the position that isn't down 30%. VTIP (short TIPS) looks even better this year (and especially after the May CPI reset).

Blackeagle

  • Bristles
  • ***
  • Posts: 297
  • Location: Ivins, UT
Re: Why is everyone obsessed over expensive things?
« Reply #13 on: April 27, 2021, 05:19:35 PM »
1) Cryptocurrencies
2) Housing, especially in unaffordable bubble markets
3) Speculative trash stocks like AMC and GME
4) Bonds yielding only 1.5% with the potential to lose 40% if interest rates rise

If we want to play One of these things is not like the other, I think housing is in a different category than the rest.  Im not really getting a speculative vibe like the pre-2008 market.  There are rational reasons for demand to rise (the pandemic, historically low mortgage rates).  The irrational reason stacked on top of these is less about speculation and people trying to get in on the upside and more about fear of not being able to afford a place that they want to live in if prices continue to rise.  Still not necessarily a great decision to buy, but I think its fundamentally different from the other, more speculative things you mention.

Morning Glory

  • Magnum Stache
  • ******
  • Posts: 4881
  • Location: The Garden Path
Re: Why is everyone obsessed over expensive things?
« Reply #14 on: April 27, 2021, 05:22:16 PM »
Wait a second, wouldn't that risk be priced into the bonds already?

nereo

  • Senior Mustachian
  • ********
  • Posts: 17580
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Why is everyone obsessed over expensive things?
« Reply #15 on: April 27, 2021, 05:55:51 PM »
Wait a second, wouldn't that risk be priced into the bonds already?
Is the market acting efficiently?

tooqk4u22

  • Magnum Stache
  • ******
  • Posts: 2846
Re: Why is everyone obsessed over expensive things?
« Reply #16 on: April 27, 2021, 06:26:54 PM »
Wait a second, wouldn't that risk be priced into the bonds already?
Is the market acting efficiently?

Duration risk is not something that is really priced as much as it is accepted as it is simply math.   A markets view of interests rates is priced in.   Vanguard BND had a duration of about 7 years, which means if interest rates rise 1% the value of the fund will go down 7%.   The inverse is true too.  So it is a bet in the direction of rates. 

A more extreme example is TLT (20 yr fund) w duration of 18 years and is down 11% ytd as the 10 yr treasury rose.   If the 10yr goes up another 1% it Will lose another 18%. 

There is a little more complexity to it but basically this the simple version. So if the Fed loses control or has to rase rates sooner or taper sooner it won't be good.   But the Fed is being helped by the fact that all other rates globally are negative so foreign capital is going to treasuries.   Hopefully they don't raise rates. 

Morning Glory

  • Magnum Stache
  • ******
  • Posts: 4881
  • Location: The Garden Path
Re: Why is everyone obsessed over expensive things?
« Reply #17 on: April 27, 2021, 07:13:00 PM »
Wait a second, wouldn't that risk be priced into the bonds already?
Is the market acting efficiently?

Duration risk is not something that is really priced as much as it is accepted as it is simply math.   A markets view of interests rates is priced in.   Vanguard BND had a duration of about 7 years, which means if interest rates rise 1% the value of the fund will go down 7%.   The inverse is true too.  So it is a bet in the direction of rates. 

A more extreme example is TLT (20 yr fund) w duration of 18 years and is down 11% ytd as the 10 yr treasury rose.   If the 10yr goes up another 1% it Will lose another 18%. 

There is a little more complexity to it but basically this the simple version. So if the Fed loses control or has to rase rates sooner or taper sooner it won't be good.   But the Fed is being helped by the fact that all other rates globally are negative so foreign capital is going to treasuries.   Hopefully they don't raise rates.

Thanks for the explanations!!!

I think on one hand raising rates would not be so bad because it would put a damper on runaway housing and construction costs. Also it would give the fed room to lower them again if another downturn hit. I do worry about the national debt though: if rates increase we will run more budget deficits and have to raise taxes or cut programs. I don't know which is better.

I can see why the market would not be efficient because the robots have probably not been reprogrammed for this contingency, so they just keep increasing the bond allocation as people age.

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6730
  • Location: A poor and backward Southern state known as minimum wage country
Re: Why is everyone obsessed over expensive things?
« Reply #18 on: April 27, 2021, 08:49:15 PM »
Wait a second, wouldn't that risk be priced into the bonds already?

In theory yes, but in practice the main buyers of these bonds are funds such as 401k retirement-year funds, pensions, insurance companies, and people overseas who need to hold dollars. They don't necessarily have a choice about what they can buy - they are by mandate locked into buying a certain number of treasuries. E.g. A foreign trader receives $100M. They cannot efficiently put this into hundreds of FDIC-insured checking accounts so they put it into treasuries until they can repatriate the funds, or maybe forever.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 22387
  • Age: 66
  • Location: NorCal
Re: Why is everyone obsessed over expensive things?
« Reply #19 on: April 27, 2021, 09:39:18 PM »
The community has changed a lot and the people who post the most aren't always representative of the population at large.
Word.

To the OP, this mustachian isn't doing any of that stuff. We are seeing crazy appreciation in our real estate, but we're not buying or selling anything. It's entertaining to watch from the sidelines.

Observation: Anyone with something to say can start a thread on any topic. If you don't see what you want to read/discuss, start your own thread.

Alternatepriorities

  • Handlebar Stache
  • *****
  • Posts: 1640
  • Age: 43
  • Location: Alaska
  • Engineer, explorer, investor
    • Alternate Priorities
Re: Why is everyone obsessed over expensive things?
« Reply #20 on: April 27, 2021, 10:32:25 PM »
I have spent money a little more freely the past year. We're FI and others are struggling, so I've tipped more generously, and bought a few things I wanted before but could justify...

But the most expensive thing I've bought is time. According to every antiFIRE scare mongering piece I've read, missing out on "prime earning years" will cost me more than a few bitcoin... Not that I would buy something that speculative. I'll stick with the long term equity and index investing that took me from student loans to FIRE in 16 years despite taking 2 of them off to see the world... Besides, I can't to be distracted tracking/trading "investments" every day while I'm biking around Alaska or exploring new hiking trails.

If anyone wants to join me this summer flights are a bargain and Alaska will be pretty empty without the cruise ships...

theolympians

  • Stubble
  • **
  • Posts: 240
Re: Why is everyone obsessed over expensive things?
« Reply #21 on: April 28, 2021, 03:03:56 PM »
Modern media and social media are drivers, and we feed on fomo. It's going up! up! up! I feel the other way, why chase the crowd?

I have a co-worker who is into investing as well. He always has a tip. He often mentions how he missed this crash or that, being savvy enough to see it coming, or made so much money on something or other. Well a few months ago he admitted he was only $50,000 ahead of me. He has been invested longer than me who has rarely changed AA. I learned that a number of people we work with have turned over their retirement 457 plans to him. He is always buying and selling a fund here or there. We have a limited selection of offerings so I don't get the rapid moves. Many of the funds have the same investments in their top ten and diverge from there. The idea of mutual funds is to buy and hold. With our plan you get locked out from repurchase for 6 months after selling.

My point being is most people don't understand what they have. Fomo, and wanting to be on the inside track. Cryptos are the newest thing. I know people that trade them, no one I have asked have ever used them. "I'm looking for the next break out crypto!"

We are in an inflationary environment. We will continue to be so, as it appears that is the gov'ts plan to deal with the debt, print our way out of it. So much money chasing a quicker dollar.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 4384
  • Age: 42
  • Location: Florida
Re: Why is everyone obsessed over expensive things?
« Reply #22 on: April 29, 2021, 04:30:04 AM »
I'm disappointed the VIX is declining so much.  The reddit traders must have calmed down.

My covered call strategy was making a decent return for the first four months this year....even with the market going up almost 10%.

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6730
  • Location: A poor and backward Southern state known as minimum wage country
Re: Why is everyone obsessed over expensive things?
« Reply #23 on: April 29, 2021, 07:07:21 AM »
I'm disappointed the VIX is declining so much.  The reddit traders must have calmed down.

My covered call strategy was making a decent return for the first four months this year....even with the market going up almost 10%.

Same here. It may be the season to buy low-risk leverage with long calls, now that they're too cheap to sell.