April has been wild for the financial markets.
On news of tariffs, the S&P 500 dropped 4.8% on April 2 and 6% on April 3- the worst two day decline since June 2020. $6.6 trillion in market cap was wiped out. Then, amidst chaotic headlines, the index popped 9.52% on April 9, the largest single day gain since the 2008 financial crisis. As I write this, the financial markets are engulfed under the uncertainty of a flock of black swans.
In spite of this, I am perpetually enamored by the market.
My love for the market stems from my fundamental belief that there are few, if any, more pure representations of bestowed trust and belief than the exchange of money.
Money, though as superficial as it is, is a rough proxy of time. Through work, time, a sacred finite resource, is irrecoverably exchanged for money. An hour spent working is another hour spent not at leisure. This is opportunity cost. I lose the opportunity to play in more frivolous hobbies, banter with friends, or sit under the summer NYC sun and watch runners stream by.
In this logic, investing is no longer just a conduit for money, but for time and all the additional lost benefits as well. By committing to clicking a button on an online brokerage, I commit my trust and tie my life boat with the prospects of several other boats, manned by public companies, industries, and governments.
Their prosperities lead to my rise. Their reckonings lead to my fall.
Built atop trust is also my opinion that financial markets offer an infinitely complex, ever-changing, and addictive mathematical and psychological question to answer: how to generate the most amount of returns for a set of quantitative skills and emotional stability?
Despite any sort of proclamations from micro niche influencers, there is no one singular right answer to make outsized returns. From 1949, Benjamin Graham popularized value investing with the classic book The Intelligent Investor and partners Warren Buffet and Charlie Munger carried the torch to build Berkshire Hathaway, compounding at 19.9%, almost double of the S&P’s 10.4%. As part of the quant wave in the 1980s, Jim Simons pioneered investing solely based on mathematical models with Renaissance Technologies, achieving industry leading 66% average annual returns before management fees. Outside the conscious of non financial professionals, private markets roared in the likes of Stephen Schwarzman and private equity, and Don Valentine and venture capital, popularizing other ways to make money.
What started as simple instruments for financing morphed into an intricate invisible network of assets shot around the world, not dissimilar to the electromagnetic fields radiating through space. Only instead of two oscillating electric and magnetic forces moving at the speed of light, an unruly number of asset classes and derivatives all push and pull over the true unknown value of companies, governments, and individuals on the order of machine executions and the shouting of brokers on cell phones.
Simply put, the financial markets offer an opportunity to convert deep research and chutzpah into cold hard cash. Stories of conquest are now in the realm of finance and business instead of bloody war.
The beauty of the market is not only available for active participants but for active observers as well. In the history of humanity, I wager there is no better window into greed, envy, and the ensuing irrationality of human behavior than the financial markets.
One of the most interesting trends has been the boom in meme coins, which exhibit no intrinsic value. Yet, in the perfect firestorm of spiking internet usage and stimulus checks in the backdrop of COVID, meme coins were pumped to the moon. At one point, Dogecoin had a market cap of $88 billion, exceeding that of Fedex. Nothing else could explain such valuation other than the intoxication induced by the cocktail spiked with greed, herd behavior, FOMO, and whatever other ingredient found in the fridge of human behavior.
Interestingly enough, this meme coin frenzy is not completely unique. As Mark Twain says
History doesn’t repeat itself, but it often rhymes.
Back when the concept of computers exceeded even the figment of imagination, the tulip bubble of 1634 saw the price for a single tulip exceed $1 million in today’s money.
$1 million!
It’s obvious to point out that no one was actually willing to buy a tulip for $1 million, but were nonetheless drive to do so under the perceived promise that someone else was willing to buy it for more.
Even the most rational individuals were caught in the frenzies of the financial markets. In the South Sea Company bubble of 1721, Isaac Newton had this gem to say upon losing most of wealth buying into and selling out of the stock:
I can calculate the motions of the heavenly bodies, but not the madness of people.
And while it's funny to recant all the antics of investors in times of chaos in hindsight, it cannot be overstated how consequential these investments decisions are in the lives of everyday people. Just like how massive profits can be reaped through a no context blind yolo trade, financial ruin can happen just as fast.
Leveraging up in the markets without expertise is like playing Russian Roulette. There’s an asymmetry of gain and loss. Pulling the trigger on an empty chamber doesn’t really have much upside. There’s a dopamine hit and overall quality in life may improve if the profits are actually big enough. But, for whatever reason, winners often keep playing. And hitting a loaded chamber leads to death. Financial ruin is much harder to recover from now that compounding is no longer a friend.
Bystanders are also not fully safe either.
Under the pressures of falling stock prices, the failures to secure financing due to rising rates, and the consequences from faulty bets, companies push cost cutting, countries shift economic policies, and organizations slow growth. The downstream consequences can be the everyday person being laid off, seeing their retirement funds blown up, or bearing the loads higher costs of living. Monetary set backs may lead to further issues- divorces, homelessness, suicides… the paths of consequences are impossible to truly enumerate and measure.
Alas, stakes are the highest in the financial markets.
And so, I will continue to look towards this trust based, infinitely complex and consequential window of human emotions in wonder for what else will spiral out into the tapestry of capitalism.