Only Yesterday

I finished reading a good book this weekend called "Only Yesterday".  It is a first hand account of the 1920's, and it ends with the stock market crash and the Great Depression.  Some of the parallels between that era and ours are so striking.  They say that history does not repeat, but it does rhyme.  The emotional make up of humans has not changed much in thousands of years, and people are fundamentally the same as they always have been.  100 years ago, they rode horses instead of cars, but their emotional make up was the same as ours today.  Hence, we can learn a lot about the future by studying what happened in the past.  The sad part is that the lessons of the past are mostly forgotten after two generations have passed, so that is one reason why human beings are doomed to keep repeating their same mistakes over and over again.   The most striking aspect of this book, to me, was the concept of "buying the dip".  This concept, today, is affectionately referred to as "BUY THE DIP!!!!!!!!!!" or "JBFD" where the "F" stands for a four letter word + "ing".  The concept is that any market pullback is an opportunity to buy because eventually it will recover and surge a lot higher.  You can look at recent history since September 2010 and see that this strategy has been very successful.  Hence, millions of amateur investors have concluded that this strategy will always be successful.  This can perhaps explain the huge optimism towards risk assets, the low levels of VIX (16.xx), and the extreme bullishness and complacency that currently exists.    In response to a story today that a trader took a large bearish bet in silver which has been surging to close above $41/oz (which is a  31 year high), here is the first quote after the article:   "I'm glad this bet was taken as we can proceed to BTFD. Currently, wouldn't touch a silver long above 39, but hopefully we can see lower price to get back into."   The lesson from "Only Yesterday" is that the Great Depression was full of dips.  And each time investors "bought the dip" and were handsomely rewarded.  There were about four instances of this just in 1928 & 1929 alone.  The market would pull back, people would rush in and buy "at bargain levels", the market would recover and move higher, and these people would make money.  People then, as now, became conditioned like Pavlov's dogs to just "BTFD".  It was very easy and it worked every time...until it didn't.  Investors who bought during the final plunge of 1929 mostly were ruined in the end.   Corporate insiders have been selling stocks at an aggressive pace since last fall.  Amateurs have been buying at all the dips.  History does not repeat exactly but it does rhyme.  We are headed for the worst stock market decline since the Great Depression in the next year or two.  This will not bode well for the dip buyers in the end.