A 23-year-old man posted this depressing message on social news and discussion site Reddit.
What could possibly have driven him to this level of despair?
Was it a relationship breakdown?
Well, kind of.
The young investor, with the username Lilkanna, was infatuated with the XIV…so much so, his post had ‘XIV is my girlfriend’.
XIV is short for the VelocityShares Daily Inverse VIX Short Term ETN.
The fund was a leveraged (higher risk) punt on the VIX — the volatility index.
Until recently, the relationship was loving and rewarding, but a touch one-sided. His girlfriend was calm and rational. And bestowed an abundance of riches upon him.
The perfect love affair…for him.
But our young lover was blindsided by his girlfriend’s sudden and dramatic mood swing. Completely altering the nature of their relationship.
This is how Seeking Alpha, a crowd-sourced content service for financial markets, described the relationship breakdown on 6 February 2018 (emphasis mine):
‘The VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV) reopened for trade a few minutes back. It’s under volatility halt at the moment, but down 93.9% from last night’s closet to $6.15.’
Here is the market price action on XIV…that vertical line is what happened to the price on 5 February 2018.
The overnight collapse in the XIV — due to the Dow’s flash crash on 5 February 2018 — saw the young man’s portfolio shrink from US$4 million to US$200k.
To make matters worse, as reported by News.com.au on 8 February (emphasis mine):
‘…he started out with just $US50,000 ($64,000) and grew it to nearly $US4 million ($5 million) in three years, $US1.5 million ($1.9 million) of which was capital raised “from investors who believed in me.’
Not only was he spurned by his girlfriend, he burned money given to him from family and friends ‘who believed’ in him.
Little wonder he was depressed.
In response to his ‘Should I Kill Myself?’ post, he penned this reflective reply — the emphasised second paragraph is one all investors should take notice of:
‘I guess you never expect it until it hits you. You always hear stories about how people get cancer and how people get randomly killed in the street or about how they lose all their money, but sometimes you find it hard to believe that it will happen to you.
‘I started with 50k and traded all the way to 4 mill over 2.5 years, started using more and more margin, started taking it less less seriously, what could go wrong? Arrogance. Stupidity.
‘Ah well. Thanks for the kind words though. They are more comforting than you realise.’
Arrogance. Stupidity. And you can add complacency to that list of character faults.
Our young lover was seduced by benign market conditions. The longer those conditions continued, the more convinced he became that nothing could possible go wrong.
The gaining of wisdom AFTER the event is too late.
In my recent book — How Much Bull can Investors Bear? — I purposely dedicated the first chapter to the topic discussing the matter of instinct versus intellect.
The vast majority of people do not really understand what they are investing in and how the earth can shift from under their feet in a matter of minutes.
Knowing the limitations of our intelligence is the best defence we have in safeguarding our capital.
If our young lover had read this chapter, he might have saved himself the embarrassment of confessing his stupidity and arrogance.
Here’s an edited extract from the chapter…take a look at the Thanksgiving Turkey chart and note the similarity with the one of the XIV.
Instinct or intellect — Which Do You Use?
‘It is our intellect and ability to reason that sets us apart from animals.’
The human race has made enormous progress over the centuries due to our power to think and reason.
Yet, in the world of investing, our primal instincts are never too far below the surface.
The herd mentality is why the average investor ends up being, well, an average investor.
Successful investors continually question assumptions. They assess the risk more than the reward.
They know that, if you fully understand what you could lose, you will have a better appreciation of what you stand to gain. The herd tends to operate on a ‘buy in haste and repent in leisure’ mentality.
Do not confuse intelligence with investing intellect. There are some very smart people who have done some very dumb things with money. A quick look at who invested with Bernie Madoff (the greatest con artist of the century) confirms this. Along with the ‘mum and dad’ investors, billionaires and bankers were victims of Madoff’s pyramid scheme, too.
Madoff understood the power of investor conditioning. Year after year, his Ponzi scheme delivered investors a consistent 10% per annum return. He conditioned his investors to expect a certain outcome.
We know there are only a few genuine certainties in life — death, taxes and night following day. All other ‘certainties’ should be subjected to robust questioning, and the more ‘certain’ a certainty, the more it should be questioned.
But why don’t people do this when it comes to investing their hard-earned money?
Over a century ago, Russian physiologist Ivan Pavlov conducted conditional reflex experiments with animals. The result of those experiments gave us the term ‘Pavlov’s dog’. This saying has become synonymous with the actions of people who simply react to a situation instead of applying critical thinking.
Hyman Minsky, the Economics Nobel Laureate, noted that stability breeds instability. This was Minsky’s ironic way of describing complacency breeding contempt.
The longer the good times last, the more convinced investors become things will stay that way — or improve even. The fact that nothing good lasts forever never seems to dawn on them.
Minsky found there was a direct correlation between the duration of the good times and rising levels of risk taking. The unquestioned belief in the trend continuing without disruption inevitably causes its demise. At the mature stage of the trend, it’s common to hear phrases such as: ‘This time it is different’ and ‘you can’t go wrong buying…’ ‘There is no alternative’ — complacency-bred contempt.
To further highlight the risks of conditioning and complacency, there’s a brilliant turkey analogy in Nassim Taleb’s book, The Black Swan.
Leading up to Thanksgiving, the unsuspecting turkey is well fed day after day. The turkey is being conditioned to think life is pretty good. The turkey’s confidence and belief system grows with each successive day of feeding. The turkey is certain it’ll be fed tomorrow. Then, one day, the turkey meets its true fate.
This graphic, from The Black Swan, is a great example of how you go from feasting…to being the feast in one foul (pun intended) chop.
It bears a strong resemblance to any number of market graphs, doesn’t it?
You can see how conditioning has led us to the situation we have today.
Highly specialised investments like the XIV and individual companies can meet the same fate as the Thanksgiving Turkey.
Death. Permanent loss of capital.
Whereas broader indices — the ASX 200, Dow Jones, S&P 500, etc. — can lose substantial value, they never die.
But financially-based dreams do perish — retirement prospects, planned expenditure, home ownership, and so on.
The sudden and dramatic loss of capital changes everything.
The Great Depression was an accurate description of the social mood that gripped that era.
People saw no way out of their financial plight. It took decades to recover…for social mood to turn from pessimism to optimism.
And it was the optimism of the 1950s that provided the spark to ignite the greatest debt supercycle in history.
Our collective arrogance and stupidity has led us to accumulate in excess of US$230 trillion of debt. We have become smug…we believe we’re entitled to a life that we cannot afford.
The Dow Jones is a reflection of the daily diet of BS we’ve been fed by the Federal Reserve and how we’ve gobbled up the nonsense that you can ‘cure a debt crisis with more debt’.
What you see here is a complacent market that’s facing the axe any day now.
To learn how you could avoid having your dreams die, please go here.
Editor, The Gowdie Letter
Editor’s note: The above article was originally published in Markets & Money.