On November 5th, there was a “crowd surge” at a Travis Scott concert in Houston.
The crowd got out of control. People panicked. Some died. It’s a terrible way to die. More importantly, it’s a preventable way to die.
Preventable because this has happened before. Not once, not twice, but hundreds of times.
The Romans and Jews infamously suffered a deadly crowd trample incident that killed hundreds of people. Do you know when that was? Hint: Romans and Jews! It was thousands
Crowds cannot control themselves. Left to their own devices, they will overcrowd. They panic, stampede, and riot. And that leads to death.
Humankind knows this. Or we should know it. We should have learned this important lesson millennia before Travis Scott was a glimmer in his pappy’s eye.
But people need reminders. Without them, we repeat our past mistakes.
It Gets Worse…
It’s the same for nightclub fires (I know it’s morbid. Stick with me and I’ll get to the investing content in a minute).
“The Station” Fire in Rhode Island killed 100 people. 230 were injured.
When was it? 1800? 1900?
Maybe 1950, or 1970?
No. It was in 2003.
The Station Fire was far from the first awful nightclub fire in the United States. We’ve had fires that killed more than 500 people – from one building!!!
But at The Station, they forgot, ignored, or never contemplated the lessons we’ve compiled from generations of fire safety.
People need reminders. Without them, we repeat our past mistakes.
Tragedy – The Ultimate Reminder
Both Travis Scott’s concert and The Station Fire make me want to grab someone by the collar and shake them: “HOW DID YOU NOT KNOW BETTER?!”
But we already know the answer. People need reminders. It’s that simple.
If we don’t actively choose to remember, then we forget. Entropy kicks in. We get lazy. We cut corners. Our safety systems lose their edge.
It’s a slippery slope downwards. Then tragedy strikes.
A tragedy jolts us. We suddenly remember, “This is why we had those safety measures in place. This is the bad outcome that can occur.”
Tragedy – or if we’re lucky, a mere “close call” – is a highly effective reminder of rationality. But of course, it’s a tragedy. We don’t want to suffer a tragedy every time we need a reminder of rationality.
The preferred choice is to maintain rationality before a painful reminder.
Ok – Let’s Talk Investing
There is a direct analogy between the panic of a crowd and the panic of an investing market.
Every investing bubble in history is marked by the fact that rationality was forgotten. Common sense became uncommon, and past lessons were ignored.
In fact, the language of market irrationality is the same as that of crowd irrationality.
- What’s a synonym for a market crash? A panic.
- How do you describe a panic-selling even? “Like a large movie theater with a small door.” Sounds like a fire trap to me.
- The most famous book about investing bubbles is called, “Extraordinary Popular Delusions and the Madness of Crowds.” The madness of crowds?
Yes – the psychology of markets is eerily analogous to that of physical crowds.
The highs can be similarly euphoric. We’re all one soul, maaaaannn! The music is flowing through me!
The lows can be similarly destructive.
And just like a fire or crowd surge, a market crash helps us remember that people need reminders. Without them, we repeat our past mistakes.
Charlie Munger – The Bitcoin Grinch
More rationality, more often. That’s the best preventative for avoiding crashes of all sorts.
If I had to guess, that’s is exactly why Charlie Munger says that cryptocurrency is “disgusting” and “contrary to the interests of civilization.”
It’s because he sees crypto as a bubble. A bubble is equivalent to Travis Scott’s concert before the tragedy. It’s a powder keg waiting for a spark.
Munger doesn’t want to wait for what he thinks will be a future Bitcoin panic. He wants to call attention to it now.
In other words, Charlie remembers. He remembers the many bubbles that he’s read about before, and a few that he’s seen first-hand. He doesn’t want to forget or repeat past mistakes.
Is Charlie right? I’m not wise enough to know. But I’m sure listening hard.
Charlie is acting as a fire marshall. He’s seen the charred remains of too many buildings. He’s now walking into the Bitcoin Nightclub and calmly stating, “This is a fire hazard and a death trap. Period.”
It’ll be hard to know if Munger is right. We might not know in a week, nor a month, nor a year. But if Charlie is correct and risk (the bubble) is present, then the law of large numbers mandates that tragedy will eventually strike.
Charlie, to his credit, is famously a student of psychology. He knows how people tick—both individually and in crowds.
He knows that people need reminders. Without them, we repeat our past mistakes.