The Upward Sloping Demand Curve

The Upward Sloping Demand Curve

Demand curves are usually downward-sloping because people will buy more of a product when it is cheaper and less of it when it is more expensive. See, you just passed 11th grade Economics.

Some things—like stocks, and especially bitcoin—have upward-sloping demand curves, which should be theoretically impossible. But they are observable in the real world—people really want bitcoin when it is expensive, but nobody was interested when it was cheap.

Every day when I am sitting at my computer, stories and anecdotes are pouring in from my readers about how grandma is suddenly interested in bitcoin, or maybe conservative grandma is suddenly interested in tech stocks, when perhaps she should be interested in 1-year bills at 1.66%, which I wrote about last week. Or a 5-year CD ladder for over two percent, which will give you income that is superior to the dividend yield on the S&P 500 index. Or some ultrashort duration bond funds. There are lots of ways to make 2% without taking a whole lot of duration or credit risk. Hardly any at all.

But nobody is interested in making 2 percent! People want to make 79,000% percent, which is about what you would have made in bitcoin had you held it since inception. You’ve seen these comments floating around the internet. “If you invested $10,000 in bitcoin in 2010, you would have $710,458,109 today.”

Go pack sand.

First of all, most of us would not have invested ten grand in a piece of computer code in 2010. Second of all, 90% of us would have sold it when it turned into twenty grand. The number of people who bought and held bitcoin and realized those pornographic returns are…small. The whole purpose of statements like these is to stoke envy and resentment and fear of missing out.

Don’t just take it from me.  Even Vanguard (and Jack Bogle himself) is out there telling people that they should have sharply reduced expectations for financial markets going forward.

What Gets Me Excited

Back to the upward-sloping demand curve.  When it comes to bags of fertilizer, normal people get excited about lower prices. If they go into Lowe’s, and see that bags of fertilizer are half off, they might get two instead of one. If they go into Lowe’s and see that prices have doubled, they might get none instead of one.

When it comes to goods that you consume, most people get excited by lower prices and demoralized by higher prices.

But when it comes to financial assets, most people get excited by higher prices and get demoralized by lower prices.

I’ll be honest—this is not entirely irrational. If you believe that markets trend, then high prices should be followed by still higher prices. There are people who buy high and sell higher and do just fine. But that’s not for everyone. You wouldn’t tell grandma to buy high and sell higher.

The crazy thing about today’s markets is that the people who are the most vocal crypto bulls are also the biggest Buffett adherents.  But that doesn’t make any sense!  Buffett (allegedly) buys undervalued assets that produce copious cash flows and holds them forever.  And every shred of evidence on how to get rich boils down to one simple concept: buy stocks with dividends that grow over time.

A humblebrag: I am wired a bit differently. When it comes to stocks, I like lower prices. Which means I miss out on most bubbles, but also means…I miss out on the busts. I stay out of trouble. I lead a relatively boring investing existence. (If you want to see how boring, check out ETF 20/20. The business of investing for the long run is exceptionally unglamorous, but we have fun with the letter!)

What we have in December of 2017 is a lot of people looking for shortcuts. But there are no shortcuts. If you’re 50, and you’re not where you want to be financially, probably the best explanation is that you didn’t start soon enough. It’s the longest of long games, and if you’re not compounding in your 20s, then you missed out. Tough luck. Bitcoin isn’t going to save you. Neither is FANG.


In the past few weeks, I’ve advised you to

  • Pay down your mortgage
  • Invest in T-bills
  • Stay liquid
  • Avoid bitcoin
  • Get rich slow

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It’s a sign of the times that I’m the one being accused of financial malpractice.

There are lots of lowbrow personal finance books out there. Dave Ramsey, Tony Robbins, the Rich Dad Poor Dad guy, the Millionaire Next Door guy. I disagree with Jack Bogle on a lot, but pick any Jack Bogle book. Pretty sure none of them tell you to invest in growth stocks at the top of a cycle. Financial assets are objectively overvalued. Buying overvalued assets sometimes works. Buying extremely overvalued assets sometimes works. But the trade has large negative expectation, which is a mathematician’s way of saying that you’re probably gonna get rinsed.


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