"It was the Dukes! It was the Dukes!" Eddie Murphy's cry from "Trading Places" -- while being strangled by Dan Aykroyd's character -- was running through my head during Wednesday's crypto flash-crash. Things recovered by the end of U.S. stock market trading Wednesday and then further overnight -- the cryptocurrency markets never close -- but what happened Tuesday night into Wednesday morning was a classic example of the psychology of markets.
I won't delve into "Extraordinary Popular Delusions and the Madness of Crowds" here, Charles Mackay's seminal 1841 work on market psychology, but you should read it. Chuckie Mac knew what the rest of us -- real traders and fictional ones like Randolph and Mortimer Duke -- have been learning the hard way for the past 180 years. Asset valuations are driven by mass psychology. It's true. But before I throw up my hands, turn off my brain, and start watching financial TV, I choose to focus on one key idea.
Valuing stocks uses the same analysis as valuing companies, and companies should only be valued on one thing: cash flows. That's how we determine intrinsic value, and that is something cryptocurrencies will never have. That's not a value judgment, it's a valuation judgment. Stocks can be valued scientifically; cryptos cannot.
In fact, cash flow never lies.
Apple (AAPL) , Exxon (XOM) and Disney (DIS) all produce cash flows. These can be measured and predicted. Predicting future cash flows and discounting them back to a fair present value is anything but an exact science, but, contrary to the beliefs of some, it is a science.
But asset values can be correlated, and one would have to be, as Thomas Dolby famously was, "blinded with science" not to see that cryptos are being traded as "risk assets." Thus, crypto values are moving in concert with the so called "riskier" side of the market, the "techie" names the Nasdaq and Russell 2000 names, as opposed to the "safer" Dow 30 names and less volatile names like consumer goods giants Procter & Gamble (PG) and Stanley Black & Decker (SWK) or those that retail those goods like Walmart (WMT) and Home Depot (HD) .
So, these are the markets in 2021. As I said in a prior Real Money column, stocks are crypto, man. You can either join the herd, or beat the herd through superior analysis. I choose the latter. It's a gainful pursuit, it's been my life's work, and it has taken me to Sao Paulo, Brazil, of all places, where I am publishing research for OHM Research. Locations don't matter, analysis is analysis.
That's your choice. You can do what everyone else does (or says they are doing, which as I noted in an Real Money column on Tesla (TSLA) a few weeks ago, is often the exact opposite of what public disclosures show they are doing) or you can educate yourself on equity research and build a portfolio that is strong and sustainable. It is the difference between trading and investing.
I don't mean to come off as some kind of pompous academic when it comes to tactics vs. strategy. I engage in both investing and trading and have formed two separate firms for those varied purposes. I choose to trade via options contracts, which have ridiculous risk-return ratios and choose to invest via income producing securities, in which the base return is already determined, and upside comes from either mispricing (fixed income) or superior cash flow growth (increasing dividends) from income stocks.
That's what keeps me sane. You can contact me through Real Money, if you want. I may or may not publish about risk assets again, but I most certainly won't be stopped out by overleveraging my trading accounts to such assets. That happened to Randolph and Mortimer Duke. I guess I would rather end up like Billy Ray Valentine and Louis Winthorpe.