Why Investing Hypes Never Work
Do you know why the most widely accepted method of generating/earning more money or investing success will never work? If you understand that being rich is relative, then the reason should be a little obvious.
The following numbers are only for illustration. Assume that someone found a method of generating wealth that really works, or some investing software, rules, or stock symbols that can generate a lot of return like 25% every year. When 1% of the population participates in such activities, it may work very well. When 10% of the population participates, it may still work okay. When more than 50% of the population participates in it, I can tell you for sure that most likely it will not work anymore. Why am I so sure? Because if 50% of the population becomes millionaires, then a million dollar at such time will no longer represent the same relative money as before. Being rich is a relative term. Or better yet, relative to the purchasing power. When 50% of the population are all millionaires, how much do you think a nice meal at high end restaurant would cost? Since one in two waiters will probably be a millionaire in such scenario, he or she most likely will not work in the same job. Less low-wage labor equals wage inflation. And since lots of people have a lot of money, they may start buying all kinds of luxury goods. A luxury car will not cost the same money as before for sure. People will compete to get luxury cars. Less goods, more money, equals inflation again. When there are more people having more money, while at the same time, the Earth is still as big as before, and the amount of goods & services does not increase, it simply means that things will cost more.
Now, if you know that 50% of population investing in real estate, do you think that all these people doing the same thing will all become rich? Let’s forget about individual differences in the execution and quantities of their investing activities for a second. Let’s assume the participants of such activities have about the same money to begin with. If 50% of population all doing the same thing trying to become rich, getting 100% or 200% return on their investment, among all of them, relatively speaking, will not have too much differences in what they own. Since being rich is relative, and when relatively speaking in terms of asset classes, these participants all have the same thing. For certain, they cannot be all rich. Because if they’re all rich, then it will break the definition of being rich as being having relatively more money than other.
This is true for all investing activities. Whether it’s the next hottest IPO, or the next greatest Microsoft. Once enough people buys into it, regardless of whether it was working before or not, the method of generating wealth will simply stop working. If you put this in the context of Efficient Market Hypothesis, any temporary market inefficiency that can be exploited will be exploited very soon as to render such investing method to be no longer useful.
If you assume that money distribution is like a Gaussian bell-shape curve, most people are in the middle, while a few have a lot of money, and a few have very little money. Whenever the participants engage in certain money-related activities, the hidden force of the Market is to redistribute the money back to the same shape of Gaussian curve. So for certain as explained above, if too many people doing the same thing, then the result of such activities will most likely give you a mediocre result: not too good, nor not too bad, just below average (almost like index investing these days). With a below average result, the Market can be best to re-shape the money distribution curve back to Gaussian again. By the same token, if you are doing what no one is doing at all, probably there can be two kinds of results: either very good return, or very bad return for your activities. Make sure that when you’re doing something special, you’re doing the right thing for yourself. The special guy is usually the smart guy or the stupid guy, and seldom the average guy.
Unfortunately, the cruel truth is that not everyone or many people can become rich in money. Because part of the required definition for being rich (in money) is that there are only a few, and not many.
P.S. Let me give you a slight hint to become rich. When you are young and you can afford bigger loss, try to do something that not everyone may do, but select carefully from the million of special things that you can do. Taking a chance with careful selection of task may give you an outsized return.