The $100 billion question that SpaceX raised

The original version of this article first appeared in The Business Times.

When SpaceX listed on the Nasdaq this month, individual investors were reported to have submitted more than US$100 billion in orders for a slice of the largest IPO in history. Demand from retail investors ran so far ahead that most of them likely came away with a fraction of what they asked for, or nothing at all.

The scenes were familiar—the media's breathless coverage, the desire to own a piece of the future, and the fear of missing out were an irresistible combination.

I want to be careful here because this is not a column about whether SpaceX is a good company. The analysts are still arguing over that one, and I suspect a clean answer is a long way off. Only time will tell. The more revealing question—the one that actually has a useful answer—is what this level of enthusiasm tells us about how people invest. An allocation to a single company, at a record valuation, based on a story everyone feels they already understand—but do they?

Beyond the fundamentals, if you strip away the rockets and the market fireworks, what you are left with is the most human of instincts: the need to act, to participate, to be part of something extraordinary. That instinct is worth examining, because it is the same instinct that has quietly been costing investors a lot of money, time and again.

We are wired to "do something"

Dimensional Fund Advisors made a point at a recent Endowus event that stuck with me. Human beings are built for agency. In almost every domain of life, effort and outcome are correlated—the harder and smarter you work, the better the result tends to be. Study more, perform better. Train harder, run faster. Build a better product, win more customers. It is the logic that governs a career, a business, a craft.

Investing systematically violates that rule, and we find it almost impossible to accept. The successful entrepreneur who built a company by out-working everyone looks at the market and assumes the same equation applies—that attention, conviction and effort will be rewarded in proportion.

That same entrepreneur would be far better served building another company than trying to out-trade firms with hundreds of analysts and supercomputers pointed at exactly the problem she is attempting to solve on her own, in her spare time. Her edge is enormous in one arena and close to zero in the other.

The SpaceX frenzy portrays that fallacy at an industrial scale. Millions of individuals placing orders on a single company, driven by a seemingly irresistible narrative with—for most—no strategy, no view on portfolio fit, and little consideration of the price and valuation being paid relative to any reasonable expectation of future return. The action feels like investing. Much of the time, it is closer to participation, or dare we say, speculation.

What the evidence actually says

The data on investors' active participation is not encouraging, and it has been remarkably consistent for fifty years—including for financial professionals who do this full time. Ever since Michael Jensen's work in the early 1970s, which examined active managers going back to the 1920s, the evidence has pointed stubbornly in one direction. Over the last two decades in the US market, where the fund data is comprehensive and we can correct for survivorship bias, fewer than one in five active funds has beaten its benchmark.

It is worth reminding that this is the record of trained professionals with research teams, direct access to management, sophisticated analytical tools, and decades of experience. The arithmetic for an individual investor—facing higher transaction costs, far less information, and a much stronger emotional response to short-term volatility—is proven to be brutally worse.

None of this is an argument against ever owning SpaceX (or any other single stock). It is an argument for being honest with yourself about why you are buying it, and whether the energy and capital you are pouring into the decision translate into an edge. For most of us, that edge is a comfortable round number: zero.

The most expensive instinct in your portfolio

There is a deeper irony here, and it connects to something I wrote last month about the futility of calling market tops—most of the time, these calls are incorrect, even when they're made by professionals and academics. The investor who is eager to act is typically doing so on a prediction—that this company, this price, this moment is the "one." But prediction is the part of investing that humans are demonstrably worse at. The economist Paul Samuelson joked that economists had forecast nine of the last five recessions; in recent form, the ratio has only gotten worse. The instinct to do something, right now, on a single name, is prediction wearing the costume of diligence.

And the cost is rarely the dramatic blow-up. More often, it is the quiet erosion: the concentrated bet that does not pay, the great business bought at a price that already discounted greatness, the long-term plan abandoned for the trade that felt urgent. For many investors, the reckoning does not come in the form of a total loss of value—stocks rarely go to zero. But the money allocated that yields subpar returns could have been invested elsewhere, in the context of one's goals and long-term strategy. Excitement, it turns out, is not a return. It is the fee you pay for the feeling of being in the game.

What disciplined investors actually do

Here is the part that may sound anticlimactic but happens to be true. Some of the most disciplined investors I know check their own personal portfolio balance roughly once a year. Rather than laziness, it is a deliberate decision about where to spend the scarcest and arguably most precious resources we have: attention and time. They point their energy at the things they can genuinely influence—earning, saving, the rate at which they put capital to work, their behaviour in a downturn—and they refuse to spend it on the things they cannot. In addition to potentially harnessing better returns by doing less, they enjoy peace of mind—which is a priceless by-product.

For the overwhelming majority of investors, the goal should never be to get an allocation in the hottest IPO of the decade or to out-trade a multi-strategy hedge fund. It should be to build wealth steadily, across a horizon measured in decades, without making catastrophic and irreversible errors along the way.

A science of restrained behaviour and delayed gratification

The tools for that are unglamorous and well understood: broad diversification, so that no single story can sink you; deliberate exposure to the systematic drivers of long-run return—companies that are smaller, cheaper and more profitable than the market average; costs kept low, because they compound against you exactly as returns compound for you; and a process you can hold to even when the next "must buy" opportunity comes along, as it surely will.

None of that will ever trend. A diversified portfolio, rebalanced on a schedule, advised by professionals, is not as good a dinner story as SPCX doing 10x. But the entire history of this column comes back to the same uncomfortable but liberating idea: the behaviour that feels like investing and the behaviour that builds wealth are often opposites.

So by all means, do admire the rockets and the fireworks. Marvel at the ambition, the engineering, the sheer human audacity of it all. But just be honest about why you are buying. The $100 billion question was never really about SpaceX. It was about us—whether we can tell the difference between participating in something extraordinary and investing in our own future. The science of wealth has always been, at its core, a science of restrained behaviour and delayed gratification.