Amid a zero-gravity market landscape lacking sense or precedent, retail stock traders are more emboldened than ever. Inexperienced market participants are piling into richly valued names and, in the short term at least, being rewarded for it.
They’re also being encouraged for this behavior. On the popular social-media forum Reddit, where people call stocks “stonks,” traders pat each other on the back for engaging in highly speculative market bets. Owning shares of “bankruptcy stocks” like Hertz, J. C. Penney, and Whiting Petroleum is apparently fashionable nowadays.
Around 19% of U.S. firms are “zombie companies,” meaning that their “debt servicing costs are higher than their profits but are kept alive by relentless borrowing.” It’s basically a Walking Dead economy, but that isn’t stopping the retail crowds from snapping up shares of anything and everything they can get their hands on.
When Tesla stock shares rocketed up to $900 apiece, even founder Elon Musk admitted that the price was too high. Within a matter of weeks, Tesla stock was trading over $1,000. Was it a ruse on Musk’s part, a bit of reverse psychology, a dare to push the share price higher? If so, then it worked beautifully and disturbingly.
The advent of low-fee and no-fee trading has democratized the stock market to a certain extent, but it’s also brought a large number of untrained participants into the fold – some with little if any regard for time-tested wisdom or traditional valuation metrics like the price-to-earnings ratio.
These trading newcomers’ complacency is reinforced by a market that’s conditioned them to buy each and every dip. The evening of June 22 provides a perfect example as White House trade adviser Peter Navarro declared the trade deal with China “over.” The S&P 500 futures fell sharply, but I’m sure you can guess what happened next:
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As you can see, traders won’t even let the market stay down for more than a few minutes. The assumption that the dip will be bought has become a self-fulfilling prophecy. People don’t just believe that the market won’t go down; they believe that it can’t go down.
Are they right? Barstool Sports founder David Portnoy seems to believe so. One of his recent tweets provided traders with two apparently ironclad rules: “1. Stocks only go up 2. When in doubt whether to buy or sell see Rule #1.”
We can probably assume that Portnoy is satirizing an old Warren Buffett quip which advises, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Buffett’s prioritizing of capital preservation, while timeless and perennial in value, simply isn’t fashionable in 2020.
In case you need further evidence of Portnoy’s derision towards the Oracle of Omaha, check out his lightning-rod tweet boasting, “I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.” Bear in mind that this is a man who lost $647,000 in a matter of weeks after declaring himself a “full-time day trader.”
Market historians might be reminded of Joseph Kennedy’s anecdote from 1929, not long before the worst stock-market crash in history: “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish… My cook had a brokerage account and followed the ticker closely.”
That tale resonates today; all you need to do is replace the shoeshine boy with an Uber driver and the analogy to 2020 is nearly complete. On the other hand, at least in 1929 the companies being traded were blue-chips like Ford rather than zombies like Hertz, and people weren’t loading up on speculative trading instruments like call options.
The other side of the argument would be that “this time it’s different” (famous last words) because the perma-bulls have an immovable and impenetrable backstop in the form of central-bank intervention. As long as they’re printing money, the value of the dollar should go down and the value of stocks should continue to go up.
There may be merit to that argument, but few retail investors have a Plan B in case their thesis is wrong. Neophyte traders haven’t traded through a sustained bear market, and they don’t know how jarring or spirit-breaking the experience can be for the unprepared.
It’s unfortunate that they may have to lose their market winnings and much more. Hopefully Warren Buffett’s principles will come back into fashion before a generation of traders learns the hard way that gravity is law, not a suggestion.
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