Thoughts from June 19, 2020

Why I am still a bear – Part 1

Everywhere I turn, the bears seem to be running for the hills.  There are fewer and fewer of us.  It reminds me of February.  Granted, there are a number of very famous investors that have fired warning shots lately regarding the stock market (Buffett, Druckenmiller, Marks, and Grantham to name a few).  It is important to note that none of these investing geniuses are actually bearish.  They have simply backed off their bullish outlook.

The investor and advisor surveys are also a bit misleading.  In the latest AAII survey (, the bears outweigh the bulls.  The recent advisor surveys show a neutral stance.  So maybe there are other bears out there?  Surveys are nice, but only have so much clout.  They are more about what people say than what they actually do.  What we do know is that most investors remain invested.  Retail investors are all the rage with day-trading, and all the data coming out of the last 2 months showed most 401k investors held on during the Feb-March correction.

So why am I not a bull now?  Can’t I see that the Fed is the backstop to the market and I shouldn’t fight the Fed?

I come back to a few guiding principles that I learned the hard way (in 2001-03 and 2007-09):

  • Every generation believes at some point that stock only ever go up, and that financial instability should not affect them
  • Earnings matter:  Price/Earnings ratios mean revert over long period of time, whether there is Fed intervention or not
  • Managing money and trading stocks are not the same thing and require completely different skill sets
  • Market cycles last longer both to the upside and downside than basically anyone thinks possible

I want to tackle each of these over the next four days, so here we go.

#1 – Generational Ignorance

Do you remember when you were 25?  Seems like yesterday to me, but here we are 20 years later with a wife, 4 kids, a major career change, a failed startup company and a whole heckuva lot of experience under my belt.  I hope to have learned a few things.

But when I was 25, I was invincible and entitled, but knew very little of how things worked.  Did that stop me from day-trading back then?  No.  At the time, we had the Internet bubble/bust.  EVERYONE thought Internet/technology companies were worth gold – even those that didn’t have a business plan.  Sound familiar?  Maybe this time is different.

But it’s not.  You don’t have to look very deep into history to see similar behavior.  Late 1920s – early 1930s, late 1950s, early 1970s, late 1990s-2003, 2007-2009 – each time, there is a belief that “easy” money can be had “risk-free” and that certain companies have the advantage of being on the cutting-edge of technology and therefore “can’t lose.”

And now here we are.  I am hearing the chatter in the grocery stores about day-trading. High schoolers are posting their trading “winners” all over the Internet. There was even a twitter post about a 10-year old’s friend group giving up video games and turning to day-trading. Even Wall Street analysts give technology companies more “value” just because.  Look at the 800lb gorilla known as Amazon.  Despite rarely making a profit, it’s value is $1.3T – a value greater than the GDP of Mexico, and they have a P/E ratio of 128.  Now, I like Amazon.  I think they are a valuable company, but is this maybe a little out of hand?  The idea that they can only ever go up and will continue to grow at a break-neck speed is naive.

The day-trading craze, partially a result of COVID-19 forcing everyone to stay home on top of eliminating sports, gambling and many other avenues where folks like to spend a few bucks, is getting tragic.  Just this week, a young-20s Robinhood “trader” took his own life after seeing his account had a -$700k balance.  I don’t know the details of how that can even happen, but it is incredibly sad and one more indication that the the retail frenzy is wild.  Robinhood, TD Ameritrade, E*Trade and Charles Schwab all reported a combined 5 million NEW retail trading accounts between March & April.  We even have a new celebrity behind day-trading with Dave Portnoy pitching mostly junk stocks since the stock market lows in March with the advice of “stocks only go up, up, up!”.

This time is indeed different…the scale is different, the ideas different, the technology different, the recession/pandemic background is different, but the behavior is the same. And the behavior is what matters.

Which leads me to valuations & earnings…

Leave a Reply

Your email address will not be published. Required fields are marked *