On this episode of The Impatient Investor, Andrew discusses why the latest boost in the stock market doesn’t make sense, why it’s happening and why it is best to turn away from Wall Street and to invest in private markets. Enjoy!
“The GDP is still way down, and unemployment is still high. That is why I call the stock market a zombie, it’s alive for the wrong reasons.”
You’re probably asking yourself why I’m calling the stock market a zombie. After all the stock market has made an amazing comeback after shedding nearly a third of its value in March due to COVID-19. We should all be celebrating, right? Not exactly.
I’ll tell you why the stock market is a zombie. It’s a zombie because it came back to life unnaturally. It’s a dead man walking because there are no underlying economic reasons for it to be trading this high. Let me explain why.
In all previous stock market crashes and recovery cycles, recovery was often slow and there was always positive underlying economic fundamentals fueling the recovery. It took eight years for the Dow to recover to previous levels after the .com bubble burst in 2000. Following the crash of 2008, it took about six years for prices to recover to the previous all-time high. What about the latest crash and recovery cycle? After hitting an all-time high in February of this year, the Dow Jones nearly reached that Mark in August, fueled by a surgeon, retail investor trading.
This latest recovery took a mere six months to return to the market’s previous highs after crashing in March. Something’s not right. This latest recovery is not supported by strong underlying fundamentals like past recoveries. The GDP is still way down, and unemployment is still high. That is why I call the stock market a zombie, it’s alive for the wrong reasons.
Here’s an area of concern. The Dow has historically traded at an average price per earnings, PE ratio of 15. The PE ratio measures the average of the Dow company stock prices compared to their earnings. A high ratio indicates stock prices are out of touch with underlying economic fundamentals. The Dow is currently trading at a PE ratio near 28, nearly double the historic average. Stocks are clearly overvalued and bound to come crashing down to earth.
I’m not the only one warning investors about the stock market. Many experts are also sounding the alarm. So-called bond King Jeffrey Gundlach, CEO of double line capital recently had this to say about the surge in the stock market. “This is a terrible sign for the condition of the market. For anybody who’s experienced a significant number of cycles, which I’ve definitely experienced” Gundlach said.
In another sign that you should avoid the stock market, Warren Buffet recently made headlines for sidelining billions in cash after liquidating massive amounts of his equity positions through his company, Berkshire Hathaway. So, what the stock market surge, if the underlying economics don’t support it? The simplest explanation, noobs.
In video game speak noobs are inexperienced players who thrust themselves into online game sessions. Most experienced players are annoyed by noobs because they break up the flow and predictability of gameplay that most players are accustomed to. The same exact phenomenon is happening in the stock market. Stimulus checks and social distancing have created a massive new breed of noob investors. The pandemic fueled a massive surge in new accounts to online brokers, as noobs dove in seeking to get a piece of the potential market comeback.
Charles Schwab, TD Ameritrade, E-Trade and interactive brokers all saw record new signups while millennial favored Robinhood, which offers free trading saw a historic 3 million new accounts in the first four months of 2020. The influx of inexperienced day traders has resulted in a greater volatility and unpredictability in the markets. Experienced traders are annoyed by the onslaught of these noobs. The noobs are undisciplined, buying and selling stocks on a whim. They’re also jittery and ignore any economic principles or analysis. That’s why experts are raising the red flag on their trade behavior. As they pick up some of the riskiest stocks on the market, including bankrupted penny stocks.
Like in video games, these noobs are bound to get hurt. I’ve been sounding the alarms about Wall Street for years and have avoided its volatility. But the level of volatility in the markets this year from inexperienced traders is at levels I’ve never experienced before. I have a duty to warn the public as I have no doubts that the market is bound for a huge correction and lives will be ruined as trillions will be wiped out in short order.
Smart investors avoid Wall Street volatility, and the noob effect by investing behind a walled garden, where certain experience in income and net worth levels are required to be even considered for entry. That’s why savvy investors prefer private markets. With long lockup periods of a minimum of five to seven years. Private investments impose discipline. It prevents noobs from buying and liquidating at will. This is not to say that private investments are shut off to new investors. It’s just that these investors are different than the new investors invading the public markets. These investors usually already have been successful in other fields and also understand the consequences of illiquidity of their private investments and are still willing to commit their capital.
In the private markets, smart investors know that the alternative assets they invest in are still guided by basic economic rules. Unlike the stock market where any semblance of economic has been completely upended. They know that with private investments, as long as they stick to certain fundamentals, they can’t go wrong. That’s why they leave nothing to chance by concentrating on assets. In proven markets, with proven demand, that cashflow and appreciate that are tangible and have a low correlation to the broader markets and are shielded from inflation. Why trust your investing fortunes to noobs, run from the stock market zombie, seek shelter in the walled garden of the private markets.