EP 47 | YOUNG & DUMB TRADERS WRECKING WALL STREET

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Hosted by
ANDREW LANOIE

On this episode of The Impatient Investor, Andrew talks about the recent headlines and why it is smart to avoid investing money in the stock market. Andrew encouraged you to instead invest in long-term, illiquid investments like affordable housing.

“The chorus of experts warning investors to stay away from the stock market is deafening.”

FULL TRANSCRIPTION:

Hey everyone, I’m sure you’ve seen the headlines about the GameStop stock shortage and the debacle it caused. And it made me think of this when we were young and dumb. We thought our reckless actions existed in a vacuum. Oh, shucks, we’re not hurting anyone. You remember saying to your parents, in defense of your 16-year-old self and your compulsive behavior, it was all fun and games until that fateful night, acting on a bet with your friends you were pressured to drive with your headlights off down a country road. Bad idea. Old Man Johnson and his tractor ended up paying the price for your stupidity. You put the farmer and his tractor out of commission for two solid weeks, young and dumb? Absolutely, harmless? Absolutely not. Your action sent the farmer to the hospital, his tractor to the garage, and put Mr. Johnson’s harvest schedule in jeopardy.

We all did young and dumb things like my farmer Johnson hypothetical. But there is a class of people who have never grown up. And there’s a new breed of the young and dumb who are wreaking havoc, not on country roads, but Wall Street, and this is how they’re doing it. Since the start of the COVID-19 19 pandemic Wall Street has seen a tsunami of first-time traders, most of them millennials, snatching up stocks left and right without the discipline in any common sense.

Millennials not ones to shy from free stuff like free room and board in their parents basement opened up new accounts by the millions on the commission free Robin Hood trading platform. With the $1200 stimulus checks burning a hole in their pockets, these first-time traders decided to try their hands at the wall street casino. Cole Smith, president of Smith Capital Management in an NBC interview last week described how young dumb investors have created a total nightmare on Wall Street through their insatiable appetite for risk-taking. They’re picking up penny stocks rolling the dice on high-risk options and even investing in companies that have declared for bankruptcy.

The result of all the speculating from young dumb traders is they’re paying an unrealistic premium for stocks. Microsoft is a wonderful company Smith told CNBC, but at 40 times earnings, there is a 0% chance of that producing wealth for someone over the next 10 years that will match their needs. What is Smith getting at? He’s saying that Microsoft is overvalued, the whole stock market is overvalued.

Anyone looking to make their money from dividends or appreciation will be sorely disappointed when they’re paying 40 times earnings like when they buy Microsoft stock. The price/earnings PE ratio is a reliable barometer of the market valuation of an individual stock or the stock market as a whole. On the whole, the PE ratio measures the average of the Dow company stock prices compared to their earnings, a price disproportionately higher than earnings indicates overvaluation, the Dow has historically traded at a PE ratio of 15. And by contrast, the Dow is currently trading at a PE ratio near 28, nearly double the historic average. And with stocks like Microsoft at 40 times earnings, the only way is down.

So what’s the danger of young and dumb traders running rampant on Wall Street? When it turns it could get ugly. According to sped who said that despite the accommodative monetary policy, the Federal Reserve ultimately can’t save a stock market, especially one that’s this top-heavy. One thing is clear, just like farmer Johnson who suffered the consequences of the actions of the young and dumb behind the wheel of a car, many baby boomers and other investors are going to be damaged from the actions of young and dumb traders when their 401K’s and portfolios coming crashing to the ground when the stock prices finally match reality.

The chorus of experts warning investors to stay away from the stock market is deafening. It’s too volatile and too dangerous are their reasons for staying away. Do you know who else is staying away? Warren Buffett. A recent report revealed Warren Buffett had liquidated billions in stocks and sidelining cash. A huge stock market correction is not a question of if but when at this point. Get out while you can. But where do you go? Follow the smart money. Smart investors are doubling down on long term investments insulated from wall street. Smart investors preferred to invest behind a walled garden of the private markets where the price of entry and accredited investor qualification requirements prevent young dumb investors from wreaking havoc.

Unlike stocks, long term investments are illiquid, investors can’t buy and sell these investments on a whim. That’s because with private market investment, investors are preventing from harming themselves by imposing long lockup periods to prevent the type of massive sell off seen on Wall Street in recent months that will be seen shortly.

Find out why smart investors run to recession-proof assets like affordable housing that thrive in a downturn and find out why they choose to invest in private markets with likeminded investors, not only to avoid volatility, but also to invest in assets with returns that accurately reflect underlying economic fundamentals and not the whims of the masses. If you’re looking to learn more go to www.stoptradinghours.com.

 

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Episode 47