If COVID Couldn’t Keep the Stock Market Down Will?
So basically the markets took an absolute bath for a month or two then roared back to life. People have been saying we’re “toppish” for years now, the pandemic made a brief dent and we’re back to ATHs again. Maybe the trauma of 2008 is so fresh that we all expect every recession to be the next Great Recession, but it’s crazy to see people saying markets are toppish with the pandemic still raging. I guess my question is just do you think the pandemic WAS the recession or was it a blip in the expansion phase with a longer recession and lower bottom around the corner? Or has the stock market broken with the broader economy completely due to retail traders, stimulus checks, printing money, etc.?
I'd love to hear everyone else's thoughts, but I'm personally in the "Chicken Little" boat in that I think the sky is going to start falling.
Personally, I believe that the advent of Robinhood and other trends like WSB are creating a fundamental gap between reality and imagination. Most public companies are overvalued right now, especially the biggest ones (Tesla made more money on bitcoin this month than they made in net income during all of last year, yet it's one of the highest valued companies on the S&P500?).
Maybe it's a trend that will pass naturally. Maybe there will be increased regulation to stop the inflation of prices, who knows. But either way, we're DEFINITELY experiencing a lot of signs of a top. Know how many retail traders I've seen write LinkedIn articles about how "this isn't a bubble - we're just changing the way that conventional finance works"? Way too freaking many for this to NOT be a top. The bubbles always pop in the same way - we hit euphoria because "stonks only go up" and then the market crashes.
Financial textbooks aren't going to be rewritten about the way that the markets work. The SPAC bubble will pop, cryptos will plunge when people realize that dogecoin is literally backed by the idea that someone else will purchase it for a higher price down the line, retail investors will get burned for following trends (like most did with GME and AMC), etc. Then everything else will crash as people become pessimistic.
Again, just my $0.02 but I think we're hitting a top.
I only want to talk about your paragraph about the specific bubbles being popped and mentioning that DogeCoin is only backed by what someone will pay for it. All non-dividend paying stocks operate the exact same way. If you are not receiving cash from the asset, then you count on appreciation as it’s source of return. Appreciation will only provide a return a return if you find someone who is willing to buy at the price that you are selling.
“Value” Investing is based on the idea of information inefficiencies in the market. Relying on fundamentals does not lead to superior returns anymore. You could say “Well growth stocks have performed well”. Kinda. I can name a few companies and stocks with outstanding growth potential but because it has not caught the public eye and it is not yet “perceived” to have growth prospects, it has performed poorly in the markets. You need attention and a perception of growth from other investors in order to actually experience appreciation.
You could say areas of the market are overvalued, but the current price of the asset reflects the accurate market price because that is what the participants believe the asset to be worth. Therefore, you need a catalyst or change in information to change the market price because there needs to a change of perception from the participants. The market isn’t going to suddenly just crash because a few fundamental investors believe the asset is “overvalued” if people are still willing to trade at those prices.
All non-dividend paying stocks operate under the assumption that they will eventually end up paying dividends. Otherwise, even the most basic financial models (i.e. the dividend discount model) wouldn't work whatsoever. So to say that they operate the exact same way is totally wrong - in fact, the value proposition behind cryptocurrencies is that they will be used as a currency. If anything, a crypto is supposed to be valued like the US dollar - there's still a supply and demand, but the vast majority of people who purchase dollars or yen or whatever are doing it because they need a way to transact, not because they're trying to make money. It's got value as a medium of exchange, nothing else, so it's COMPLETELY different from equities. Even professionals who trade in foreign exchange markets don't purchase a dollar because they think it's going to pay dividends later - they do it because they think that considerations like geopolitical tensions will lead to the dollar being more valuable compared to other currencies.
The two ways for a company to repay shareholders is through 1. dividends and 2. share repurchases. If a company never plans on doing either then their stock is essentially worthless - it's just an imaginary value according to all real financial theory.
And yes, value investing is based on the idea that there are information inefficiencies. This idea that you've presented about companies with outstanding growth potential not catching the public eye is the entire basis behind conventional value investing - you purchase shares in companies that are trading lower than their intrinsic value because they WILL one day return to their intrinsic value, at which point they will hopefully outperform the market. And actually, the REAL reason why you do this is not specifically because you think they will outperform the market by 1000%, but because you want the downside protection if the company goes under (in other words, a margin of safety as Seth Klarman and Warren Buffett put it). If these stocks haven't appreciated as much as they deserve to, it's likely because they aren't covered by many researchers yet, which is actually a blessing in disguise, because they're undervalued and you're almost guaranteed a return barring any unusual circumstances that drop the intrinsic value of the company.
That’s my point. I don’t think those models work. Nobody uses them for good reason because it wouldn’t be beneficial in today’s market. Big difference between theory and practice at play here.
I will give you the point for Crypto. Although I’d argue that only half of the investors are investing for the belief that it will replace the USD, at least half are investing for appreciation.
Lastly, regarding your last point about following the book’s ideas of investing in “undervalued” companies, that idea used to work back when there were informational inefficiencies in the market. By the way, the reason those companies finally realize those returns is because of a catalyst. You don’t just hope that it moves in the direction you believe. You have to find a reason why it will appreciate otherwise your timing will be off and when it comes to investing, being wrong and the timing being off is the exact same thing. If you try to pitch a stock to a PM without proving that there will be a catalyst to experience superior returns within a specific time range, you will be shot down very quickly. It takes other market participants to share your view/change their perception/whatever the case may be in order to realize those gains.
Omg take this back to your caves you dumb bears. SOGU
Stonks Only Go Up
Biden is going to pass even more stimulus. This bubble will not die until 2022 maybe even 2023.
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