As if a global pandemic is not enough to worry about, there are troubling signs that the novice investing community is growing and trading, well, like one would expect novices to trade. If this does not remind you of the folks who quit their day jobs in the late 1990’s to become full-time day traders, it should. That did not end well and we have seen similar examples outside of the financial markets since. Remember when every day it seemed like ESPN was airing hours of World Series of Poker (WSOP) coverage from Las Vegas? There were a lot of people who quit their jobs to become professional poker players (I knew one personally) and it is safe to assume that most did not last more than a few months.
The signs in the financial markets have been growing. I wrote about the rapid and unexplainable rally in shares of soda bottler Coca Cola Consolidated (COKE) last May, which some attributed to small investors on Robinhood mistaking it for Cola Cola (KO) stock, which comes with the less obvious ticker symbol.
We are now hearing of grade schoolers who used to spend the bulk of their time playing Fortnite jumping into the Robinhood bandwagon, though it should be hard for minors to open real brokerage accounts (their parents would need to be the custodian for a UGMA account and hand over trading to their kid.
The result is some crazy trading action in low dollar stocks, regardless of underlying company fundamentals. Consider Genius Brands (GNUS) going from 30 cents to nearly $12 in about a month thanks to some turbo-charged press releases.
And then there are the rapid ascents and trading volumes of bankrupt companies, led by Hertz (HTZ), which was so stunned by the trading action in its own stock that it is trying to get permission from the court to sell fresh stock in order to help pay creditors in bankruptcy. The shares still fetch $2 each even though the company’s own disclosures explicitly state that they do not anticipate the equity being worth anything but zero. The company’s $1 strike puts expiring 6 months from now can be had for 65 cents, which is pretty good upside if one takes their risk disclosures seriously. We have seen similar moves in other bankrupt firms (e.g. J.C. Penney has tripled from its low of 11 cents).
With the S&P 500 only down 8% from its peak despite the pandemic, a resurgence of day traders among the novice crowd, and some crazy valuations in the tech-related space (any takers for Zoom Video at 37 times pandemic year revenue? How about 45x for Shopify?), it is hard to make sense of what is going on in the U.S. equity market. Some might try to keep it simple and come to the only logical conclusion; the risk-reward currently being offered by the market is far from overly attractive for the next, say, 3-5 years. Some professionals such as Jeremy Grantham at GMO are taking it even further than that.