Very smart investment gurus tend to agree: you cannot time the markets. That is, you almost never know where the top of a market is and it is nigh on impossible to pick a bottom.
Some go further and pronounce that picking individual stock or commodity is a fool’s errant and that simply “buying the index” is about the best you can do.
I tend to agree with this view except in the most extreme circumstances and then in only a few of those circumstances. For example, I don’t think the crash of 2008/2009 could have been predicted by any one who was not intimately familiar with the shitshow that was securitized mortgage lending and its implications for over leveraged banks. And, even per “The Big Short”, had you known all of that, the consequences for the overall market of what was essentially a banking crisis were far from predictable.
On the other hand, the bursting of the dot com bubble in March of 2000 was a matter of when not if and it was pretty obvious for at least a year before it finally burst. For a real bubble to form you need novice investors putting value on companies which have no earnings and you need people trading shares for the sake of trading. In the run up to the 2000 crash “day traders” were the new financial heros and people were raising a billion dollars to sell reams of copy paper or fifty pound bags of dog food online.
In the winter of 1928 Joe Kennedy, father of JFK and major stock market player, stopped to get his shoes shined. The shoeshine boy leaned in and said, “Buy Hindenburg”. Kennedy began unwinding his positions saying, “You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”
I had a similar experience in late 1999 when a friend took out a mortgage on her condo to buy shares in the billion dollar online copy paper empire. She had a perfectly good job in retail garden supplies. Remembering Kennedy, I advised another friend that her Nortel was looking a bit overbought. As it happened she sold quite near the peak.
The 2020 equivalent of the shoeshine boy is the perfect storm is the free trading platform, robinhood.com. This is a nicely designed site where you can trade shares on your computer or phone. It has become very, very popular with younger, new investors. My late 1990’s day trading pals would have killed for this sort of interface and no brokers fees. It has spawned a whole host of reddit chats, twitter streams and countless YouTube videos on the excitement of swing trading. (One fun spot to watch Robinhood is the https://robintrack.net/leaderboard which shows which stocks the people on Robinhood are buying. It is a bit slow and buggy but a great front row seat.)
What is striking about the robinhood.com world is that it revolves around trading rather than any sort of “investing”. You hop into APPL in the morning, see if you can make a couple of bucks by noon and move onto the next thing. And Apple is a real, solvent, company.
Robinhood has been in the news recently because the herd has charged into the shares of a number of companies which are either in or near bankruptcy. Hertz Rent-a-Car dropped from $20 to $0.50 in three months as the market realized that with no travelers there would be no car rentals. Interestingly, we learn from robintrack.net that at $20 there were a little over 1000 users holding, as Hertz crashed the Robinhood users piled in, at $0.55 there were 44,000 and there are now 158,000. And many will have made money, lots of money, trading the gyrating price from $0.50 to back up to $5.00.
In the run up to the crash of October 1929, long after Joe Kennedy had pulled his money from the market, retail traders were coining it trading the “swings” on margin accounts. It didn’t matter what the company actually did, it was going up. The same “irrational exuberance” was a big feature in the dot com bubble.
Justifying the current trading frenzy are all sorts of snappy phrases, “You can’t fight the Fed” is a favourite. “V” shaped recovery is another. There is a sense that age of the dinosaurs, the Warren Buffets and the Carl Ichans is over, that fresh, app driven approaches to investing, and more importantly, trading have been unleashed.
The election and Presidency of Donald Trump created a sense that we had all stepped into an unanticipated world. At the best of times, Trump is unpredictable and the reactions to Trump are off the scale of normal political response. Then COVID and the huge economic uncertainty it has unleashed came crashing onto the stage. Then the George Floyd convulsion layered on another coat of unreality. In fact, surreality.
Day trading surreality seems entirely crazy but it is also a huge tell. Rail traffic has crashed but rails stocks are up, the US is officially in recession but the NASDAQ hit an all time high on Monday, all measures of the real economy are cratering but the stock markets are flying.
The thing about surrealism is that it depends on reality remaining fixed for its often intoxicating effects. Dali’s melting clocks are striking because they do not conform to how we know real clocks look and behave. Stepping away from a surrealist experience there is a snap back to reality. Sometimes you see that reality differently, but it is there nonetheless.
The Robinhood day trading, options fueled, herd investing suggests very strongly that a harsh, perhaps very harsh, snap back is pending. What triggers that snap back is unknown (and therefore impossible to time). It could be as simple a the closure of a bankrupt commercial mortgage fund or the end of banks mortgage deferrals. Whatever it is will be enough for retail investors to start liquidating their positions.
The lessons of the 1929 crash and the 2000 dot com bust were simple – get out early and be in no hurry to get back in. Right now the dinosaurs like Buffet and Ichan are sitting on stacks of cash. Just like Joe Kennedy was when Wall Street swan dived in October 1929. They got that cash by selling their shares to shoeshine boys and the bright lights at Robinhood.