The stock market rebound of the past three months has made Warren Buffett look like a know-nothing and know-nothings look like geniuses.
The greatest investor of all time has sat on US$137-billion in cash and missed out on the massive surge in share prices since late March. Meanwhile, day traders betting on a quick bounce back from the pandemic have enjoyed double-digit gains.
You can interpret this reversal of fortune as a generational shift, a sign that Mr. Buffett is over the hill. Maybe people such as Dave Portnoy, the newly famous F-bombing guru of the “stocks are easy” set, are the new voice of market wisdom.
But, really? The sudden rise of day trading seems to be more about the U.S. Federal Reserve than about a changing of the guard.
Mr. Buffett has made some bum deals in recent years. However, the 89-year-old billionaire remains reliably brilliant, judging from his appearances at annual meetings of his flagship Berkshire Hathaway Inc.
Meanwhile, Mr. Portnoy, founder of Barstool Sports, a pop-culture website, has soared to fame by bellowing “stocks only go up” to his online audience and Twitter followers. He is fun in a frat house sort of way, but several subway stops short of brilliant.
The one thing that Mr. Portnoy and his fellow day traders got spectacularly right – in many cases, without knowing why – was the unprecedented speed and overwhelming power with which the Fed and other central banks would rush to support the pandemic economy.
Central bankers don’t seem fazed by the possibility that their actions may be fuelling mania in some corners of the market. Fed chair Jerome Powell said a week ago that the Fed wasn’t going to be deterred from pursuing its central mission by worries over surging asset prices.
“The concept that we would hold back because we think asset prices were too high … what would happen to the people we’re supposed to be serving?” he said.
The implication is that the immediate problem of supporting the broader economy takes precedence over everything else. Stock market bubbles can be dealt with at a more convenient time.
All things considered, this makes sense. But it also suggests that investors should be wary of how the speculative fervour will unwind.
The most incontrovertible evidence that parts of the market are overheated is the news that Hertz Global Holdings Inc. will be selling up to US$500-million of shares – despite the company being in the middle of bankruptcy proceedings that will nearly certainly wipe out its shareholders.
Who would load up on stock in a bankrupt company? Maybe the same folks who are eagerly bidding up stocks in other troubled industries on the theory that massive stimulus will lead to a better-than-expected economic recovery. Shares in airlines, cruise lines and retailers have all enjoyed big bounces since late March.
This dash to trash has only a loose relationship with sound investing. For proof of that, consider the “garbage portfolio” constructed by analysts at Man Group PLC, the British hedge-fund operator. It represents about a thousand U.S. companies that face serious doubts about their credit quality. It is, to put it bluntly, a group of companies selected for their awfulness.
Since the start of April, this garbage portfolio has trounced the broad U.S. market. Not only do investors not seem to care about strained balance sheets, they seem to be betting that troubled companies are the place to be during the economic recovery because reality will turn out better than most people expect.
“Speculative excesses such as this do give us some pause about the durability of the recovery,” the Man Group analysts say with notable understatement. “There are some movements in price which seen entirely divorced from fundamentals.”
Investors may want to ponder those words. For now, share prices reflect a growing belief that the recovery will be better than was feared just a few weeks ago. But with virus counts still on the rise in many parts of the world and the future of many sectors still in doubt, uncertainty reigns supreme.
Despite what Mr. Portnoy says, stocks go down as well as up. Mr. Buffett may be having his struggles at the moment, but investors should be willing to at least contemplate the possibility that his caution is warranted.
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