Despite 40-plus years of trading and investing, it seems I learn something new every day. That’s why I love the business. No day is the same. Also, the market — essentially — tries to predict the future, so it’s always interesting to see if investors guess (as that’s what it usually is) rightly or wrongly.
But despite getting long in the tooth, every market cycle still reveals many things I just don’t really get. Whether it is this bubble or that bubble, investors’ inane focus on short-term results, or some other issue of the day, some of it leaves me shaking my head. Investing should not be that hard: Pick some great companies and wait 15 years. Let’s look at a few market head shakers these days.
There are more than 5,000 cryptocurrencies. Really? Last I looked, there were 3,000. How many can you name? How does one even give a name to so many? Heck, there are less than 250 countries in the world, and not all of them bother to even have their own currency. Sure, there are a few popular cryptos beyond Bitcoin and Dogecoin. But who is trading these fringe coins after the first, say, 1,000 different offerings? (Just kidding, we don’t know anyone trading beyond the big five). As a store of value, they leave much to be desired if a single billionaire’s tweet can crash the market. We are not sure why anyone is buying most of these.
Analyst coverage (or lack thereof)
How come some stocks get little or no analyst coverage? Yes, I understand analyst coverage on a company is often (always?) associated with the possibility of investment banking fees. That’s why some dopey $100-million market cap company might have 12 analysts following it, while one of the big companies you own gets almost no love from the Street. But, surely, at some point, performance, size and execution should matter — even just a bit.
Look at Icahn Enterprises LP, a US$150-billion company with a yield of 13 per cent and a year-to-date return of 15 per cent. The stock has doubled in the past decade, but the number of analysts who follow it? One. Or take Amerco, a US$11-billion company with a one-year return of 82 per cent (one analyst) or Enstar Group Ltd., a US$5-billion company with a one-year return of 75 per cent (no analysts). Investors forget that ignored companies can often be better investments, since they are more inefficiently priced.
Buying crazy stocks
Who really buys these things? I have been around long enough to know that a trader can make money on anything if it is priced right. But I always wonder about the thought process of investors who like to buy fringe companies or shares of companies that have already proven to be problematic. Companies such as Nikola Corp., which rolled a truck down a hill to impress the electric-vehicle crowd, or Luckin Coffee Inc., which reported fraudulent sales and filed for bankruptcy in February, yet still trades millions of shares each week.
Yes, Luckin Coffee is still operating, and the bankruptcy was largely a restructuring move, but how does that conversation go between a broker and an investor? “Yes, Mr. Client, we have bought shares in a small Chinese company that faked sales and filed for bankruptcy, but, don’t worry, we are going to make some money.” Or, “Yes, we know the truck was simply rolling down the hill. But fear not, they are going to get one to work for real one day.” With tens of thousands of stocks one can buy, why trade the risky stuff at all.
Fear of rising interest rates
Why did investors freak out so much about rising interest rates earlier this year? Yes, higher interest rates are not good for companies with debt or for the discounted value of future cash flows. But, as an economics graduate, I also know interest rates almost always rise in an economic recovery. Companies can still nicely grow and stocks can still rise in such an environment. Do investors not want companies to grow in a better economy? Sure, all the free government money has been nice. But wouldn’t it be better if companies earned real profits and grew quickly as the economy roars back?
I was at a cottage during the recent long weekend and found a Time Magazine from 1958. The pages were filled with doom and gloom, because, surprise, there was a big recession that year. If you had read the magazine back then, you would have probably wanted to sell everything. But looking back now, I bet you would have liked to have bought some stocks back then (you’d be loaded).
In a similar vein, I have recently wondered why inflation scares so many investors. It was not that long ago that everyone was worried about deflation . Of the two evils, trust me, an investor wants inflation over deflation. Deflation can be devastating. Inflation, on the other hand, can be (though not always) beneficial for many companies. Inflation reduces purchasing power, but asset inflation helps offset this impact if you are an investor. Worrying about inflation is understandable, but it does not have to be a portfolio killer if you have properly set up your investments (hint: own some metals and gold).
What makes you shake your head in the markets these days?
Peter Hodson, CFA, is founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. Peter is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. ( 5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned).