The Big Picture

“You’ve got to know when to hold’em, know when to fold’em.” -The Gambler, by Don Schlitz

An iconic song arguably best performed by Kenny Rogers. A chance meeting of a professional gambler on a late night train and the life advice shared. 

Investing and gambling are not the same. However this does not prevent some investors from approaching the financial markets the way one may approach a game of chance. Every market cycle there comes a period where an increasing group of “investors” become rampant speculators with can’t-lose attitudes. This period usually arrives later in the cycle, when investors become complacent, and gains seem assured. While I would not have guessed that the year of COVID would have spawned this environment; it seems market participants just couldn’t help themselves. As has been the case throughout this market cycle, policy is making it very easy for speculators to believe there is little risk in financial markets.

 

At minimum we can find humor. 

For many not finding this environment so entertaining, the frustrations are understandable. We have discussed the disconnect between markets and the economy over the year. This cycle, unlike any before it, seems uniquely situated to ignore certain economic realities. In this particular circumstance, risk may be being fully underwritten by the government.

Have a Plan and a Process!


From the Trenches

“Be fearful when others are fearful and greedy when others are greedy!”

The original was a bit different… From Warren Buffet: “Be fearful when others are greedy and greedy when others are fearful.

For the first time in decades, retail investors, as well as younger/new investors, are flocking to the markets in record numbers. The online broker Robinhood, this generation’s E*TRADE, saw the greatest spike in new accounts. Investor behaviors within financial markets vary widely over the market cycle. The most recent behavior we are seeing is herding!

“Robinhood turns investing into gambling!” –Medium

“They make it so easy for people that don’t know anything about stocks. Then you go there and you start to lose money.” – Market Watch

“I think my husband is gambling away our future on Robinhood.” 

– Tampa Bay Times

So is it investing, or is it gambling?  There is a clear difference between the two. One is absolutely more fun than the other, I suppose only when winning! One is much more perilous than the other. In reality, the two could not be more opposite. The gambler is looking for wins, the investor is looking for returns. The gambler is looking for quick satisfaction, the investor long term results. Maybe most importantly, the vast majority of gamblers end up with nothing! The investor who respects risk rarely ends up with empty pockets.

Bottom Line: Does this behavior remind older investors of another time of rampant speculation… never experienced for the younger generation, not so long ago for the “old guys”.


The Weeds

“I don’t want to be the old guy telling the kids not to buy Tesla.” -YouTube market commentator

On this comment, I must admit, I found myself laughing.

That said, please do not mistake the seriousness of this endeavor for the humor one may find in comments along the way (No reason this can’t be fun!). Everything from proclamations that “stocks never go down” to the many “business plans” that don’t meet even the simplest of litmus tests are currently finding their way into the financial markets.

Recently, these are the characteristics we are finding among many investors:

  1. Investors growing exceedingly complacent. “How can we lose?!”
  2. Investors ignore common investment factors and justify herding behavior. With the goal of achieving quick wins. “There are only a few names worth owning.”
  3. Investors convince themselves, usually with narratives or stories, that counter long standing investment norms.  “This time is different!” 

Now for the most frustrating aspect. These periods may last much longer than the investor has patience for. Patience is not a trait that most humans handle well (especially in this culture!).  I frequently hear from investors “how a particular scenario cannot be so…” or “how a particular scenario must end badly…” While I may agree or disagree, the truth is none of us can see the future. We must deal with the present set of circumstances and utilize a process for managing our future expectations. Focus on what can be controlled, not on what was, what could have been, and absolutely not on what you believe should be.

Back to work…

This is not a cry wolf situation. In an upcoming update, I will discuss in greater detail the increasingly bullish case going forward. However the bullish case applies to the broad markets and economy as a whole. In some sectors, as well as individual names, the outlook is somewhat precarious and the risks significant. The real issue at work is the understanding and recognition of a very different as well as mixed market environment; and what it means for investors going forward.

For the professional gambler, which are few and far between, they play the cards they are given, not the one’s they wish they were given. The professional gambler understands when the odds are in their favor, and presses. They also understand when the odds are stacked against them, and withdraw. The professional gambler adapts to the changes in the environment in which they try their luck! These are the only things the investor and the gambler may have in common. Luck, is not a process. For those depending upon observed extremes continuing unabated, I do wish you the best of luck, you may need it!

Bottom Line: The investor… does not gamble.