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Just So You Know Where You Are

  • Writer: ACosgrove
    ACosgrove
  • 1 day ago
  • 3 min read
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As investing commentator Howard Marks often says, we cannot predict the future but we can observe today's investor behavior and note whether others are speculating and chasing risk or hoarding cash and avoiding risk.


No prizes for knowing where we stand today. A quick tour of the investing landscape reveals many examples of clear speculation - here are a few:


Behavior marker #1: yes, there is an ETF (Exchange Traded Fund) for everything today - even an ETF for meme stocks (i.e., stocks with a lot of social media buzz). That ETF debuted 12/2021 (almost nailing the top of the 2020-21 speculative cycle), shuttered in 2023, and just relaunched last month.


"The reemergence of MEME says a lot about today's market mood. Speculative trading is back in full swing, with retail investors once again chasing volatile, social-media-driven names."(1)


Behavior marker #2: growing issuance of leveraged ETFs (these are ETFs that attempt to amplify the daily return of an index or stock); and - not content with amplifying daily returns 2x or 3x - adding even more leverage, e.g., Volatility Shares(2) has filed for 5x levered single stock ETFs.


Behavior marker #3: a data center developer(3) in Amarillo TX whose asset is a ground lease, with no revenue, valued at $16B at last month's IPO.


Behavior marker #4: cryptocurrency speculation...


"Wall Street is only too happy to help the bourgeoning retail cohort expand its horizons. CNBC reports today that Morgan Stanley "told its financial advisors that the firm was broadening access to crypto investments to all clients and allowing such investments in any type of account, including retirement accounts." Prior to that pivot, Morgan Stanley's wealth management pros could pitch digital assets only to clients with an aggressive risk tolerance and at least $1.5 million in assets."(4)


Does this tell us anything about what will happen tomorrow? No. But it does tell us that the casino is open for business and there are a lot of ideas that are getting attention and capital - including some ideas (perhaps many) that probably shouldn't be getting much attention and capital.


To paraphrase Warren Buffet, you only see who has been swimming naked when the tide goes out. Or, to circle back to where we started with Howard Marks:


The key observation is that good times lead to complacency, risk tolerance, and carelessness, as people bid aggressively for assets and compete to make loans. And then, bad times expose the results of that carelessness, as investments that were entered into without an adequate investigation and margin for error fail to hold up in a hostile environment.


In other words, many flawed decisions, which the economist Friedrich Hayek aptly described as "malinvestment," are made in booms and exposed in busts. It will ever be so. This is summed up most concisely in a great banking adage: "The worst of loans are made in the best of times."(5)





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