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A Bubble Unlike Any Other


That was the quote from investor Jeremy Grantham (of GMO fame) in an interview with Advisor Perspectives published 10/22/2020. That we are in a bubble - but it is unlike any other we've seen. The story continued: "Everything is overpriced, he said, but there is no way to say when they will peak. To call that peak, it is useful to look for signs of “crazy” behavior."1 Grantham pointed to SPACs (special purpose acquisition companies), which are having their day in the sun this year, as one sign of the craziness. The stories are everywhere, he noted.

Everywhere indeed. Let me share two further examples of the "making money in stocks is so easy!" phenomenon that found new heights during the third quarter (in the midst of a global pandemic, no less). The first comes from Palm Valley Capital Fund's third quarter commentary:

"During the summer, we noticed an old high school friend updated his job on his online profile to “Retail day trader.” He made the following pitch on social media:

“Just an example if you had invested in $TSLA. Interest in savings is going down and inflation is killing your savings. Put that money to work! Get the absolute cheapest way to trade stocks and two free stocks.”

What followed was a screenshot of an unidentified account 100% invested in Tesla that was up 15% for the day and 291% since inception, leaving a tidy seven figure account balance. He included a link to his Robinhood referral page. Robinhood offers a free share of a random stock if you refer friends. There is a 98% chance the value of the share is between $2.50 and $10. In other words, you earn a few breadcrumbs if you convince your friends to trade speculative stocks. The hook, of course, is showing some hypothetical rich person’s burgeoning single name portfolio."2

So…just cherry pick a well-known in-vogue stock (which according to Macrotrends happened to peak recently at > 15x sales) and throw it up on social media so friends can also play the Robinhood trading video game…

Then there is this example from Longleaf Partners' Global Fund. Speaking to other examples of exuberant investor behavior (e.g. bitcoin fever late 2017; house flipping fever prior to the financial crisis) in their recent commentary, the portfolio managers noted:

"But we have to go back to 1999-2000 to see a retail frenzy for certain stocks at similar levels [to what] we are seeing today. Putting a sad 2020 twist on the old “shoeshine boy test”, one of us recently lost someone close to us but was unable to attend the small funeral service due to COVID restrictions and family obligations. While texting with the family member who was able to attend, she reported back not on the details of the service, but rather on all of the questions about options trading and an electric vehicle stock from the guests in attendance!"3

The "shoeshine boy test" is a reference to the stock market exuberance of the late 1920s, which preceded the great depression, when even shoeshine boys were confidently handing out stock tips to their customers.

One more quote to put all this in perspective:

"So as we enter the fourth quarter, we remain EVER incredulous on many fronts as to what is happening around us, and…we don’t see a lot of intellectual reasons to completely swap out an investment process and philosophical underpinnings that have “centuries” of demonstrated success. Pay a fair price for a great business, buy decent assets at distressed prices, find people who are stealing with you versus stealing from you, think long-term, don’t over diversify…"4

And that - not chasing the stock du jour - sounds like a good plan to us.

1. https://www.advisorperspectives.com/articles/2020/10/22/jeremy-grantham-the-market-bubble-will-burst-in-weeks-or-months?bt_ee=UOjXcRAQrNHNS2zAfR90T2EwwpMTrvX8NuiIQUsf7LbIMz6BS%2BAzeOLafX9dPqYi&bt_ts=1604138525556

2. https://www.palmvalleycapital.com/fundcommentary

3. https://southeasternasset.com/mutual-fund-commentaries/

4. http://covestreetcapital.com/wp-content/uploads/2020/09/CSC-Strategy-Letter-41-Sept2020.pdf

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