When we were “young and dumb,” we thought our reckless actions existed in a vacuum. “Ah shucks, we’re not hurting anyone,” you remember saying to your parents in defense of your 16-year old self and your compulsive behavior.
It was all fun and games until that fateful night – acting on a bet with your friends – you were pressured to drive with your headlights off down a country road. Bad idea!
Old man Johnson and his tractor ended up paying the price for your stupidity. You put the farmer and his tractor out of commission for a solid two weeks.
Young and dumb? Absolutely!
Harmless? Absolutely not!
Your actions sent a farmer to the hospital, his tractor to the garage, and put Mr. Johnson’s harvest schedule in jeopardy.
We’ve all did young and dumb things like my Farmer Johnson hypothetical, but there is a class of people who never grow up and there’s a new breed of the “young and dumb” who are wreaking havoc – not on country roads, but Wall Street. This is how they’re doing it.
Since the start of the COVID-19 pandemic, Wall Street has seen a tsunami of first-time traders – most of them Millennials – snatching up stocks left and right without discipline and any common sense.
Millennials, not ones to shy from free stuff (e.g., free room and board in their parents’ basement) opened up new accounts by the millions on the commission-free Robinhood trading platform. With $1,200 stimulus checks burning a hole in their pockets, these first-time traders decided to try their hand at the Wall Street casino.
Cole Smead, president of Smead Capital Management, in a CNBC interview last week, described how “young, dumb” investors have created a “total nightmare” on Wall Street through their insatiable appetite for risk-taking. They’re picking up penny stocks, rolling the dice on high-risk options, and even investing in companies that have declared for bankruptcy.
The result of all this speculating from young, dumb traders is they’re paying an unrealistic premium for stocks. “Microsoft is a wonderful company,” Smead told CNBC. “But at 40 times earnings, there is a 0% chance of that producing wealth for someone over the next 10 years that will meet their needs.”
What is Smead getting at? He’s saying that Microsoft is overvalued. The whole stock market is overvalued. Anyone looking to make their money back from dividends or appreciation will be sorely disappointed when they’re paying 40 times earnings like when they buy Microsoft stock.
The price/earnings (PE) ratio is a reliable barometer of the market valuation of an individual stock or the stock market as a whole.
On the whole, the PE ratio measures the average of the Dow company stock prices compared to their earnings. A price disproportionately higher than earnings indicates overvaluation. The Dow has historically traded at a PE ratio of 15. By contrast, the Dow is currently trading at a PE ratio near 28 – nearly double the historic average. With stocks like Microsoft at 40 times earnings, the only way is down.
What’s the danger of young and dumb traders running rampant on Wall Street?
“When it turns, it could get ugly,” according to Smead, who said that despite the accommodative monetary policy, “the Federal Reserve ultimately can’t save a stock market” – especially one that’s this top-heavy.”
One thing is clear. Just like farmer Johnson who suffered the consequences of the actions of the young and dumb behind the wheel of a car, many Baby Boomers and other investors are going to be damaged from the actions of young and dumb traders when their 401(k)s and portfolios coming crashing to the ground when stock prices finally match reality.
The chorus of experts warning investors to stay away from the stock market is deafening. It’s too volatile and too dangerous are their reasons for staying away.
Do you know who else is staying away? Warren Buffett. A recent report revealed Warren Buffett had liquidated billions in stocks and sidelining cash.
A huge stock market correction is not a question of “if” but “when” at this point. Get out while you can. But where to go?
Follow the smart money…
Smart investors are doubling down on long-term investments insulated from Wall Street. Smart investors prefer to invest behind a walled garden of the private markets where the price of entry and accredited investor qualification requirements prevent young, dumb investors from wreaking havoc.
Unlike stocks, long-term investments are illiquid. Investors can’t buy and sell these investments on a whim. That’s because with private market investments, investors are prevented from harming themselves by imposing long lockup periods to prevent the type of massive selloffs seen on Wall Street in recent months and that will be seen shortly.
- Find out why smart investors run to recession-proof assets like affordable housing that thrive in a downturn.
- Find out why they choose to invest in private markets with like-minded investors – not only to avoid volatility but also to invest in assets with returns that accurately reflect underlying economic fundamentals and not the whims of the masses.