Reddit market mania fuelled by short sellers
We live in a time of fear, and fear can be a highly effective marketing tool.
The word “bubble” is being thrown around a lot in the financial media and online investment forums these days. In some cases it might be true, but in others the motives behind the bubble talk are opportunistic.
The term for that is “talking your book” and throwing out the b-word can be used by some market pundits to manipulate large numbers of investors into supporting their positions whether it’s true or not. The pundit often has a short position or a position in other derivatives that rise in value as the underlying security falls in value.
There could be a legitimate bearish argument for avoiding an investment based on fundamentals at certain times, but some perma-bears make a living by persuading the masses that the sky is falling. It’s a multi-billion dollar industry.
That’s not to demonize short sellers or bears. On the whole, they tend to increase market efficiency by identifying and amplifying flaws in the economy, the markets and individual companies. It backfired for hedge funds shorting GameStop Corp. this week when a coordinated effort by day traders on the Reddit platform pushed back by driving up the share price. The resulting circus makes it impossible to know what GameStop is really worth.
What we’re witnessing with GameStop is a game of speculation.
The real harm to retail investors saving for retirement comes from self-serving claims of bubbles in the Canadian residential real estate market and big tech.
You have to feel for young renters turning into middle-aged renters waiting for the housing “bubble” to burst so they can own a home. A constant bubble-chant since the 2008 financial meltdown and beyond has priced many frightened wannabe buyers right out of the market.
Time has proven the bubble pundits wrong in the country’s largest markets.
Sure, the condo landscape in Toronto and Vancouver might be frothy and due for a slowdown or correction - but a bubble?
The same can be said for the big technology companies that are keeping many retirement portfolios above water during the pandemic. In 2000, the value of the tech-heavy Nasdaq plunged 60 per cent from a 1999 bubble where the dot-com craze pushed companies with no earnings to unsustainable prices. That was a bubble.
Today, the S&P 500 technology sector is trading at prices 28 times trailing earnings - a bit higher than normal but not a bubble. Apple Inc. is trading at 38 times trailing earnings after reporting stronger sales for the devices it produces.
Bubbles form when prices are no longer tethered to earnings or when there are no earnings. Securities like cryptocurrencies are especially vulnerable because they don’t produce anything and their sole value is based on a widespread belief that they have value.
No matter the price, investments like real estate and most big technology stocks have an intrinsic, or underlying value. The value of real estate is in the structure and ground beneath it. It’s real. The intrinsic value of technology companies, or most other companies, is in their assets and the products they produce. A cold glass of water on a hot day might have a higher intrinsic value than Bitcoin.
The biggest harm from misleading bubble talk to retail investors saving for retirement comes from the cost of not being in the market. Most company pensions and registered retirement savings plans can only reach their objectives if the investments inside of them grow. Staying on the sidelines, or dumping a position when the b-word comes up, is not an option.
Corrections and pullbacks will occur, and that’s why it’s important to diversify your portfolio and keep a long-term view to ride them out.
Risk is unavoidable. If fear is getting the better of you, talk to your financial advisor. If you don’t have one, consider hiring one. Start with your bank or any other financial institution you trust.