The rally in stocks since March 23 has left a lot of market experts scratching their heads. The market has been so far removed from the economic data that many market pundits have been doubting it the whole way up. Warren Buffett, who is known for taking advantage of opportunities that are created from market selloffs, did not make any major purchases during the downturn and instead made headlines for selling the airlines. One of Warren Buffett’s many famous quotes is “buy when there is blood in the streets”. Well, it certainly felt like there was blood in the streets, but he did the opposite of what he usually does.
Many friends were reaching out and asking me if they should buy some airline stocks. My thinking was that they weren’t a great long-term investment given the changes that will come from this crisis. Warren Buffett validated my concerns with his uncharacteristic sales during a downturn. The airlines rallied quite a bit from the prices Warren Buffett sold them at and made both him and me look stupid in the short term.
Enter Davey Day Trader. Dave Portnoy from Barstool Sports is a phenomenal marketer and has built an amazing brand. I enjoy his pizza reviews from time to time and get a kick out of his rants. He has a great following and has most recently entertained them by publicizing his newfound hobby of day trading. One of my friends sent me a video of him ranting about how he is “killing it” and declaring that Warren Buffett is washed up. I was also sent another rant of him belittling an analyst who downgraded the stock of the company that recently took an ownership stake in Barstool.
The analyst and Warren Buffett represent the market experts and Portnoy represents the novices who have been buying up beaten down stocks including stocks of companies that have recently filed for bankruptcy. In the last couple of months, the Portnoy’s of the world have been making a lot of money while the Buffett’s are sitting on cash expecting the market to go back down.
The price action in some of these stocks has been insane. One of my friends told me he acted on a hot tip from one of my other friends to buy Chesapeake energy. They rode it from $20 all the way to $70 only to watch it collapse back to $20. This was over a 3-day period. They thought it was going to $100 so they didn’t get out when it was high. Now they are left wondering what could have been.
It’s a perfect storm if you think about it. There haven’t been any live sports to gamble on so the Portnoy’s of the world have turned to stock trading. The zero-commission trading has essentially turned parts of the market into an online casino where Davey and his troops have been “killing it” in their own minds. However, none of them understand the risks associated with investing that the Buffett’s of the world are taking into consideration. They are enjoying the doubling and tripling of their capital in very short periods of time and are experiencing a similar feeling to the thrill that they get from gambling. For now, the most informed people are continuing to exercise caution while the Davey Day Traders are gloating about their gains. Will they take the profits in time or will they watch them erode until it is too late like my friend did? We’ll see how it all unfolds. In the meantime, I’m sticking to the discipline that has worked for many years by keeping a long-term view and not trying to time the market.