The ancient relationship between experience and money….

Thursday, 28th May 2020

The ancient relationship between experience and money….

Early 2020 is on record as the most volatile period in the markets since the Great Depression….

The CBOE Volatility Index sits at 27.6. That’s well short of a peak fear reading of 82.69 recorded on 16th March….

…. but still ahead of a year-to-date average of 16.0….

…. and a long way above the low readings (signaling confidence and/or complacency) seen for long periods during the bull market that followed the 08/09 global financial crisis….

In other words, volatility has subsided. But it hasn’t gone away. A bit like the COVID-19 virus….

  • Recession ahead….

Something else that hasn’t gone away is worrying data – some of it the worst in living memory….

US jobless claims are at almost 40 million. That’s a fifth of the labour force in the world’s biggest economy sitting idle and watching daytime TV….

Output has slumped worldwide. World trade volumes have shrunk ‘precipitously’. Every metric you might quote is on the floor. Every sector in every economy has contracted….

Things are improving as global lockdowns relax – but only in terms of shrinking at slower pace. The world faces a post COVID-19 of steep and significant proportions….

Depending on who you listen to, things might take anywhere between 5- and 10-years to return to turn-of-the-year levels….

The road ahead will be painful – for industry, business and consumers. Yet still markets surge….

  • The gravy train….

There are multiple reasons for this upward trajectory in stock prices at a time when performance and prospects have seldom seemed bleaker….

One is fresh participants. It’s not just old money at play….

Online brokerages worldwide – many offering a zero rate on trades – report record levels of new trading accounts being opened during lockdown. Hundreds of thousands….

Some new players are bored. Stuck at home with no job, no sport and nothing to spend or bet money on, they’ve taken to playing the markets….

Millennials are getting in on the action too. They see the COVID-19 crisis as their time to leap onto the stock market gravy train….

The millennials an interesting group. These youngsters can’t imagine a world in which mobile phones, the Internet, Instagram accounts, TikTok videos, Netflix and PlayStation don’t exist….

Nor can many comprehend a world where stock markets fall without instantly getting up and taking off again. A perpetually rising market – one that always recovers – is all they have known….

They have grown up on narratives that said 2008 was a great time to buy. And 2009. And all the years between then and 2020. Why should now be any different?

  • Cheerleading brigade….

I’m not sure how many millennial investors check-in with the outpourings of the financial media….

But, if they do, they will find plenty of cheerleaders twerking their support….

Here’s Harvey Jones at Motley Fool just last week, for example….

‘Young investors can get rich and retire early by investing in cheap FTSE 100 shares. The Motley Fool has been arguing this for years, and younger investors are starting to get the message….’

A fortnight back, Tim Welsh of Nexus Strategy told CNBC how much fun investing and trading is….

‘If you don’t know what you’re doing, it’s almost gambling, it’s almost speculation, and that sounds like fun…you experience very quick run-ups and rundowns…. It’s entertainment….’

To be fair to Welsh, he also points out that rundowns can prove expensive. That you can trade too much. That you shouldn’t play with money you can’t afford to lose….

‘The more you trade the worse you do. There’s buy and hold for a reason and anyone who’s inexperienced and is just clicking around and buying and selling based on the movements in the markets on a daily basis really have no chance to be successful.’

That’s the voice of experience. But nobody comes to the world or to the markets pre-equipped with that specific commodity. It takes time to acquire. There’s usually a cost involved….

  • Experience and money….

There’s a parable about experience and money that goes like this….

Bring together a man with money and a man with experience and pretty soon the man with the experience has all the money, and the man who had the money now has some experience….

That’s the way things usually pan out. That’s a law in human affairs that stretches back way beyond the last bull market and into the mists of ancient history….

It might be different this time, of course. We’ve never seen such strange times….

Governments have never pumped such volumes of new money into the system (trillions). They show no sign of stopping. They’re committed to ‘whatever this will take’. It will take plenty more yet….

And whenever Jerome Powell at the Federal Reserve or Andrew Bailey at the Bank of England or Christine Lagarde at the European Central Bank or the Chinese, Japanese, French or Germans make some statement about additional stimulus packages, stock markets spike in response….

Maybe the sails of millennial investors will make the most of those strong gusts of wind and make their way to financial freedom via stock market speculation, trading and all the rest of it….

It’s how the markets have worked since 2008. It’s how people got rich over the last decade. Maybe economic and commercial fundamentals really don’t matter anymore….

  • Bubble behavior….

As long as central bank spigots remain open, perhaps levels of production, output, trade, sales, profit, and employment don’t really bear on what listed businesses or the wider market is worth….

When the COVID-19 correction occurred, maybe millennials recognized the moment of opportunity and boldly made their entrance into a game that will transform their lives….

Good luck to them. But don’t be surprised if it turns into tears before bedtime….

When inexperienced, untrained, untested, largely uneducated (financially) players are making money in the markets (or believe they can), we’re looking at behavior you’d normally expect in a  bubble market….

Remember the shoeshine boy who gave Joseph Kennedy a stock tip in 1929? It was downhill for the markets from there….

This is not so different. Perhaps it should take a little experience to make a little money. Perhaps the money is the payoff for the effort and expense experience requires….

When it doesn’t take experience or time-developed skill to make money (or that illusion exists) at a time when the world stands on the cusp of a greater depression, maybe that’s a sign that something is seriously out of whack in the markets….

Just last week, 68% of fund managers surveyed by Bank of America said they believe we’re in a bear market rally. Just 25% predict a new bull market….

Maybe all is as it should be, and millennials investors are headed for an experience they will learn from….

That’s how it looks from here….

All the best

Dave Gibson

Money Truths