From The Desk Of A Trader
A repost from last year. The take is still as relevant as it was when written.
Today, we are happy to share the thoughts from the desk of a soft commodities trader. The following views are that of Martijn Bron and do not represent the views of his employer.
I will BTFD
Four great quotes from the best investor of all time Warren Buffett, which I believe are very applicable to current financial market environment;
“Nothing sedates rationality like large doses of effortless money”
“Speculation is most dangerous when it looks easiest”
“What the wise do in the beginning fools do in the end”
“Attempt to be fearful when others are greedy and be greedy when others are fearful”
North American and European equity and housing markets are at record highs. I am long equities and a house. I am happy, but not because of those record highs, ….I am a buyer of equities for years to come, so I rather have lower equity prices than current high prices, and equity in a house you can’t use, it just allows you to live & sleep well, which in itself is very valuable, probably more than cash.
You often read about bull markets climbing a wall of worries, and current bull market being hated as supposedly not driven by fundamentals but by extreme accommodative policies of central banks. I am personally not worried as I have a long term view, don’t apply leverage, and I believe corporate fundamentals are actually strong. Yet I believe that parts of current financial markets are becoming irrational, while according to large groups of people, I dare to say mostly from the millennial & Z generations, current financial markets are totally rational. And I believe this has to do with quote 1 to start with. Whether it is through buying equities, certain meme stocks, cryptos, or NFTs, there are a lot of people who have made large doses of effortless money. Some (if not many) even consider quitting their jobs and become a full time retail day trader, which is not rational for most (if not all).
Linked to 1 is quote 2. Despite high volatility, mostly in cryptos, less so in equity markets for the last year, the buy the dip (BTFD) strategy looked easy. Making money trading, investing & speculating cannot be easy, not for the masses. The potential for high returns is caused by the fact that risks (to lose money) are high, and it is very difficult to scoop money out of the markets, from others, consistently.
Quote 1 and 2 lead to quote 3, which is also called the fear of missing out (FOMO), and the narrative following the price, which causes markets always to overshoot to the upside and downside. Many are intoxicated by the returns that the early Bitcoin adopters made when they gambled USD 1000 when Bitcoin traded USD 100, and now believe they will be able to repeat that when they get in at USD 50k.
What for me really the sign of peak speculation & irrational exuberance is, is the recent NFT frenzy and then specifically the pet rocks. Take a step back, regardless of assumed innovative underlying technology and future potential use cases, the fact that people/entities are paying > USD 1 mln for a digital picture of a rock must make us consider what is rational about that, and what it means for the extent of excess in speculation and ability to throw money at nothing of value really. I rate it as obscene and a sign that we r building the same environment which caused the internet stock crash in 2000 and the global financial crisis in 2008. FOMO, extreme speculation, often in combination with leverage, create the conditions for markets to eventually break.
So we now come to quote nr 4. Buffett’s wisdom suggests us to sell rather than buy today. I won’t sell, LOL. This is I think contributing to current market environment too. We have quite a lot of diamond hands in the financial markets nowadays, by those who got in during the pandemic driven market crash early 2020. Partly this is caused by TINA (there is no alternative), and also due to the emancipation in the financial markets. You can label current environment in the financial markets as gamification (through meme stocks & Robinhood and all kinds of other apps) of investing and as a risk, yet despite the risk I tend to see it more as healthy emancipation, forcing many to better think about their financial future and tools to shape it, and also getting insights how Wall Street always seeks for their next gravy train exploiting naïve or greedy people. Ok, quote nr 5; “Wall Street will sell whatever they can sell”.
I wish the FED not only tapers, but fully pulls the rug, creating a serious setback in the financial markets broadly, get speculation reduced, and make people much more aware of risk, and the difference between a digital pet rock and a corporation producing valuable goods and services profitably consistently. This could prevent an enduring market collapse and a global recession later on (The Big Short style). Those NFT pet rocks are the canary in the coal mine. And I will BTFD.
Global Head of Trading at Cargill Cocoa and Chocolate
Whether to sell depends on time frame. Anyone need to to live off their paper profits for next 10 years should raise cash. Take some profits on core positions and get risk of speculative story stocks. Having cash, clears the mind - forces you to make active decision of at what price to buy, prevents being depressed “why didn’t I sell” and makes you look fr new idea. Find stocks you want to buy, and decide what price you think is a bargain. A falling market means some stocks are going fall below good value, and if you haven’t figured that out in advance you won’t see it.
Thinking got distorted by negative interest rates, the economy got severally impacted - instead of using low rates to buy long term earning assets that would make the economy more productive, there has been a pile in to financial assets and real estate - rising prices confirmed in too many peoples minds that prices could only go.
It will take a seriously large decline to break people out of that fantasy. Too many think the Fed will intervene to keep market up - the only thing they can do is markets stay open and trading. People have a ton of false beliefs to be abused of.
agreed, as Ackman says 'shock the market!' so people stop free-riding and we get a more sensible business cycle in the long run