Erroneous Experts

More than ever, investors need to be selective about the content they consume

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Sometimes it feels as though there’s nothing left to add. Curate your social media feed well enough and it’s like everyone already knows everything.

Follow the news for long enough and you start to see the same old stories just rehashed in a different way.

But, scratch the surface and you realize an important truth. No-one knows everything and in some cases, no-one knows anything.

FinTube Frolics

I came to this realization after watching some YouTube finance channels over the weekend. There are good ones out there. But this time I picked some channels that I don’t usually watch.

It’s not that they’re bad in an illegal kind of way (though some are). It’s just that the quality of discussion varies so frequently from episode to episode.

For example, this snippet of conversation comes from a well known investing podcast with over 110,000 subscribers:

Interviewer: What would it take for you to turn bearish?

Guest: I’d have to see earnings really get crushed. And unemployment.

Bear in mind that the guest here is not some random guy off the street. This is a 30-year Wall Street veteran who worked at a leading investment bank. Hopefully you can spot the obvious problem with this statement.

The stock market looks ahead. By the time earnings get crushed, the stock market will most likely have already fallen by a significant amount. In fact, this has already been one of the stories of 2022.

Zoom earnings, for instance, are up 47% since January 2021 and yet the stock price is down -78%. Datadog’s net income turned positive for the first time in 2022 and yet the stock is down almost -50%. Even Google shares are down -28% despite a 4.8% increase in operating income.

You simply cannot afford to wait around for data to confirm your decision making. It’s exactly as Stanley Druckenmiller says “you have to visualize the situation 18 months from now. Never ever invest in the present.”

From the same interview:

There hasn’t been a period since early 2000 where everybody was bullish. I want everybody to be bullish. When that happens, I’m out.

This statement is equally perplexing.

Apparently, the excess we saw in 2021 was not enough of a signal for our Wall Street veteran to change his view?

Just remember, this is a year in which we saw (amongst other things):

• The S&P 500 hit 70 all-time highs, a record that’s second only to 1995.

• A Shiller CAPE recording second only to December 1999

• A declining video game retailer rally 1700% in a couple of weeks thanks to an army of Reddit users

• An NFT bubble that saw a JPEG of a rock sell for $1.3 million

• Numerous companies with zero revenue or earnings come to market with billion dollar valuations

• Numerous SaaS companies trading above 10x revenues and some more than 100x revenues

The idea of waiting until everyone is bullish (or indeed everyone is bearish) then taking the other side sounds smart. But it only works if you actually notice when those things are happening.

Hollywood Blockbuster

Moving along to another popular channel. This line comes from a YouTuber with over 700,000 subscribers describing the events of 2022:

Hollywood couldn’t have written this script. This market is not normal. It’s a freak show.

The influencer continues:

Wall Street is in full scale panic mode and they are panicking out of these stocks left and right.

I dislike this line of reasoning for two reasons.

One, it’s based on short-term events. Two, it’s emotionally charged.

The truth is that 2022 is an extraordinary year. But only because every year is extraordinary. Whether it’s a world war, a global pandemic or a financial crisis, every year there’s something big going down. 2022 is no different.

The idea that the current environment is abnormal may lead to more YouTube views. But ultimately it heightens investor anxiety and creates FOMO. Investors feel like they should be doing something. That they’re missing out on the action.

The reality is that the performance of the stock market, when compared to history, will in all likelihood be indistinguishable from previous years. If you’re only after excitement, the casino might be a better option.

source: macrotrends.net

It’s The End Of The World

But when the market is dropping, the exaggerated videos and articles explode in quantity. Here’s something else you hear when stocks are down:

The bears are out in full force. Everyone is acting like the world’s going to end.

This remark, again, provides no insight.

Obviously, if someone expects stocks to underperform it doesn’t mean they think the world is coming to an end.

It has nothing to do with the world coming to an end and everything to do with the expected return based on valuation.

As Vince wrote a few weeks ago, all that needs to happen to see stocks get cut in half is a “30% decrease in earnings combined with a 30% compression in the earnings multiple”. We’re not saying that will happen. We’re saying that could happen.

Staying objective, analyzing facts and considering future scenarios is the correct way to approach these tricky markets.

Content Treadmill

I could continue along this train of thought for some time. There’s certainly no shortage of fodder with which to critique. But I sense it will get tedious before too long. After all, unreliable opinions from ‘experts’ are nothing new.

It just feels like, with the constant need for influencers to stay chugging along on the content treadmill, low signal content is getting more common. And many people don’t seem to be particularly concerned about that.

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PS. Have you noticed many of these influencers are happy to shill cryptocurrencies while prices are going up but as soon as the price crashes, their videos and affiliate links disappear? I would have thought if Bitcoin was such a good investment, a price drop would be an opportunity to accumulate more. But of course, that’s not how it works is it? Because no-one actually knows how to value a cryptocurrency.

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