Buyer Beware

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For the stock market and cryptocurrency investors, it’s buyer beware. Stocks and cryptocurrency are trading at all-time highs right now – riding on a wave of investor optimism. The problem is, besides investor sentiment, there’s not much else supporting the high stock and crypto prices right now. 

In the world of behavioral finance, two metrics explain an asset’s price: sentiment beta and traditional beta. Traditional beta demonstrates the degree to which underlying economic fundamentals reflect an asset’s return.

A stock’s price with a high conventional beta reflects the underlying company’s strong financial performance. A stock leaning high on sentiment beta is trading more on investor sentiment and optimism than underlying economic fundamentals. A high sentiment beta reflects a high level of speculation.

Right now, the markets for both stocks and crypto are trading high on sentiment beta. In other words, investors are treating stocks and crypto no different than buying a lottery ticket.

Unfortunately, many are taking a “devil may care” gambling approach to their investing.

This is due to a perfect storm of factors fueling reckless investor speculation: RedditRobinhood, stimulus checks, low-interest rates.

Millennial traders have taken the stock and cryptocurrency markets by storm – investing in anything and everything that captures their attention in which some observers has termed ‘gamified’ investing.

Gamified investing is investing with the belief that there are no consequences to your actions – just like in a video game where dying isn’t dying and where your actions have no real-world consequences. The gaming generation is now investing, which explains a lot about what’s going on in the markets.

Millennial investors armed with stimulus checks, cheaply borrowed funds, and liberal margin trading policies on free trading platform Robinhood – along with being influenced by internet-fueled hype in Reddit chat rooms and social media – are driving stock and cryptocurrency trading to record highs. But, throwing caution to the wind, these traders are ignoring economic fundamentals in the pursuit of big payoffs.

One of the most glaring examples of sentiment beta right now is the intense interest in Dogecoin, a cryptocurrency that started as a joke. 

Dogecoin’s founders launched it as a satirical take on Bitcoin. The founders saw no real purpose for the coin beyond generating laughs. That hasn’t deterred Millennial investors, however.

Just like with floundering retailer stock, Gamestop (GME), Millennial investors latching onto Reddit, Internet, and social media buzz are diving into Dogecoin, driving up its price 11,000% year-to-date. There is no underlying economic reason for Dogecoin’s surge.

It is purely fueled by investor hype. 

Imagine a grandfather coming back from the grave, and you have to explain how you’re investing your hard-earned(or otherwise) in something that can’t be seen or felt, serves no purpose, or has zero practical function. He’s either going to respond by shaking his head or bring up one of those hair-brained crazes in the ’80s or ’90s that drove up the prices of stupid toys simply from people trying to make a buck from selling it downstream to a bigger sucker. Remember Cabbage Patch Kids and Beanie Babies? At least those toys were tangible. The speculation on something intangible that serves no purpose would seem even more ridiculous to your grandpa.

The problem with gambling is it’s a zero-sum game. For someone to profit, someone else will get hurt, and many experts are predicting a lot of pain in the stock and crypto markets down the road once the stimulus checks run dry. However, Charlie Munger, Warren Buffett’s right-hand man at Berkshire Hathaway, has more vital words about the rampant speculation going on right now.

“It’s really stupid to have a culture which encourages so much gambling in stocks by people who have the mindset of racetrack bettors and, of course, it will create trouble.”

– via MarketWatch

Savvy investors aren’t falling for the hype. Instead, they’re sticking to what’s always worked – tangible assets that fill a basic need. They invest in demand – demand in an asset that thrives in good times and bad. As your grandfather would say, “Don’t invest in nothing you can’t touch, feel or kick.”

Unlike Dogecoin, tangible assets such as dirt and housing (e.g., mobile home parks) will never go out of fashion. Invest in demand. Invest in scarcity. Mobile home parks bucked the commercial real estate performance in the pandemic-plagued 2020 – being one of the few segments that saw a rise in occupancy as well as rents.

Investing for long-term financial success requires discipline, and it requires resisting chasing those shiny objects everyone else is chasing. 

Instead, stick to tried and true investment principles in assets with a history of strong performance with long-term viability, and you won’t get burned like those investors playing the stock and crypto markets like a casino.

Ferd Niemann IV

Ferd Niemann is a mobile home park owner, operator, and lawyer, as well as a real estate investor, financial analyst, entrepreneur, and attorney whose career has focused on a myriad of areas of real estate. His experience includes mobile home park investments and turnarounds, retail development and redevelopment, residential investments, and real estate law.

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