Why do the millennials of America have newfound interest in the stock market at a time like this? Today, the Robinhood trading platform is their friend, helping guide their newfound interest. In 1999, it was Ameritrade, E*TRADE or any other discount brokers that wanted to “help” you get involved in what the stock market offered. This element is timeless and will take place as long as capitalism and democracy reigns in a free country.
If you put these two problems together, you’ll find a white-hot investment strategy heading into an era where the stock market is likely to cause a lot of disappointment in the future. This is the worst-case scenario for investors and the biggest risk to investors today.
Was the investor buying Coca Cola in 1972 going to hold through thick and thin? The Nifty Fifty was raging. It was exciting! What wasn’t exciting? Waking up at the end of the 1970s with your stock value declining 53.54%.
Was the investor buying Microsoft at the end of 1999 going be a buy and hold investor? The dot-com bubble was raging. It was once again exciting for a whole new generation of investors. At the end of the 2000’s, Microsoft had declined 47.79% during that decade.
Did it matter whether Microsoft and Coca Cola were truly great American companies? Did it matter that they produced very high profitability? Did it matter that they had a lock (or a monopoly) on their customer?
Our clients are investors that fear stock market failure and are advised by a low turnover, differentiated, value discipline seeking great businesses to build wealth. The discipline continues to focus on companies that benefit from the economy normalizing. To put it frankly, it’s the kind of thinking that very few can visualize because stock market investors are so dour on the economic future!
We continue to advise our clients to remain excited about the prospects of the homebuilding business in the U.S. NVR (NVR), Lennar (LEN) and D.R. Horton (DHI) have rebounded from shutdown lows, but we believe the resilience and demand will continue to shock investors. We have witnessed our subprime auto lender Credit Acceptance Corp. (CACC) survive a credit market that was supposed to ruin them. Instead, the lack of auto manufacturing has caused the assets that back their financing become more valuable. If you know a friend buying a car, have the dealer call Credit Acceptance. They’d love to help. We have seen travel-related stocks like Booking Holdings (BKNG) bounce pretty close to where it was before the shutdowns. Most investors that are unknowingly set up for stock market failure have feeble views of these businesses. They believe the small reversion in these businesses and their stock prices have run their course.
We advise our investors to eschew this view. We believe we are at the beginning chapters of a wonderful economic era globally where the consumer and economy will have slack to build upon for years. With rates this low and many stocks so cheap, it seems illogical to us that investors are so unaware that stock market failure could transpire out of today’s circumstances. The problem is that logic has nothing do with what is going on. As James Grant wrote in his 2019 book Bagehot, “Logic is as poor an argument against a boom as it is against a love affair.” Our parting advice: be logical and avoid stock market failure!
Cole Smead, CFA, is president and portfolio manager at Smead Capital Management.