January 23, 2021
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How Young “Investors” and Wall Street Have Turned Parts the Stock Market Into a Dangerous Circus Show, Ripe for a Disaster
What is discussed (the extreme dangers of the following):
· Insanely high levels of speculation and overvaluation
· The “army” or “cult” of young, retail traders manipulating the market through illegal activity
· Flood of IPOs, SPACs etc. taking advantage of the irrational market and young traders, perhaps fraudulently
· The risk of turning the market into a pure gambling/speculation machine
· Robinhood’s targeting of young people
· The Bitcoin/crypto hype
· Wall Street’s role in all of this
· The feeling of invincibility in young traders
Market Manifesto of Arin Pezeshkian (24 yo law student)
This is meant as a warning of what is likely to come and also proof of my assertions so that I can write a book later or something if/when I’m right.
Introduction
Throughout the last few months, I’ve noticed major major problems with the stock market that are going down a slippery slope and likely to end in a catastrophe if it keeps going on. I’m not saying the broad market is necessarily at great risk, but certain parts of it are, where young and new retail traders, and now some greedy people on Wall Street, have piled into and turned into a circus. Severe overvaluation in speculative companies, hand-over-fist buying by unsophisticated traders, illegal market manipulation/pump-and-dump schemes, a flood of IPOs/fraudulent SPACs seeking to take advantage of the irrationality in the market, and several other factors contribute to what I believe has created a highly dangerous environment and future trajectory for the market if this does not stop. What will follow will likely be an evolved version of 2000.
For those who don’t know, young investors have flooded into the market within the past year, mostly referred to as “Robinhood heads” or “retail traders” who believe they are invincible and that stocks only go up. They do no fundamental analysis, don’t care about a company’s valuation, and are willing to buy stocks in companies making 0 money that are valued at billions of dollars. These young retail traders/“investors” do this by using their strength in numbers powered by Instagram/Slack/Youtube influencers who hype up certain stocks to artificially inflate stock prices by incessant buying---which is illegal and constitutes market manipulation. As described below, this takes the stock market on a dangerous path as Wall Street is now following the retail trades and taking advantage of the excess volume/liquidity to make billions of dollars. This is DANGEROUS, and in my opinion, unethical and fraudulent. As explained below, almost everyone is blinded by the non-stop bull market making everyone money and I think this is going to end in a catastrophe the longer it goes on, whether it be in the next few months or few years, and whether it be in the form of parts of the market crashing, a flood of lawsuits, or the fundamental purpose of the stock market (which is to be used as an investment tool) turning into a gambling/speculation/manipulation-flooded machine.
Insanely High Speculation and Overvaluation
Certain parts of the market have gotten to dangerous, scary, bubble-like levels and the market is infested with market manipulation and retail-trader frenzy. Most of the speculative, hype, retail-crowded stocks, and even some medium sized software/tech/growth names are trading at ridiculous levels. There are countless companies trading at 10, 20, 50, 100, even 500+ multiples of revenue (some even have absolutely no revenue and are pure ideas/business plans). A lot of these hype/growthy companies are priced to beyond perfection. They are not all going to grow into 20b-100b companies, but there are so many of them trading in the billions or tens of billions range. A small % of them will make it to the big leagues, but the rest will crash biblically once people realize how much growth is already priced into so many of these high-risk/highly speculative stocks, and when they fail to meet these insane growth expectations. There aren’t 200 future Amazons, Shopifys, Paypals, etc. worth trading anywhere near today’s valuations. Also, my most hated, and in my opinion, the most dangerous, incorrect, and irresponsible response or justification to these insane valuations is that a company “is the next Tesla” or “look what happened with Tesla.” There is only 1 Tesla. Tesla is a once in a generation stock and company run by a once in a generation genius. [Note: I think Tesla’s valuation is starting to be very speculative and extremely high. Their current valuation assumes all of their businesses (EV, batteries, software, solar) will all be multi-hundred billion dollar companies which is possible, but a far stretch, and poses a huge risk to the stock price if everything doesn’t pan out perfectly].
At this point, these high-flying stocks are pure gambles and pure trading mechanisms rather than investments, and not what stocks are supposed to be. Stocks are supposed to reflect the fundamentals of a company (including its future growth prospects). There is no way that hundreds, if not thousands of publicly traded companies will grow into their insane revenue multiples and growth expectations. The many that don’t will be pummeled at some point, but we don’t know when that will be. Therefore, you don’t want to be stuck in these high-flyers when the currently insanely crowded trades, which have worked for almost a year non-stop, eventually turn around and bite the “stocks only go up” people in the butt. Yes, in the long term, quality companies go up— but the DOW, S&P, and NASDAQ don’t reflect how these speculative risky plays pan out since a majority, if not all of the weight of these indices is large-cap, successful, profitable companies. However, if you look at Nasdaq in 1998-2000, when it was full of speculation and insane growth expectations, and see what happened- it ran up 200% in two years then took almost 15 years to get back to those levels. Even Microsoft, one of the best and most profitable companies of all time, which had an amazing future ahead of them, took 15 years to recover from the crash of 2000. The argument that “this isn’t 2000 because tech companies are actually profitable” is misguided. While this is true for big tech and the best software companies, most of the specs/growthy/IPOs/SPACs/near-dead companies/no revenue companies etc. are losing money, not growing revenue at crazy levels, and/or are valued at insane multiples. Regardless, a lot of people are blindly buying them non-stop. While the “crash” won’t be completely visible in the big indexes like the Nasdaq since most of the Nasdaq is made up of quality companies, it will take place where it hurts young/retail traders the most. This is what will probably happen to many of these high-flyers trading at crazy multiples. These blank-check companies, new IPOs, SPACs, EV plays etc. are most definitely not a Microsoft and might never reach near these levels again once people realize there aren’t going to be dozens, if not hundreds, of “future Amazons or Teslas.”
The reason these stocks are running insanely is mostly because of a crowded trade propped up by Wall Street raising price targets (PTs) and following Robinhood/retail/young traders along for the ride and making billions. Hedge funds are now using the retail trade momentum to profit, but once they decide to pull the rug under these insanely overvalued companies, they are going to leave retail investors in scrambles. Most of the young retail traders/“investors” don’t know the basics of how to value of a company or even bother to check the financials. I think it’s extremely irresponsible of Wall Street to encourage and raise PTs of these highly speculative companies just so they don’t look stupid and can ride the retail trades themselves, but they’re doing it anyway and can get away with it. This is not sustainable. Certain parts of the market are getting to dot-com bubble levels (EVs, small-mid cap software, blank check companies, speculatives, IPOs, SPACS and near-dead companies). Instead of learning about the basics of investing such as reading a company’s financials and trying to find consistently profitable and growing companies so that 50 years down the line they can guaranteed retire millionaires, these greedy new traders/“investors” are constantly trying to recreate double/triple-digit % gains in stocks that are artificially inflated. They are going to be clueless and start losing money once we exit the raging bull market. Currently, every single stock is a buy on the dip, and every couple of weeks, these insanely crowded trades spike 30%+. For example, DASH added 5b in market cap in one day on rumors it was going to advertise during the Super Bowl, or PLTR added several billion in market cap in one day on news that it added a 3 year, 15m/year contract. This is irrational. Younger traders have become addicted and greedy, and justify their “buys” by meme-ing anyone who doesn’t hop in on their trades, and hopefully not, but by truly believing, that they have figured out how to beat the market and are “experts” at what they do (more of this to follow). It is a slippery slope for so many young people.
Illegal Behavior Plastered all Over the Market: Fraud, Market-Manipulation, Pump-and-Dump Schemes, etc.
BIG PROBLEM: PUMP-AND-DUMP SCHEMES
IMPORTANT: In my opinion there’s A LOT of illegal pumping and dumping/market manipulation going on. What happens with these pump-and-dump schemes is that some Instagram influencers/Slack groups/retail “investment club advisors” (ex: Robinhoodkilla, Wallstreetbets, etc.) promote and tell all of their followers (their “cult” or “army”) to buy a certain stock, usually a smaller-cap stock, so that the price gets artificially inflated. It is ILLEGAL to pump a stock up by constantly promoting it to a bunch of people and driving up the stock price then dumping it for a profit with the intent of doing so. I know for a fact this is what is going on rather than actual investing because 1) these speculative stocks randomly pop 30% on no news, 2) they fluctuate up and down so consistently like clockwork, 3) it’s constantly the same stocks spiking crazy after any sell-off, 4) I have seen the “pumping” posts myself, 5) there’s 0 fundamental reason for these stocks to rally like that and trade at these valuations, 6) I know a lot of people that participate in these schemes, 7) they target highly shorted companies to take advantage of short-squeezes, 8) it’s like a magnet attracting more and more young people trying to make money like their friends did (somewhat of a network effect), 9) these young people turned stocks into a meme and they tell their ‘army’ to pump up a stock just to troll short-sellers, 10) these retail/young traders barely know anything about the companies they’re pumping up and probably have never looked at their balance sheets or income statements and neither do the owners of the social media account, 11) young people brag on social media about how they are making money in the market with triple-digit returns luring in other unsophisticated people into the scheme, etc. This type of market manipulation is extremely dangerous to the market and it ruins the purpose of the stock market. Additionally, the Robinhoodkillas/Wallsltreetbets/Stock Dweebs of the world make money both on driving up a stock they bought then subsequently dumping it for a profit, and also charging a subscription to receive some of their alerts, which is wrong and illegal. They should be sued and issued an injunction to stop what they are doing. Market manipulation and pump-and-dump schemes are ILLEGAL and most young traders nowadays make money by participating in these, probably not even knowing it is illegal. Even the social media influencers recommending certain buys probably haven’t even done the research to know what they are doing is probably market manipulation since they are so engulfed in the current market euphoria that is making them, and their followers, a lot of money. Again, this is NOT what the stock market is supposed to be and it is ILLEGAL and DANGEROUS. As their numbers grow, the army of young traders now have the ability to influence the movement of mid-cap stocks, not just small-caps, which threatens this trend to permeate throughout the market even more. Who knows, maybe one day these schemes will end up on American Greed if they get bigger.
Also, these pump and dump schemes work right now because there is a lot of liquidity and activity in the market. This, however, is also unsustainable. Once COVID is over and people leave their house, retail volume might subside which will threaten the valuations of these stocks and might cause them to plummet since Wall Street might choose not to ride along with the retail trade anymore.
These influencers and young retail traders who make fun of and make memes of the “fundamentalists” and people who care about a company’s financials/valuation are making a big mistake by not learning the language of finance/how stocks are traditionally valued over long periods of time. It’s easy to shun and dismiss arguments for “fundamentals” or “valuations” when every stock is soaring and when we are in a raging bull market. At the end of the day, however, stocks are equity in a company and this equity is valued a certain way which one day or another should reflect the true value of a company and its growth prospects. When things rationalize, those who completely ignored fundamentals and just followed the crowd/hype are the ones who will be left behind for scraps. Almost everyone made crazy money in 2020. It won’t stay like this for too long and to get used to it/try to replicate it is a baddddd habit. These young people making money on illegal market manipulation/following the hype trades of the week now think they are “experts” -- but we all know how these quick, easy money-making schemes pan out in the long term. It’s almost never this easy. In the long-term, it is usually NOT traders/option gamblers/speculative stock buyers who become the multi-millionaires or billionaires of the world. It is the ones who learn how to invest in fundamentally sound companies and are confident parking their money in it for decades while consistently adding money, later retiring comfortably.
IPOs, SPACs, and other highly speculative companies/schemes:
I think this new wave of IPOs and SPACs is mostly unethical and perhaps fraudulent, and intended to take advantage of the current hype/momentum/liquidity/retail traders and cash out while valuations are insanely high and speculation is at its highest since 1999 in certain sectors. The founders and shareholders are laughing their way to the bank with what ridiculous prices both Wall Street and retail “investors” are paying now for their companies. Example: Insiders at DASH and the investment bankers who worked with them to finance the company valued it at 16b in June 2020 (remember these are the insiders who know most about the company and want their company to be valued high during a funding round). In December, it IPO-ed and opened at around 60b and is trading around that valuation right now. What changed from June to December that quadrupled the company’s value? Nothing. Retail investors who don’t understand valuation are willing to pay 25x+ revenue for a company with so many competitors and who’s peak growth probably happened this year due to COVID, and who’s valuation quadrupled in 6 months merely on the company knowing they can milk retail traders/Wall Street riding the retail trade and IPO wave. There are many many many more examples. (see what happened with Nikola where every kid thought it was “the next Tesla”).
Even worse, some of these IPOs/SPACs/blank checks are merely business ideas/plans with multi-billion dollar valuations, mostly because retail investors want to catch “the next Tesla.” The companies misrepresent and highly exaggerate future prospects so they can raise money and cash out, taking advantage of some of the irrational behavior in the market today and the amount of ‘unsophisticated liquidity’. This is a dangerous mindset and crowded trades like this with high speculation and almost no fundamental basis are what lead to bubbles bursting and crashes. Like I’ve said, there’s only 1 Tesla and only a few potential Amazons, Apples, Shopifys etc. that are worth trading at crazy multiples now... not 500+ companies projected and valued to be the next 20b+, 50b+ or 100b+ giant.
Threat of Dilution
Another big big risk to these high-flyers which a lot of people don’t understand is that the companies usually take advantage of the high stock price and subsequently issue stock to raise capital, which dilutes current shareholders and lowers the % of profits each share is theoretically entitled to. Companies do this to cash out and raise money while the stock price is high. So far, the market has ignored share issuances and shrugged it off, mostly probably due to the trading (not investing) nature of the market with no regard for fundamentals. One day this will catch up with the people still clinging on these high flyers/doubling down hoping for it to keep going up and up.
Robinhood Negligence
Another major problem is Robinhood specifically and intentionally targeting younger people with no experience investing and instantaneously giving them the ability to buy/trade options and highly speculative plays, even on margin, which can cause them to lose all of their money or even more in a day if they act recklessly and are unlucky. Robinhood has gamified stocks and made them appealing to people who have never touched the market before. Even though it’s great for everyone to start INVESTING their money, Robinhood is used mostly by the youth as a gambling mechanism or to pump highly speculative stocks with their slack/Instagram group (which is illegal). I think Robinhood could be legally liable for negligence for targeting unsophisticated investors without having additional safety measures in place. The only reason this hasn’t been a big problem yet is because everything’s been going right for these speculative companies, and Robinhood users have mostly been making money, so no one cares. But Robinhood users are one day going to incur heavy losses once sh*t hits the fan with this incessant gambling/crowded trades/“stocks only go up” mentality.
How will this all end?
In my opinion there are 2 ways this will end: 1) stocks will lose their traditional definition and purpose as an investment vehicle reflecting a company’s fundamental prospects, and rather become pure gambling and trading tools with names attached to them, where valuation is meaningless; 2) a major correction/downturn in these out of the world high-flying stocks followed by lawsuits and certain groups pointing fingers at other groups to blame for creating this circus show in the markets.
My advice is to take profits while you have them and play with the house’s money. Don’t think you can consistently replicate the trades of the last year. It’s been a year unlike the market has ever seen and there is insane amounts of speculation in certain sectors, plus insane amounts of money flowing in since stocks are pretty much the only game in town (other asset-classes are almost un-investable currently). Fundamentals at some point are going to catch up whether it’s a few months from now or a couple of years. Rates will eventually start rising materially in the next couple of years, which the market could price in ahead of time. Treasury yields are already starting to creep up which could end up hurting these speculative/growthy names the most.
The Bitcoin Hype- while it may have some uses, I don’t think it will be the future.
Now… Bitcoin/Crypto. First off, I don’t think BTC/crypto is entirely useless, but I don’t think it’s going to be nearly as big and important as most people think. The biggest risk and most likely to occur is government regulation. I think regulation of BTC is inevitable which will take away a lot of the advantages it has to offer. The commonly asserted argument by younger people that government can’t control BTC is clearly wrong. First off, BTC right now is mostly used as a trading mechanism and is barely used as a currency to buy actual things. 2) It’s used mostly for illegal transactions such as online gambling/drugs. 3) Very important—- If BTC/crypto does start to be used as a common mode of currency, government will likely have to strictly regulate it. The government needs control over fiscal and economic policy (as we saw with COVID) and will need to regulate BTC by limiting the size/scope of transactions, requiring fees, implementing additional taxes, etc. to limit its use as a common currency. 4) Two benefits of BTC people mention are as an inflation hedge and ability to transfer money overseas instantly without worries about currency exchanges. However, government has a strong interest in limiting this to prevent large overseas transactions for illegal activity (such as ISIS sympathizers receiving payments from a kid in New York, or politicians easily sending funds overseas with no trace). Also, currency exchanges exist for a reason and allow the government to have a good gauge on how the economy is doing, what fiscal/economic policy is needed, etc. Congress and the Fed won’t allow themselves to lose control over this and they shouldn’t, since we need the government to implement these policies to ensure a stable economy. 5) Government can simply make it illegal to do certain things to stop or slow it down- they don’t need control over the algorithm and mechanism. Just like government can’t “control” people from committing murder but can regulate it by sending people to prison for committing it, or by issuing citations for traffic violations to deter it. 6) No one knows the origins of BTC, what the creator has planned for it, if there is a secret hidden in the algorithm which can create unexpected results, etc. There’s just too much uncertainty and risk.
I think the risks of future regulation of BTC and its non-adoption as a universal currency far outweighs the potential benefits it may have in the future. I don’t think BTC/crypto is useless, but I don’t think it’s going to be nearly as big and important as people think. Institutions are trying to hop on the retail train now and make some money on it so BTC price might run up a lot more, but WHEN Congress/Fed starts to talk about serious regulation after BTC becomes more popular and used regularly, crypto is going to be in trouble. We don’t know when this is going to be, so I wouldn’t recommending dumping too much money in crypto hoping it’s invincible/the future.
Conclusion
Remember- everyone’s a genius in a bull market. Almost everyone’s made good money this year, but don’t think you can keep replicating triple digit percentage returns every year with these speculative high-flying stocks. Everyone thought they were a genius 1998-1999 until sh*t hit the fan (there are similarities and differences between 2000 and now, but the concept is the same). Greedy people pushing their luck with these “gambles” and speculation are going to be in trouble when things turn around and valuations come back to our solar system for some of these speculatives. Be careful, take profits while you can, and don’t be greedy. All these problems with the market are important because this is real people dealing with real money and the stock market has always been the foundation of investments in America. Now, parts of the market are at risk of turning into a pure speculation and gambling mechanism for younger people. Again- what I’ve said does not apply to the great American companies that have justified high valuations such as Amazon, Shopify, MasterCard, Apple etc—- it applies to the crazy speculative companies that have not “made it,” yet people price in that every single one of these speculative companies will make it to multi multi billion companies one day, which is absurd and unrealistic.
This can go on for a year, 2 years, maybe longer. It could also come crashing down sooner. You don’t want be stuck at the wrong end of the downturn and be unprepared, so don’t go chasing crazy returns in 2021 like you did in 2020. Also remember, the bigger the climb the harder the fall.
It’s fine to have your speculatives/high-flyers/risky stocks be a small % of your portfolio but a lot of younger investors are all in on it or have it as their core holdings which is the scary part. In the long run, the sure/steady way to make money/get rich is to invest in fundamentally sound and valued companies, not to try to speculate and gamble for 100%+ annual gains. Be careful.
[Note: Also, before I get “memed” by today’s retail/young investors for writing this because I’m jealous or upset, I’ve made more money in the market than anyone I know in the past year (without participating in any of the speculative/crowded trades mentioned below) so the following is not written out of spite as some people might claim. That’s not meant to brag, but it’s meant to shut down the argument most young people use that whoever talks bad about the market is somehow envious of them. In fact, it is the younger “investors”/traders who brag about their last year’s stock earnings on social media and mock anyone who isn’t riding their circus trades with them. Even though I’ve made a lot of money in the past year, I don’t claim to be a genius stock picker who believes they can replicate triple-digit returns every year, unlike some of the arrogant and greedy young “investors today.” I know that we’ve been in a once in a lifetime rally and bull market, unlikely to continue anywhere near this pace, especially in the parts of the market described below.]
Arin Pezeshkian
January 23, 2021
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