While reading the Wall Street Journal, watching CNBC, and following financial headlines might seem like a good way to gauge the best places to invest your money, these can not only lure less experienced investors into dangerously crowded trades, but also scare them away from common sense investment opportunities. From my experience, most of the time, sentiment for parts of the market shifts one way or another in an unreasonably extreme manner regardless of the fundamentals, creating fairly obvious long-term opportunities. While an investment might seem ridiculous or stupid in the moment considering what media headlines say, these are usually when the biggest opportunities arise. The explanations can be either of the following: i) large institutional investors collectively take on certain trades for a short period of time that align with headline news to push up the price and then unload , ii) or they are just generally flat out wrong in the medium to long-term and can’t use common sense. The former is probably a better explanation given the pervasive nature of algorithm-based trading, the short-term time horizon of hedge funds/money managers, and technical traders looking for a quick buck (in simpler terms, many hedge funds and money managers want to make quick money so they get a cut of it - they usually don't look years down the line when placing trades; long-term fundamental investors sit on the sidelines and don't really affect daily price action). This can cause extreme positioning in one direction, creating big opportunities on the contrarian side, and that happens much more often than people expect. As easy as it sounds, they key is tuning out the noise, having patience, and building confidence through research and self-education. Having this mindset, along with discipline and understanding of how markets move can be a great way to build long-term wealth for anyone willing to stomach short-term volatility.
(Throughout the article, when I use the term "Wall Street," it refers to the general group of analysts, hedge funds, money managers, news outlets such as CNBC, and other so-called investing 'experts.')
Brief Summary of Current Macroeconomic Conditions
We are currently in one of the most interesting and difficult times in the markets (stocks, bonds & commodities) in recent history. Wall Street is currently sounding the alarms as if Armageddon is coming and that we are headed towards a recession, further strong inflationary pressures, rising rates, and a period where most sectors are not investable. We’ve seen rates rise significantly in the last few months, the stock market drop pretty significantly (while indexes only dropped roughly 20% from their highs, most individual stocks are in a deep bear market of 50%+ declines). The already-inflicted massacre in stocks is not well reflected in the major indices (S&P/Nasdaq), which are being saved by the relative outperformance of big tech stocks (AAPL, MSFT, GOOG, TSLA etc.) that make up such a big % of the indices, and defensive sectors like healthcare.
Widespread consensus on Wall Street is the following:
· Significant economic slowdown or recession is coming
· Inflation will continue to hurt markets/consumers
· Defensive investments are the place to be, aka healthcare, utilities, consumer staples, commodities, gold, and cash
· Risk-off, risk-off, risk-off
This article won’t go into too much detail about what I think about the future (that will be a separate article). It rather reflects on some of Wall Street’s extremely incorrect macro predictions in the past couple of years and why you should block out the current noise from media/CNBC etc., try to do your own research, form your own opinion, and go against the consensus sometimes if you see an opportunity. It is absolutely shocking, at least to me, how "investing professionals" could be so wrong so consistently on a medium to long-term basis. Hopefully the following will help.
The purpose of this article is to point to how wrong the consensus on Wall Street has been in the last few years in their general claims about the economy or certain sectors. When there has been overwhelming consensus among analysts, strategists, hedge funds, etc., then going opposite that consensus (if there is a legitimate reason for doing so) has provided highly attractive opportunities for profit. Don’t listen to so called “experts” just because they are experts, as their guess about the economy is usually as good as anybody else’s, and they also have hidden agendas and their own positions to advocate for.
I ignored Wall Street’s “consensus” over the past couple of years and I couldn’t have been more spot on regarding general calls on the market and specific sectors. This is not meant to brag, but just point out that I very closely monitor what happens in markets, and also that it’s not hard to spot areas of opportunity. It’s not because I’m a genius or anything close to it, but because Wall Street tends to collaborate to push markets in one way or another to profit, then jumping ship once retail investors are lured to follow the momentum. This is pretty easy to spot after a little bit of experience. Unfortunately, I made the rookie mistake of not betting big on my convictions and sticking through with it for several months. So, while I did make some money, I learned the hard way that I should stick to my convictions and use irrationality and extreme positioning in markets as longer-term opportunities.
In my opinion, the economic forecasts and trends “experts” try to identify are a bunch of noise that distracts ordinary investors from the irrationality of the price action (how stocks move in the short-term). While no one can consistently and accurately predict what will happen with the economy or markets, when you have common sense and sound fundamentals telling you to trade opposite of Wall Street consensus, there could be major mis-pricing to take advantage of.
I think a lot of this current pessimism and preaching of hell breaking loose is blown out of proportion and is misleading uninformed investors to be extremely fearful of investing. From my experience, Wall Street generally tends to pick one side of a trade and 90%+ of analysts, hedge funds, etc. go along with that general trend, while preaching their contentions confidently to the public. Predicting what will happen to the economy is a fool’s errand – rather, using rational investment approaches and common sense can be more rewarding.
In my opinion, the time to worry was in the middle of 2021, when sentiment was so positive, and markets were trading at euphoric valuations (discussed more below) - not now when so much carnage has wrecked financial markets. When there is a lot of bad news priced in, the risk-reward of investing becomes increasingly more attractive.
Now, I will provide a few examples from different parts of the economy over the last two years illustrating what the consensus on Wall Street was, how wrong they ended up being, and how dramatically their views changed in such a short period of time. Whoever had the stomach, patience, and average intellect to take the opposite trade ended up with lucrative rewards. Understanding from the examples below can open the eyes to current opportunities and of those to come.
Examples of General Consensus Predictions on Wall Street vs What Actually Happened (2020-2022)
Oil Prices and Oil Stocks
Back in 2020, when oil prices hit historically low levels due to COVID, almost every single person on Wall Street said oil companies will never be investable again. Oil stocks absolutely plummeted and declined continuously for months (look up the charts for XOM, CVX, OXY, FANG, and others). Oil prices even went negative briefly. The general reasonings among Wall Street were climate change concerns, the rise of electric vehicles, COVID causing a massive change in consumers who would be scared to travel for the rest of their lives, etc. Wall Street sold off, shorted, and absolutely sh*t on oil all throughout 2020. Such low valuations in oil stocks, low oil prices, and terrible sentiment indicated a lotttt of bad news was already priced in, and that a massive opportunity awaited if the doomsday preachers were wrong.
To me this seemed like an opportunity to invest for multiple COMMON SENSE reasons. First, it was pretty obvious the pandemic would be over within a year or two and we would have a vaccine (side note: I also predicted when the vaccine announcement would be made and that it would have been effective, something anyone could have done – all you had to do was read updates on Pfizer's studies, but somehow Wall Street missed this too or chose to ignore, failing to invest in the "reopening" trade until only after). Knowing that the pandemic would subside at some point and life would go back to normal, it was fairly obvious people would soon drive their cars and travel on airplanes, bringing demand for oil closer to normal.
Next, knowing that there would be a significant surge in demand in the coming years, I looked to the supply side. Oil companies had drastically cut production because demand had temporarily gone down. Additionally, they significantly cut their operating expenses and put together leaner business models fit for a lower-demand era. To me, it was a strong possibility that demand would quickly surge back once COVID subsided and there would be a significant need for oil, while there was a significant supply shortage as oil companies cut down production to stay solvent throughout the pandemic. This means oil prices would rise due to the impending demand/supply disconnect, and these now-leaner oil companies would be highly profitable. This was fairly apparent if someone blocked out headlines and took some time to think, but Wall Street absolutely got this wrong or just manipulated for short-term profits shorting oil (and now turning around and making profits on longs also). They decided to make money just shorting and selling oil stocks throughout 2020. After the vaccine was announced and we started to reopen, demand increase slowly materialized and people started to realize we did not have enough supply, and that oil companies would massively profit from these higher oil prices due to the pent-up demand and the massive amount of money people had saved up to travel.
In the end, Wall Street is now more bullish on oil stocks than ever (and they also were before the Russia-Ukraine War), while somehow they were claiming just a year and a half ago that oil would NEVER be investable again and that it was the worst place to be in the market. If you bought XOM, CVX, OXY or any other oil company while Wall Street was slamming their stocks down, you would have easily made 100, 200, 300%+ returns in a year. This is one example of sentiment being so bad, perhaps irrationally, that betting in a contrarian manner paid off big.
Technology/Growth Stocks
Where do I even get started. Throughout 2020/2021, I was the biggest and only bear I knew for most tech and growth stocks, which were trading at ASTRONOMICAL levels. While I was wrong for a while and missed some of the ride up, I ended up being right because of common sense. I thought that a “techoning” would come towards the end of 2021, and it happened in a biblical manner (see this paper in Jan. 21 which could have saved a lot of people a lot of money had they listened). Tech/growth stocks were trading at astronomical multiples that they hadn’t traded at since the 2000 dot-com bubble. It was blatantly obvious, but no matter what happened or how their earnings reports were, they would just go up and up. Almost everyone on Wall Street was a complete bull and recommended buying these tech companies even near their all-time highs.
Their reasonings/excuses for constantly promoting these growth stocks were the following: 1) we have a near-zero interest rate policy and the fed will keep rates near-zero through the end of 2023, and thus we should pay any multiple for these tech companies when using such a low discount rate (as I’ll talk about more below, it was obvious rates wouldn’t remain at those levels due to a very robustly recovering economy and the threat of inflation that was so apparent, yet ignored); 2) that these tech companies are the future and are part of another technological revolution; 3) COVID permanently changed consumers’ behavior to only want to do stuff online using software; 4) the companies are putting up extremely strong earnings and growth; and the list goes on.
However, while some of the reasons were valid points in general, the valuations they assigned these companies were so ridiculous that it was bound to end in disaster. So many companies traded at 30-40x+ revenue. We had 50b+ companies popping out of everywhere as if every tech company was going to grow and be the next Amazon/Google, and no one really warned the general public to be very cautious until massive declines already began. When looking at it with common sense, most of the great earnings these tech companies put out were because of pull-forward demand during COVID as companies went digital. This growth and demand for digital products was highly unlikely to continue, and if anything, would significantly slow down (which it did).
I shorted these tech stocks for a while and wanted to place a BIG long-term short bet, but I was a bit too early and made another rookie mistake of not sticking through my convictions, closing my shorts early for only small gains. Hedge funds, retail investors, and almost anyone else was heavily concentrated in tech and was bullish because it just kept going up. As I kept preaching that valuations will eventually matter and these companies will get absolutely obliterated, the consensus was that investors should own tech/growth stocks at any price. (As a side note, I did not expect the declines to be this massive, with many many important tech companies falling over 50%. Now, this sell-off itself looks like extreme positioning and a long-term buying opportunity. There is a lot to say on this subject so I will save it for a separate article).
Now, most of these high-growth tech companies are below their pre-COVID levels and are down 70%+ in the last few months. This extreme sell-off is partly because they were so over-owned and so many people are getting margin called/having to liquidate, including many retail investors who did no due diligence on valuation and just tried riding the train up because they fell in love with the company’s story. Once again Wall Street was only using the environment to pump up tech stocks and make huge profits, and when they finally came to their senses, they started unloading tech/growth stocks ferociously. While these companies have not changed their business model from a year ago, Wall Street’s most useless group of people (sell-side analysts) have cut their price targets immensely as a reaction to the stocks just falling, just so they don’t look completely clueless in hindsight. Everyone was bullish at all-time highs in 2021 buying at any price, and now bearish in 2022 AFTER 50%+ declines in most growth stocks. I guess buy high sell low is the new strategy nowadays.
Again, the moral of the story is when sentiment is shifted so much towards one side and everyone is so heavily positioned one way, sometimes the most common sense thing to do is go the opposite and stick to your convictions. While tech/high-growth companies were the darlings of 2020/2021, most of them up 200-500% in those years, most have plummeted 80%+ since then and wiped out so many people in a short period of time who just followed the crowd.
(Think about the opportunity available right now if the sell-off in the beginning of 2022 was just as overdone as the bull-run of 2020/2021. Most growth stocks gave up 2 years+ worth of gains in a matter of weeks/months even though fundamentals remain strong.)
Retesting market lows after 2020 COVID crash
Back in June 2020, as the market recovered from the March 2020 crash, almost every Wall Street strategist/analyst said we would retest the March lows and that we would have a prolonged recession and a bear market for years to come, even as the market was already down 30%+. They ignored the fact that the Fed was here to pump as much money as needed to save the economy, that COVID would likely not last beyond a year or two, and that we live in the greatest economy/country ever. Anyone who was drawn in by the fear-mongering by Wall Street missed out on an opportunity to buy high quality companies at egregiously low prices.
Inflation & Preaching Near-Zero interest rates until end of 2023
It was blatantly obvious the economy was recovering fast through the end of 2020 and 2021 and that inflation was running rampant, but somehow the Fed/Wall Street brushed this off through most of 2021. There was a lot of liquidity in the market and a consumer as strong as ever, willing to spend, while we had supply chain problems and other shortages from COVID keeping supply down. Somehow, the fed guided for a while that they’d keep rates at 0 until 2023 in order to support the economy. Their “transitory” terminology was puzzling, and most money managers/CNBC heads also preached inflation would be transitory (now, everyone who agreed with the Fed seems to forget their own ignorance and makes fun of the fed’s failure to recognize the impending problem of inflation). To the Fed’s defense, the vast amount of quantitative easing in the beginning of 2022 was done to save our economy, which they did a great job of. But after we started to see our economy swiftly recovering after the first few months of COVID and companies remarkably putting up strong earnings, there was no reason for people to think inflation wouldn’t become an issue, as we saw people paying ridiculous prices for goods and spending their stimulus/unemployment benefit money. I was very hawkish at this time when everyone thought we could enjoy a dovish fed for years, because once again, I used common sense. The economy was so strong that we did not need the fed’s support. These are the reasons I shorted bonds towards the end of 2021 and was hesitant to buy any high-valuation technology stock, as higher rates hurt high-valuation stocks the most. The reasoning was that the fed would be forced to raise rates, and investors would demand higher rates from bonds due to inflation.
BUT now, every single person who was in the camp that inflation would not become a problem (this was a majority of Wall Street) and that rates would stay extremely low for a while have the complete opposite view. Once again, these strategists/analysts were dead wrong and have completely flipped their stance. The same people who were hand-over-fist buying long-duration assets such as high-growth technology are now dumping them indiscriminately a year later. Now they say rates will be going higher and higher, the fed needs to slam the breaks, and that inflation is embedded in our economy. As I’ll talk about in another article, I think fears of systemic inflation that will harm the economy for years is beyond overdone at this point, just like their ignorance and overlooking of inflation was completely overdone a year ago.
Banks
From March to November 2020, bank stocks got absolutely obliterated and were in free-fall. The consensus was that credit quality had significantly deteriorated, the economy would remain weak, small businesses would default on their loans, and that rates would remain extremely low (low rates are generally worse for bank profits). Wall Street/hedge funds indiscriminately sold these stocks for months, and many banks were trading significantly below their book value. To me, this made no sense.
It was fairly obvious that the economy was much stronger than people expected, all big banks had strong balance sheets and plenty of reserves to weather the storm, the government was printing and handing out money to save businesses (thus, defaults would remain low), the consumer was ready to spend the money it had saved up during lockdowns, credit was strong (banks reported strong numbers but Wall Street ignored it), and that the valuations on the big banks were pricing in a multi-year recession. While all the noise scared investors away, common sense and some due diligence made it pretty clear that banks were seriously mis-priced/undervalued unless a major recession was coming, which for the reasons mentioned above (such as fed support/imminent vaccine) was unlikely.
There were 100%+ gains made in a matter of months for investors who were willing to block out all the BS on Wall Street and buy high quality bank stocks. Reading analyst recommendations was absolutely useless, and even damaging for long-term investors. It would have paid off to instead spend some time thinking about the risk-reward of buying banks significantly under their book value who have strong balance sheets and post-2008 risk-mitigation measures.
For illustration, here is an example of how analysts Morgan Stanley covered Wells Fargo stock from 2020-2022; in March 2020, it dropped its price target from 49 to 39 – then to 27 in June 2020, 25 in July, and 23 in September, following the stock's rapid decline. At these levels, the stock was trading at about half of its book value, meaning if Wells Fargo liquidated, shareholders would technically be entitled to receive roughly double the amount the shares were worth upon distribution. All these price targets cuts were merely reactive and happened after the stock fell below that level, making the price targets useless to investors. Then, as the stock started to rise aggressively, the same analyst raised his price target in panic to avoid looking stupid, to 40 in November, 43 in March of 2021, then to 49 in April, 61 in December, then finally 72 in January of 2022, following the stock’s over 100% increase in a year. To summarize, in a year and a half, the same analyst raised his price target from 23 to 72, an over 100 billion market cap and 200% difference. Moral of the story, don’t listen to BS from analysts, don’t just follow price action, or listen to crowds on Wall Street preaching Armageddon. Sentiment and positioning among big investors changes quickly and viciously to the opposite, so be ready to take advantage.
“Roaring 20s”
Most Wall Street strategists/analysts were confident in 2021 that we were headed towards a roaring 20s where the US economy would recover robustly and continue to grow strongly. They were preaching for a multi-year bull market led by cyclical stocks as we entered a post-world war recovery type decade. Less than a year later, the sentiment has completely shifted, and they are advocating for the complete opposite, a recession and perhaps prolonged period of below-average returns for stocks.
Conclusion
There is a lotttt of noise and fear mongering out there. The best way to find great opportunities is to do your own research and make investments based on fundamentals, rather than sentiment. Yes, in the short-medium term, the market could fail to price in your investment fairly and you’ll have to go through really tough times, but a quick change in sentiment the other way could create a vicious rally like we saw in the banks/oils in 2021.
The market has become mostly a place for algorithms and technical traders who group together a bunch of stocks and influence price action one way or another (fun fact: roughly 80% of all trading that takes place is done completely by algorithms and no human decision-making goes into it). It creates value opportunities for fundamental/long-term investors that are willing to wait for the market to rationalize a bit, assuming they do their due diligence and are willing to stomach short-term losses. Another thing worth noting is that the bulk of trading, and thus price action, is done by hedge funds/money managers that receive compensation on the profits they generate for clients, usually on an annual basis. Thus, most money managers do not have a long-term time horizon and just follow trends/place trades that seem to make sense in the short-medium term – it’s very likely that many money managers work together to follow the same trends and profit together since they are the ones moving the market. What this short-term profit incentive for hedge funds/money managers does is create movements in stock prices that are decoupled from fundamentals and instead focused on short-term headlines/trends, rather than the true value of the stock which is likely to be realized over the long-term.
Soon, I will share an article about current valuations in specific sectors, positioning in the market, opportunities, and what I see for certain groups of stocks, rates, and the overall market going forward. To cut it short, there are a lot of compelling opportunities out there, both long and short. As far as recession risks, I don’t think the Fed needs to cause a recession to tame inflation, and they could make an even bigger policy error than they made in 2020/2021 by tightening too aggressively and unnecessarily hurting the economy. There has already been massive damage in the equity markets which has led to layoffs and will likely lead to more (especially high-growth companies that use more stock-based compensation and raise $ through equity to fund growth). For reasons I will explain soon, I think inflation will not be a problem in a year, if not sooner. The Fed would make an error being complacent with destruction in equity markets and a recession is only probable if the Fed screws up and succumbs to public pressure to aggressively tame inflation at any cost.
Gaining the confidence to ignore the noise takes time and a little bit of effort for those somewhat serious about investing. Avoiding greed in good times and fear in bad times is crucial. Staying level-headed and open-minded will make opportunities to build long-term wealth more apparent. For newer investors (like myself), it really isn't hard to understand the basics, which is all you need. Once you have a decent grasp of the basics, you can start to identify attractive long-term investments with ease. Again, don't let people fear monger you into not investing and don't let the incessant chatter scare you. Take the dive slowly but surely, and make sure to manage risk by starting small.
Comments