Episode Details

You may have read commentary that the share market isn’t reflecting reality at the moment. For example, the share market can rise by 3% on the same day that we receive bad news in respect to the spread of the virus. Spectators are left thinking how can market values rise when global economic expectations are so negative? That is a fair question.

Then there’s stocks like Tesla in the US and Afterpay in Australia.

Electronic car manufacture, Tesla's share price has risen by 50% over the past couple of weeks. Its market value is now equal to the total value of Australia’s big 4 banks plus BHP combined. The difference is that the banks and BHP make total profit of $12 billion p.a. whereas Tesla loses money (and has never made money)!

These exuberant valuations are happening here too. Towards the end of March, Australian listed FinTech company Afterpay was trading just above $8 per share. Today, it is trading at circa $70 per share and is worth over $20 billion. It also doesn’t make a profit.

So, how do you navigate a market that doesn’t make a lot of sense?

The Robinhood effect

One of the contributors to this irrational exuberance is the influx of amateur investors – often first-time investors. Back in May, Australian regulator ASIC noted there had been a 340% increase in the opening of new share trading accounts. The US has also reported a record number of new account openings this year.

The theory is that people are becoming bored being locked in their homes. Sports betting and casinos are closed. So, people have turned their attention to “gambling” on the share market.

FinTec companies, particularly in the US have jumped onto this trend. US provider, Robinhood is best known for gamifying share trading. It offers free stock to anyone that opens a new account – and additional free stock if you refer friends. The screen turns green if your trade is in profit (and red if its not), sends you confetti when you buy and gives you your money straight away after you sell, so you can trade again (it takes 3 days in Australia). Many brokerages in the US now don’t charge commissions or fees – instead they hide their margin in the quoted share prices. All of these things are aimed at encouraging people to gamble, not invest.

Similarly, ASIC has noted its concern with Australian retail investors trading in pursuit of quick profits. Its data suggests most are unsuccessful and lose money. For example, per ASIC, in the week of 16-22 March 2020, retail clients’ net losses from trading CFDs were $234 million.

Of course, this behaviour is against everything we believe at ProSolution and is more akin to gambling than it is investing. But speculators (gamblers) can have a substantial impact on markets in the short term – Bitcoin is an excellent example of this.

Everything is popular until it’s not. This will end in tears

Well-respected stock market analyst, Rob Arnott highlighted in this interview that Amazon is currently valued on a price-earnings (PE) ratio of 120 times. Even if you believe that Amazon could grow its sales by 20% p.a. over the next 10 years (which would mean that in 10 years it would be larger than the entire retail marketplace globally – you’d have to be sce