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dpetrescu
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Has anyone been reading through the Wall Street Bets forum on Reddit? It has almost 2M subscribers and almost every post is about more and more extreme gambling - putting everything on one stock based on random recommendations, meme stocks, Buying large short term options with most not fully understanding how options work and trading on maximum leverage.

 

There are a lot of survivorship stories of 100x and 1000x and 10000x returns - think going all in on OTM Tesla call options. There are also some stories of losing up to 100% but then it’s save more money and keep gambling.

 

The average age of Robin Hood users is about 28. There is no memory of a dot com or real estate bubble - got on board on the COVID massive rising tide. A lot of stories of people quitting jobs (in a time of high unemployment) to trade full time.

 

How does this end? With the fed committed to low rates for years its tough to imagine a crash in the near future. But high margin gambling like this makes the market less stable. How could a 30%+ crash take place (even with low rates) in the next 1-3 years?

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Wouldn't these people constantly get burned  over time? As you said, there is survivorship bias, which means a lot of people are already blowing up now.

 

I think a market bubble is actually built based on what seems like rational decisions at the time. Individual stock crashes will happen for sure. But I doubt pure gambling-like decisions can build an overall market bubble that would lead to a big crash...

 

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As I mentioned in a different thread: it is the bus that you didn't see that hits you.

 

I have a friend in his late 20's who wanted the market to be shutdown in mid-March as losses were pilling up rapidly and daily. I cannot blame him as the sharpness of this sell-off was worst than 2008 and 2000 felt like a walk in the park!

 

9 nonths later we are at record highs, IPO's double ar the open like it is 1998-1999, VIX is still in the 20's indicating something really messed up in the options market, etc.

 

Looking ahead, the economy is definitely going to improve despite these politicians last hurrah at controlling masses with shutdowns. Last estimates that I saw showed U.S. unemployment at 5% and GDP growth of 4% + in 2021. So we will go back rapidly to full employment which is quite remarkable.

 

A 10% pullback happens almost every year in the stock market while larger drawdowns are more rare. Betting that the latter will occur soon is a loser's game as many here will be able to acknowledge having tried puts and other strategies in the past.

 

One problem that I have is logic and it made me pull my hair more than once. I have finally accepted that the crowd will continue to do their irrational stuff until they finally stop.

 

There was a strategist at Bear Stearns years ago who only asked one question: "Does your company make money? If so then you will be fine."

 

It seemed way too simplistic for the early 20's investor that I was back then. However, it is true.

 

For a long time I thought his saying lacked around "quantity" of earnings but, if a growth stock earns money early on eventually or on average it will earn enough to take care of this issue.

 

Long message but, eventually panic will return. No idea when or why? If you are away from the excesses you will make it through just fine.

 

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The mantra of the WSB / Robinhood crowd is "Stocks only go up."

 

One member of Gen Z recently told me that she has been buying Tesla shares because "it's free money."

 

I don't think this is poised to end well, but I have also been thinking that for 5+ years now and have been proven consistently wrong. If the Fed is going to continue to step in to prevent companies from failing, then the current trend seems poised to continue, as the upside to equity ownership is rewarded and downside risk is virtually removed from the system. Ultimately, it's central bank liquidity driving this casino market. What the Fed is doing is terrible for capitalism in the long run, but good for stocks in the short term.

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Guest cherzeca

draftkings....predictit...robinhood...commisionless trading...the internet has made the stock market far more accessible than understandable

 

momentum stocks will suffer at some point.  as an indexer mostly, I note the difference between spy and qqq is remarkable...100% outperformance by qqq over 2 years.  should continue and then shakeout...

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Just one more data point for the bubble.

 

But, generally speaking, if they want to gamble, why not play house? I've done really well over time feeding the gambling crowd. This year selling puts to people who dont understand the greater details or simply judge a book by its cover has been the best way to take advantage of the option premiums. Good if not great companies that get swept up in rhetoric or false narratives where premiums are massive. Just mentioned RICK a couple days ago. Few other favorites would be FIZZ, DDS, SPG, PSTH, shit even Tesla a few months back, around the time of the split, I was able to short some (split adjusted) $4 puts for 30c with a June 2021 expiration.

 

People often think of the dumb money, and its wise to enter that into your underwriting equation, but I've found it much more lucrative to feed to dumb money that thinks they're the smart money.

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The mantra of the WSB / Robinhood crowd is "Stocks only go up."

 

One member of Gen Z recently told me that she has been buying Tesla shares because "it's free money."

 

I don't think this is poised to end well, but I have also been thinking that for 5+ years now and have been proven consistently wrong. If the Fed is going to continue to step in to prevent companies from failing, then the current trend seems poised to continue, as the upside to equity ownership is rewarded and downside risk is virtually removed from the system. Ultimately, it's central bank liquidity driving this casino market. What the Fed is doing is terrible for capitalism in the long run, but good for stocks in the short term.

 

+1

 

In my view, the market will stay expensive and "investors" will continue to speculate until the time comes when companies can fail again. The only way I see that happening is for the Fed to lose control, i.e. when inflation picks up to the point where investors in Treasury bonds demand higher rates to compensate for this. The Fed can't continue to force yields lower at this point by printing money, because this will only increase inflation expectations, and cause investors to demand an even higher yield as compensation. It will be a self-reinforcing fly-wheel, and a very ugly one at that.

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I'm a believer that many stock prices that are listed no longer represent future cash flows of the Company (using appropriate discount rate).

 

Many stocks share the same valuation characteristics as antiques. It's very debatable whether these stocks will generate enough CF to sustain their current valuation, and what a rational investor would pay if they modelled future CF in excel.

 

I own many antiques, and they are quite valuable - I enjoy them and plan to keep them - knowing full well they do not have an intrinsic value of what they sell for.

 

Bitcoin is the poster-child of this era's discrepancy in intrinsic values from typical valuation models (e.g. discounted cash flow).

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draftkings....predictit...robinhood...commisionless trading...the internet has made the stock market far more accessible than understandable

 

I realize not the point of the thread but Predict it has been out of control lately. There is free $ to be had. For example, "Which party will win presidential election" was settled a few days ago and the last trading price was $0.94 (the payout is $1). Even 2 weeks after the election this market was trading in the $0.85 range. There are few other markets that are trading at unreasonable prices, given that we already know what the outcome will be. I suppose the gamblers/the believers are those who are taking the opposite side of these bets and they really just need to be right once to recoup their losses.

 

*The catch with predictit is that withdrawal cost is 5% (4% is you use cash back card) and they take 10% of your winnings.

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The mantra of the WSB / Robinhood crowd is "Stocks only go up."

 

One member of Gen Z recently told me that she has been buying Tesla shares because "it's free money."

 

I don't think this is poised to end well, but I have also been thinking that for 5+ years now and have been proven consistently wrong. If the Fed is going to continue to step in to prevent companies from failing, then the current trend seems poised to continue, as the upside to equity ownership is rewarded and downside risk is virtually removed from the system. Ultimately, it's central bank liquidity driving this casino market. What the Fed is doing is terrible for capitalism in the long run, but good for stocks in the short term.

 

+1

 

In my view, the market will stay expensive and "investors" will continue to speculate until the time comes when companies can fail again. The only way I see that happening is for the Fed to lose control, i.e. when inflation picks up to the point where investors in Treasury bonds demand higher rates to compensate for this. The Fed can't continue to force yields lower at this point by printing money, because this will only increase inflation expectations, and cause investors to demand an even higher yield as compensation. It will be a self-reinforcing fly-wheel, and a very ugly one at that.

 

100%. 

This is the dynamic that I simply can't wrap my head around.  It amazes me that we are living in a world where everyone seems to believe inflation will remain low forever and interest rates will never go up again.  If and/or when this changes, it will be the game changer for market valuations... suddenly gravity turns back on.  I just don't know if it will happen in 1 year or in 20 years, but like you said, it has the potential to spiral out of control, and this is a good enough reason for me to play the game slightly cautiously for now. 

 

 

 

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The mantra of the WSB / Robinhood crowd is "Stocks only go up."

 

One member of Gen Z recently told me that she has been buying Tesla shares because "it's free money."

 

I don't think this is poised to end well, but I have also been thinking that for 5+ years now and have been proven consistently wrong. If the Fed is going to continue to step in to prevent companies from failing, then the current trend seems poised to continue, as the upside to equity ownership is rewarded and downside risk is virtually removed from the system. Ultimately, it's central bank liquidity driving this casino market. What the Fed is doing is terrible for capitalism in the long run, but good for stocks in the short term.

 

+1

 

In my view, the market will stay expensive and "investors" will continue to speculate until the time comes when companies can fail again. The only way I see that happening is for the Fed to lose control, i.e. when inflation picks up to the point where investors in Treasury bonds demand higher rates to compensate for this. The Fed can't continue to force yields lower at this point by printing money, because this will only increase inflation expectations, and cause investors to demand an even higher yield as compensation. It will be a self-reinforcing fly-wheel, and a very ugly one at that.

 

100%. 

This is the dynamic that I simply can't wrap my head around.  It amazes me that we are living in a world where everyone seems to believe inflation will remain low forever and interest rates will never go up again.  If and/or when this changes, it will be the game changer for market valuations... suddenly gravity turns back on.  I just don't know if it will happen in 1 year or in 20 years, but like you said, it has the potential to spiral out of control, and this is a good enough reason for me to play the game slightly cautiously for now.

 

Investors said the same thing in early 2010s. I've heard this before.

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Has anyone been reading through the Wall Street Bets forum on Reddit? It has almost 2M subscribers and almost every post is about more and more extreme gambling - putting everything on one stock based on random recommendations, meme stocks, Buying large short term options with most not fully understanding how options work and trading on maximum leverage.

 

There are a lot of survivorship stories of 100x and 1000x and 10000x returns - think going all in on OTM Tesla call options. There are also some stories of losing up to 100% but then it’s save more money and keep gambling.

 

Are we sure that folks on reddit aren't just... lying? I mean, it's the internet. People lie on the internet.

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Has anyone been reading through the Wall Street Bets forum on Reddit? It has almost 2M subscribers and almost every post is about more and more extreme gambling - putting everything on one stock based on random recommendations, meme stocks, Buying large short term options with most not fully understanding how options work and trading on maximum leverage.

 

There are a lot of survivorship stories of 100x and 1000x and 10000x returns - think going all in on OTM Tesla call options. There are also some stories of losing up to 100% but then it’s save more money and keep gambling.

 

Are we sure that folks on reddit aren't just... lying? I mean, it's the internet. People lie on the internet.

 

Sure there's lots of lying and inflated success and the occasional faked account screenshots but survivorship bias really does play a factor. If you followed WSB before this year when it was less mainstream, there were just as many (probably more) cases of people blowing up their accounts and losing tens or hundreds of thousands of dollars as there were instantaneous success stories.

 

The culture there has selected for a YOLO mentality and anything that's not "gains porn" isn't worth posting. Read some of the GME threads on there and the masses have trouble understanding the guys who've bought in with big positions in shares rather than just putting it all in options.

 

If you look back a couple years there was some decent analysis. WSB has been cultishly bullish on AMD for years and buying in at just about any point would have yielded a good return.

 

You also have to factor in the one-upsmanship attitude there, at this point a lot are playing with house money so YOLO'ing it on an options play for cred makes sense in a world where WSB cred + more money > potential loss. I think of this scene a lot while reading WSBs

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Yea, but the one-upmanship is sort of what I'm talking about. How do we know these people aren't just 4chan-faking it because it's fun to watch people think their posts are real?

 

(FWIW, there's definitely froth out there, but I don't know that r/wallstreetbets is where I'd go for a good representative sample of the market. Basically, I'm wondering about the possibility of confirmation bias in seeing/thinking there is froth in the market and then seeing r/wallstreetbets and thinking that it's more real than it is. It could all be kayfabe for all we know.)

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Yea, but the one-upmanship is sort of what I'm talking about. How do we know these people aren't just 4chan-faking it because it's fun to watch people think their posts are real?

 

(FWIW, there's definitely froth out there, but I don't know that r/wallstreetbets is where I'd go for a good representative sample of the market. Basically, I'm wondering about the possibility of confirmation bias in seeing/thinking there is froth in the market and then seeing r/wallstreetbets and thinking that it's more real than it is. It could all be kayfabe for all we know.)

 

A lot of posters are probably "karma whoring" (likes = karma points).

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That is a good point about confirmation bias. I personally have the feeling we could be at extreme overvaluation and the market could crash. I probably am looking for stories to support that.

 

Some interesting links:

The recent Munger interview, thinks that market returns in the future will be much lower. Interesting that after saying that, he quickly corrected himself and clarified that “real” returns will be a lot lower

https://youtu.be/btdqC1V8cgg

 

See the chart at  1:10. It could be that this will continue on for 7 or so more years (average duration between recessions) of course with a few 10% corrections, until the next recession before we get 30% to 40% crash

https://youtu.be/9M2TG-https://youtu.be/9M2TG-yVrzw

 

It’s not worth any mental effort  to try to make predictions but I think it is important to see when things get really irrational.

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Guest cherzeca

what I am thinking through is how different this pandemic-induced downturn is from GFC. see eg https://www.wsj.com/articles/three-reasons-2021-could-be-a-lot-better-than-you-think-11608732900?mod=hp_featst_pos4

 

although from a social perspective I lament this, this economic downturn has hurt moms/pops small businesses, not large businesses and not banks, like GFC. this portends for a quicker and stronger recovery in 2021 than you saw in 2010-11-12.

 

so yes the stock market is richly priced, but in anticipation of an economy that will do very well in 2021...perhaps even better than expected because of delayed gratification/socialization in 2020 resulting in more than expected consumption in 2021.

 

so if you agree, then you stay long if you are long, and get longer if you are not. (but no gambling!)

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Guest cherzeca

And what if you don’t know but want to maximize your upside and minimize your downside? ;)

 

sustainable risk taking as best as you can.

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