Return Of Capital Takes Center Stage From Return On Capital

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by Tyler Durden
Wednesday, Feb 02, 2022 - 07:45 PM

By Ven Ram, Bloomberg markets live commentator and analyst

If the recent market jitters are anything to go by, gone may be the years when investors threw down money with such ease into investment fads and seemingly earned mind-boggling returns with even greater ease.

Recall the heady days of 2020 and 2021 for speculators:

  • Blank-check investments? Check.

  • Pay astronomical P/Es for a whole band of innovators? Check.

  • No intrinsic value but there’s only a bunch in supply, and everyone and their granny has made money hand over fist because it’s the future? Check.

What seemed like gas balloons headed straight to the stratosphere suddenly seem not-so-invulnerable. The return of inflation -- a prodigal entity long forgotten in several economies -- together with a seemingly aggressive Fed mean, however, that investors should perhaps care about the return of their capital that they had been taking for granted all this while rather than the return on their capital.

However, what makes the current market different from previous downtrends is the level of retail-investor participation. And even amid the recent stock volatility, Robinhood investors are still seemingly blase with questions on the popular Reddit forum. Ranging, for instance, from, “I am a newbie...and I have an open options contract. What should I do?” to “I have virtually zero experience...It seems a stock would hit +2% before -5%...what is stopping me from repeating this...(and making) a profit each time?”

If people with little experience are playing with options you know it’s a story that isn’t perhaps going to end well.

As Warren Buffett likes to say, there is nothing that dulls the brain than a few instances of making money easily. Alas, years of unchecked money creation and profligate central bank bond purchases that overstayed their best-by date have contributed to investors treating the stock market like a casino.

The upshot of all that is that some of the most naive investors will be paying for their market tuition with some hard-earned lessons.