Fools!

By Chris at www.CapitalistExploits.at 

Today, our head trader, Brad, chimes in. Enjoy!

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The world is made up of fools. And it seems we’ve a never ending supply of them, particularly as far as financial markets are concerned. Why do people/investors do such stupid things?

A number of reasons perhaps, but that’s not important. What is important is that there seems to be a never ending supply of fools out there. Whether it was the 1980s, 1990s, 2000s, or today — different day and different fools. But always a supply of fools.

My first big baptism of “fool behavior” was during heady days of the late 1990s with the Asian financial crisis, then the LTC debacle, and to top it all off (so I thought) was the TMT bubble.

I now make my living by identifying and trading against this fool behavior, essentially looking for extremes in market behavior and betting on the reversal to occur.

Identifying fool behavior isn’t that difficult. It’s applying the view that is way more challenging, namely figuring out ways to position for a reversal and not being carried out on a stretcher before the view plays out.

How to spot fool behavior? Well, a little bit of common sense is all you need. Here are a few examples to illustrate. And let me use more current examples than historical because I can’t stand hindsight geniuses.

Let’s do a trivia test...

True or false:

Tesla

Tesla has a forward P/E greater than 100.

  1. True
  2. False

Tesla has about the same market cap (+/- 10%) of Deer & Co, GM, and AIG).

  1. True
  2. False

Tilray

Last week, Tilray’s market cap was about 17% of Merck & Cos.

  1. True
  2. False

Last week, Tilray’s market cap was about half that of Colgate Palmolive and more than that of Yum Brands and Twitter.

  1. True
  2. False

Tilray’s market cap is currently more than all offshore oil drilling stocks combined.

  1. True
  2. False

Commonwealth Bank, Australia

In 2016, Commonwealth Bank (Australia’s biggest bank) was the 7th biggest bank in the world by market cap.

  1. True
  2. False

In 2016, Australian banks represented about 12% of the market cap of all the publicly traded banks in the world.

  1. True
  2. False

Commonwealth Bank is bigger in market cap than Mitsubishi UFJ (Japan’s biggest bank).

  1. True
  2. False

FirstRand Bank, South Africa

FirstRand Bank (South Africa’s biggest bank) has about the same market cap as UK’s Standard Chartered and Germany’s Deutsche Bank.

  1. True
  2. False

FirstRand Bank trades at a higher P/book value than 95% of banking stocks in the world.

  1. True
  2. False

Swiss Government Bond Yields

Someone's locked in a negative yield on the Swiss government 50-year bond back in 2016.

  1. True
  2. False

And in case you are wondering, the answer is true to all those questions. 

What fool guarantees a loss for the next 50 years in an “investment”? That would only make sense if we had “rampant” deflation for the next 50 years or if capitalism failed. Could happen but that’s a big call to make.

Swiss 50-year yield

With all the stuff going down in South Africa as of late (as if what has been happening for the last 5 years wasn’t enough) like land expropriations and thinking like this: And the market still carries on as if the South African banking system is the most respected and stable in the world and that the “Rainbow Nation” economy is an economic miracle.

Dow Jones Global Bank Index relative to FirstRand Bank in USDs

What fool would be short world banks on a P/book of 1x and long FirstRand Bank on a P/book of 3x?

And that isn’t even taking into account the socio economic macro trends of South Africa and the “expropriation” policies/desires of the ANC government.

Conclusion

Things are always going to be this way though the old maxim which has been attributed to Keynes rings true:

The market can remain irrational longer than you can remain solvent.

And so all too often we need a catalyst to bring about the inevitable and a rational well thought out trading plan. It’s just how it is and so it’s best not to fight it.

Just realise it for what it is and have the cojones to trade accordingly.

-Brad

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