The other day I wrote a piece “When will chasing the hot stock no longer work?” which outlined how “price momentum” was the main driving factor during the recent stock market rally. I went through how value stocks have been sucking wind ever since the Great Financial Crisis.
The article got a lot of feedback, but there was one email that I wanted to share. It comes from Andy Mayer - Albion Green founder - a financial markets trainer, lecturer, consultant, and just all-around-good-guy. He sent me an interaction he had with one of his students:
This brought to mind a conversation I had with an undergrad finance student last month. At a course presentation, students were comparing various stocks using a few standard valuations, and this student was recommended to buy the stocks with high PE. Myself and the other trainers told him that we compare valuations to find under-valued stocks, not to buy over-valued ones. But he was not swayed, he was firmly of the opinion that good and growing companies have high PEs and companies that are badly run have low PEs. Finally the debate was settled when he said - look, there is real empirical evidence that buying high PE stocks and selling low PE stocks is a winning strategy. And over the past few years he was right of course!
This is the way that young people in the markets think these days - they have been trained by the market to think totally differently to the old school, and until value starts doing well, they will be the ones making money.
Ahhh... Millennials... You gotta luv ‘em. Fully convinced they know better, but making the exact same mistakes every other generation has made.
Now don’t take my chiding as a belief we are somehow better. My generation had the “DotCon” bubble. There were plenty of stock-market-wunderkids who were “experts” at picking stocks for the “new economy.”
Heck, we even took one of these knobs and elevated to him to mythical status after he made this speech:
You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.
OK. Here goes. Write them down – no handouts here!: 724 Solutions ( SVNX), Ariba ( ARBA), Digital Island ( ISLD), Exodus ( EXDS), InfoSpace.com ( INSP), Inktomi ( INKT), Mercury Interactive ( MERQ), Sonera ( SNRA), VeriSign ( VRSN) and Veritas Software ( VRTS).
We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over – and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don’t even have earnings per share, so we won’t have to be constrained by that methodology for quarters to come.
The date for Jim Cramer’s keynote speech? February 29th, 2000.
Now we all have some bad calls, so I shouldn’t be too harsh on Cramer, or the current batch of millennials embracing growth stocks. After all, if you had started your investing career in 2010, you probably would also think that “growth only goes up” and that “value is at best, dead money.”
As I was thinking about this post, I was reminded of a story about a famous trader in Jack Schwager’s second book, The New Market Wizards. Randy McKay is probably one of the least known figures from Jack’s books, and deserves way more attention. So many of his stories are timeless classics that any young trader would be wise to study religiously.
Randy’s foray into stock trading was no exception. From The New Market Wizards:
In 1982, I began to notice on the evening news that the Dow was up almost every day. I started getting very strong bullish feelings about the stock market. This was the first time I had ever had any market feel based on something other than watching futures. I was reluctant to start picking stocks, because that was someone else’s game.
I opened an account with a friend of mine who was a stockbroker, instructing him to buy a cross section of stocks because I felt the market in general was going higher. At the time, I didn’t know that his method of picking stocks was exactly opposite to my approach in the futures market. His theory was to buy the weakest stocks on the premise that they could go up the most. Well, that certainly wasn’t my theory. He ended up buying me only three stocks, his favorites, which he had been in love with for the past ten years; After watching the Dow go up for about three months while my account went down at the same time, I asked him to send me charts on the stocks I owned. I discovered that he was steering me into stocks that were near their lows, while my natural inclination was to buy stocks that were moving higher. I decided the arrangement wasn’t working out, and I closed the account.
I pulled out the phone book and found that there was a Merrill Lynch office nearby at the comer of Michigan and Wacker [in Chicago]. One summer afternoon after the market had closed, I walked over to the bank and withdrew a cashier’s check for $1 million. I then went to the Merrill Lynch office, walked through the door and asked, “Who’s in charge here?” The branch manager came over, and I told him, “I want to talk to your least experienced broker.” That’s the honest truth. I wanted somebody without any opinions.
He turned me over to a broker who was about twenty-three years old. I put the check down in front of him and said, “I want to open an account, and here’s what I want you to do. I want you to start out by investing three-quarters of this money in a wide variety of stocks, all of which are at or near all-time highs. After that, each week, I want you to send me a list of stocks broken down by market sector ranking the stocks in each sector by how close they are to their all-time highs.
He followed my instructions exactly, and I did very well in that account. However, that same year, the Chicago Mercantile Exchange began trading the S&P 500 futures contract, which solved my problems on how to trade the general stock market. I thanked my broker for his efforts, closed the account, and switched into buying S&P futures. I felt bad about closing the account because he had done exactly what I had wanted him to do. He broke the market down into different sectors and bought the strongest stock in each sector.
What I love about this story was Randy’s ability to understand that in a bull market, you don’t want to own the laggards. You want to own the stuff that’s rising.
And that’s the lesson that all these millennials have embraced whole-heartedly over the past bull market. All of us old-timers that remember 2008, or even 1998, were scarred with the realization that the current darling-go-to stocks can go down just as fast as they went up. Millennials have no such nightmares. They only know Facebook, Google, Amazon and whatever crazy-over-priced-growth-stock-they-have-recently-discovered chugging higher. Dips were only buying opportunities to add to their position.
During the past year, one by one, other world stock markets have sagged and dipped into negative territory. Yet American growth stocks were impervious to this fact. They kept rising. Then recently, certain sectors of the U.S. market started showing some weakness. All this time, the millennials were there with their stacks of blue tickets - keeping growth bid.
But something has changed during this last sell off. It’s no longer such a clear dip buying opportunity. And most importantly, growth is no longer leading the way higher.
There is a famous saying about being young and your political views. It goes something like this:
If you are young and aren’t liberal, you have no heart. If you are old and aren’t conservative, you have no brain.
I feel like we should change that to:
If you are young and don’t believe in growth stocks, you have no vision. If you are old and aren’t buying value stocks after a decade of massive underperformance, you probably had a head injury as a child.
There is nothing new under the sun, and this overstaying in growth is a mistake every generation makes. I am by no means picking on the millennials, after all, my generation somehow thought this video was cool…
(Seriously, if you were born between 1965 and 1975, don’t watch this video. It will instantly become apparent how bad our youth was for fashion and will forever ruin your pleasantly distorted memories.)