How Old Was That Shoeshine Boy Again?

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Includes: IWM, QQQ, SPY
by: Paulo Santos

Summary

Market lore includes a tale about how Joseph Kennedy avoided the 1929 crash;

The present, given the circumstances, is looking mighty similar in a way;

This might yet be another red flag for the present risk-always-on market.

A famous market lore tells of how Joseph Kennedy (JP Morgan is also mentioned sometimes) decided to sell his stock portfolio as the market crash of 1929 approached. As the tale goes, Joseph Kennedy decided to get out of stocks when he started getting stock tips from a shoeshine boy. Joseph Kennedy figured the market bubble had to be very advanced, if even shoeshine boys were handing out stock tips, and he was right given the market plunge which followed.

Shoeshine boys are rarer these days. After all, compulsory education keeps most of those boys in school until a later age. But still, recent events beg the question - how old was that shoeshine boy who got Joseph Kennedy (or perhaps JP Morgan) out of the market (by recommending stocks)?

I have no answer for that question. But I ask it because recently, we got a spate of 17-year-olds in the news, bragging about their stock gains. These included:

There are several other things the last two stories share, beyond the protagonists being young:

  • How little time these investors have had in the market, thus being exposed only to the FED-driven risk-always-on market;
  • How the articles are presented as if these investors have specialized knowledge already, even though they clearly lack experience (hence the "lessons");
  • And how the articles actually depict dangerous behavior, including the type of stocks they invest in (penny stocks, overvalued tech stocks) and the lack of money/risk management (all-in bets, doubling down when losing).

Yet, more importantly than all the red flags regarding their investment methods, what seems to be happening here is that this is awfully close to getting tips from shoeshine boys - only the boys in this case are in high school.

The market nowadays seems to be comprised of two major trends, and this highlights one of them:

  • We have a powerful trend towards passive investment, which is helped by the underperformance of actively managed funds. Some of this underperformance by actively managed funds comes from the risk-always-on nature of the market; some is structural; and some comes from fundamentals being worth less and less - in a self-fulfilling prophecy where passive investment overwhelms active investment, as well as due to the speculative nature of a riskless market propelled by central bank cash;
  • And then we have the speculative fringe - which these boys illustrate. The last thing on the speculative fringe's mind is valuation. They want to buy stories. To buy stocks of things they use, no matter how unprofitable for the companies that make them. They want to go all-in, and they want to double down if the stocks fall - after all, they always come back.

This is not the first time this happened, either

Even beyond the Joseph Kennedy tale, one can find evidence that the youngsters had at least one other time they were particularly interested in participating in the market folly. The following is from a year 2000 article on BusinessWeek:

The stock market isn't just for grown-ups anymore. According to Stein Roe Mutual Funds, about 19% of students in grades 8 to 12 own stocks or bonds, up from 10% in 1993. About 2 million of them are active investors who pick their own stocks, estimates Ginger Thomson, chief executive of DoughNET.com, a financial Web site for teens.

Needless to say how that particular trend went, either. Or maybe it suffices to say that DoughNET.com is no longer in business.

Conclusion

There might be many reasons for the current market rally to continue unabated, including:

  • The central bank cash continuing to flow in, now from the ECB and BoJ;
  • The opportunity cost - since stocks might be expensive, but so are all the alternatives;
  • Valuations still not looking extreme - as if valuations HAD to get extreme every time the market goes up.

However, at the same time many red flags continue popping up here and there, with the latest apparently being this emergence of the shoeshine - await, no, high school - boys handing out lessons on what to buy and how to do it (all in). All of this from the height of their wisdom accumulated over less than 20 months.

This doesn't bode well.

I personally don't think we're on the verge of a 1929 repeat, though. So this is not a call to sell everything. But the implications are that there must be significant added risk at this point. It thus calls for:

  • A more conservative approach to the market, namely regarding the more speculative/overvalued stocks;
  • Avoid concentrated exposures, especially to the kind of stocks which, due to their high multiples or high cyclical exposure, can lead to significant losses in a single stock;
  • Avoid the use of margin debt (which is also at levels that make alarms sound off);
  • And perhaps, but only for the most informed and/or aggressive investors, adopt a market neutral stance - which would imply using diversified stock short sales or market-wide hedges (short selling of index ETFs or futures, buying of index puts).

I find it hard to imply that going net short or aggressively net short can make sense in this situation given the ongoing money printing, even if this money printing is now happening only outside the U.S.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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