• Bull.




The guest commentary below was written by written by Jack Raines, and originally posted on his blog Young Money. This piece does not necessarily reflect the opinions of Hedgeye.

Market Musing | Rethinking Risk - 10.03.2018 danger ahead cartoon

It's a dangerous time to be investing, isn't it? I mean, it certainly feels that way. The S&P 500 is down 23% YTD, the Nasdaq is down 32%, housing prices are crashing, interest rates are soaring, and the British pound and the euro seem to be headed to zero.

And that's just the "real" assets. The "safe" assets.

What about the fun stuff? The explosive stuff? The stuff that was making waves in 2020 and 2021? The stuff that was minting new millionaires left and right, every single day. The high-flying growth stocks. Cryptocurrencies. NFTs. SPACs.

Well, here's some headlines.

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It was fun while it lasted, wasn't it? The Office's Andy Bernard once said, "I wish there was a way to know you were in the good old days before you actually left them."

And man oh man, we didn't know just how good we had it.

Everyone was making money buying anything and everything. We had self-proclaimed "growth stock" investors writing stock-picking newsletters that covered the same 50 "innovative" tech companies while conveniently ignoring any whisper of valuation concerns. No price was too high for game-changing tech, after all! Who cares if the company will never turn a profit, or if their revenue growth was pulled forward by Covid?

Certainly Carvana, Zoom, and Roku were going to keep climbing by 300% per year.

Cryptocurrencies, which never really functioned as "currencies", were collectively worth trillions, and Web3 startups raised hundreds of millions of dollars while still searching for "use cases."

Back in the day, we called this search for "use cases" brainstorming.

Dave Portnoy ran a livestream of himself day trading, some dude who's Reddit username was "DeepF*ckingValue" made $50M betting on GameStop, and Matt Damon told us that if we wanted to reach the same plane of human achievement as the Wright Brothers, the Apollo 11 team, and those who have hiked Mt. Everest, we need to buy Dogecoin on crypto.com. 

Oh, and to top it all off, this picture of some Times New Roman text sold for $800,000.

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"Divine Robe of Fox". lol, lmao. NFTs are wild.

We really didn't know how good we had it.

Well the good days are over. The market isn't fun anymore. It's dangerous. Perilous, even. We are dealing with inflation, war, and an impending recession. Companies are laying off employees in the thousands, nations around the world are dealing with energy crunches, and it's obvious that things are only going to get worse.

It is far too risky to invest right now.

Or at least, that's what it feels like.


Risk is a funny thing.

No one worried about risk when we printed off trillions in stimulus while the world stopped in its tracks for two years. No one worried about risk when interest rates fell to near-zero.

No one worried about risk when we normalized "price to sales" for valuations, and then we decided 50x sales was perfectly normal for a tech stock. 

No one worried about risk when companies with no sales went public as SPACs, assets with no value traded for billion-dollar valuations as cryptocurrencies, and stocks jumped 10% a day because Elon Musk tweeted out a dog emoji, Cathie Wood sent an email of Ark's stock picks, or Chamath shared a word doc with some bullet points.

No one worried about risk in early 2021, despite the fact that we were sitting on the tail end of a 12-year bull market, in the middle of a pandemic, with unsustainable easy money flowing anywhere and everywhere.

No one worried about risk when the S&P 500 was sitting at 38x earnings, its highest level in 11 years.

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No one stopped to think, "What happens next?"

Lines kept going up, everyone kept getting rich, and if you didn't get in on the action, you were getting left behind. So the music kept playing, and the party rolled on.

Risk is a paradox. It is highest when we forget it exists, and it is lowest when it's all we can think about.

When everything feels happy and good and you just know that you are the next Buffett/Druckenmiller/Burry because all of your stock picks are home runs, risk is high.

When you and all of your friends are getting rich overnight while veterans with 30 years in the market are urging caution, risk is high.

When people are tweeting "[Rocket emoji] HAVE FUN STAYING POOR" because something they "invested in" 2x'ed in a week, risk is really, really high.

But when you think that you're the next Druckenmiller, and when you and all of your friends are making money hand over fist, and when you are busy tweeting,"[Rocket emoji] HAVE FUN STAYING POOR", you don't think about risk. You just think about the next dollar.

That's when things get risky.

And when everyone has gotten so accustomed to lines going up that they forget about risk entirely, risk happens fast.

Interest rates get hiked. Growth stocks tank. Currencies collapse. Earnings shrink. Speculative assets fall to zero as investors take a step back from their collective euphoria and realize, "Man, I should probably keep my money in something that has some sort of tangible value."

And that's where we are today, on October 4th, 2022.

It's only after these collapses happen that markets feel risky. But the risk already happened. It's played out.

It was far, far riskier investing a year and a half ago than it is today. Interest rates are returning to their historical range, the S&P's earnings are back at a healthy level, excess liquidity is leaving the system, and you can no longer make easy money playing hot potato with a worthless asset.

18 months ago, markets were a ticking time bomb. A mean reversion was bound to happen sooner or later, it was inevitable. But no one thinks about mean reversions at the peak.

Consequentially, everyone thinks the pain is just beginning once the mean reversion cuts deep.

Risk happens in the past, and we act on it in the present. We think, "All of these bad things happened over the last 12 months, now is a horrible time to be in the market." While we should think, "A lot of the bad stuff is out of the way, now is a great time to invest more money in the market."

Yeah, pullbacks suck. Bear markets suck. But that's the cost of admission for playing in the stock market. The real risk isn't what's going on now. The real risk was getting caught up in the FOMO of 2020 and 2021. Buying into trends that were only backed by hype.

But the time to buy wasn't then, when FOMO was peaking and nothing made sense. It makes much more sense to buy now, when valuations are reasonable and much of the risk has already played out.

But that's not what risk feels like, because easy money is euphoric and bear markets are excruciating.

And that's why this investing game is so hard.

- Jack