2020 Ends With A Mania

The latest update shows Goldman’s basket of U.S. retail investors’ favorite stocks are up 85.9% year to date which is destroying the S&P 500 which is up just 14.2%. Words can’t explain how unusual this is. Only in the 1990s did retail investors do so well. Because words can’t do it justice, we have the chart below which shows the 20-year annualized return of the average investor is 2.3%. Those are negative real returns. Keep in mind the chart is slightly dated but demonstrates the point nonetheless.

Source: JP Morgan via Quora

Retail investors usually don’t beat the index or earn any real returns for that matter. Of course, just because the retail favorites have done well this year doesn’t mean everyone has been a winner. Some investors panicked in March and some lost it all betting on options. We are seeing survivorship bias in play when most of the people bragging about their 2020 performance on social media had triple digits gains in 2020.

The is a SPAC market not a stock market. About 300 SPACs have gone public in the past couple of years. It’s possible at the latest rate that we could have 1,000 by the end of 2022. There are only about 4,000 stocks traded in America. It’s funny because in the past few years we have talked about the decline in stocks listed. There has been a worry that the power in the economy has become too centralized. These SPACs aren’t really doing anything to change this because they mostly lose money. The economic profits still go to the internet giants. In 2019, there were only 59 SPACs. In the past 4 days, there have been 40 new SPACs. There were 9 on Wednesday. This is what will cause the end of the bull market in speculative stocks. Supply always beats demand in bubbles.

Pilgrim Baxter & Associates

Some people still don’t think the 2nd half of 2020 is like the 1990s stock market bubble. We will keep going with this comparison until the bubble ends. Bubbles never end in a plateau, but some think that’s possible because they have recency bias. Back in 1997, there was a firm called Pilgrim Baxter and Associates that rode the momentum wave. Don Phillips of Morningstar stated, “Pilgrim Baxter caught wave after wave: momentum investing, investors chasing performance, instant mass distribution from Schwab OneSource. They got phenomenally lucky, but instead of being grateful, they kept pushing the envelope.”

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