Market Commentary April 2021

April 12^th can’t come soon enough. I’m looking forward to seeing friends that I haven’t seen in months, drinking my first proper pint of beer since November, and watching less Netflix. There’s not been a huge amount to do in lockdown other than work and watch television and I’ve found myself re-watching childhood favourites such as Fawlty Towers, Dad’s Army and Only Fools and Horses. Del Boy resonated with me. Not because I’m an East End wheeler dealer but due to the timeless catchphrase of ‘this time next year we’ll be millionaires’. This mantra has always been somewhat endemic in certain parts of the stock market, but this first quarter has seen an unusual amount of speculative behaviour.

The first bout of speculative behaviour came during January when a little-known video game shop (Gamestop) rose from $17 per share to $500 in a matter of a few weeks. This wasn’t driven by the traditional drivers of share prices (improving outlook or undervaluation) but by a band of retail investors who spotted that the shares were being bet against very heavily by hedge funds. By a quirk of the market (which I won’t bore you with), this meant that there was exceptional demand to buy the shares, stoked by internet chat rooms, which saw the shares rise in value thirty times. Typically, it would take you about 50 years to increase your capital by thirty times (assuming ‘normal’ market growth rates for equities), not thirty days. The unfortunate part was that the majority of retail investors who bought shares bought them near the top. It was obvious it was a bubble. I’m not just saying that with hindsight: it was glaringly obvious at the time. What’s happened since then? The shares fell from $500 to $50, causing most investors to lose nearly all their money. Most of the money lost was from retail investors, who – to be quite frank – didn’t know the risks they were taking.

I think a contributing factor to the aforementioned views is the lack of financial education amongst many. This is a huge societal issue that needs to be addressed, as too often it is the ‘man on the street’ who gets drawn into bubbles and ends up losing. If something seems too good to be true, then it usually is.

Getting rich in the stock market is a slow process. The power of compound interest was described as the eighth wonder of the world by Albert Einstein: ‘He who understands it, earns it; he who doesn’t, pays it.’ Too many people get drawn in by the prospect and illusion of getting rich quick in markets. It doesn’t happen. Or if it does, it happens with a huge amount of luck and a tiny amount of judgement. A minority of investors will have got considerably wealthier with the speculative bubbles of the last few months, the majority have lost or will lose a vast amount of money. The best course of action has and always will be investing with patience and prudence. This may not sate the appetite of the Del Boys out there; but it’s a sure-fire route to becoming rich slowly and not becoming poor quickly.