Run It Up

Hedge fund heavyweights and industry titans of all sorts spent the better part of the pandemic era bemoaning ostensible recklessness among retail traders and complaining about what many decry as wild speculation on the part of small investors, all enabled by monetary and fiscal largesse.

If we’re honest (and we hardly ever are), it’s sour grapes. Almost every, last bit of it is sour grapes.

I’m allergic to hero worship of any sort, but especially when it comes to markets. Watching adults (in many cases grown men) fawn over other adults (in almost all cases, other grown men) in interviews or in the course of celebrating “legends,” hall of famers and members of a pantheon that includes the likes of Stan Druckenmiller and Jeremy Grantham, causes me considerable psychological discomfort — on behalf of the people doing the fawning. I’m embarrassed for them.

It’s an altogether different dynamic than someone interviewing a sports star. Unlike, say, basketball, capitalism is a religion. It’s a humanist religion, but it’s a religion nevertheless. So, while a SportsCenter anchor might say something like, “I wish I could make it look as easy as you, LeBron,” the sportscaster doesn’t usually mean that, if given the chance, she’d immediately trade her life for the life of an NBA player, with no questions asked. But every Christian wants to be Jesus. In transubstantiation, they even pretend to eat him and drink him. Similarly, every capitalist wants to be Warren Buffett. Literally. There’s even an annual pilgrimage. Relatedly, seemingly every CNBC anchor wants to be a hedge fund manager. And, judging by his whisper-like, awestruck intonation, Erik Schatzker wants to be every, single rich person who sits across from him for an interview.

Perhaps the most laughable example of this dynamic came earlier this year, when Buffett’s army of disciples (and, really, the entire financial universe) was distraught at what the media called a “tone deaf” annual letter. Apparently, Buffett was supposed to provide some kind of unique insight into the human suffering caused by the pandemic. Market participants also criticized Buffett’s letter for being bereft regarding America’s reckoning with two centuries of racial injustice.

As I wrote at the time, it probably seemed strange to people outside of finance that anyone would be particularly concerned with Buffett’s apparent lack of profundity vis-à-vis the most vexing issues of our time. Buffett’s just a guy who made some money. It’s not obvious (at all) why he should be expected to possess special knowledge not accessible to other American grandads, unless the topic is making billions investing a massive insurance float.

One thing that’s common to almost all of these capitalist prophets is the implicit (and sometimes explicit) contention that making large sums of money by gambling in capital markets is something only they should be allowed to do.

Exotic derivatives, illiquid assets, distressed debt and highly-concentrated, leveraged bets built, in many cases, on access to cheap financing, are all perfectly legitimate arenas for “experienced” gamblers. But when “amateurs” turn a $1,400 stimulus check into $50,000 in meme stocks and cryptocurrencies, that’s “reckless speculation” by “monkeys,” as a smug Druckenmiller put it, exactly a year after making one of the single worst market calls to ever emanate from someone who’s supposed to be good at this (figure below).

It’s been 19 months since Druckenmiller declared equities, broadly construed, uninvestable. Since then, US stocks logged among their best performances on record over such a compressed time frame.

To be fair, Druckenmiller didn’t use the word “uninvestable.” But he may as well have. During a virtual chat with the Economic Club of New York on May 12, 2020, Druckenmiller said “the risk-reward for equity is maybe as bad as I’ve seen it in my career.” There are only so many ways you can interpret that, even if you’re inclined to be generous.

The S&P has logged 101 new record closing highs over the past two years. 2021 was the second-best year ever on that score (figure below). The S&P’s risk-adjusted return through mid-December ranked in the 79th%ile since 1987.

“According to Benjamin Franklin, only death and taxes are for certain, but in retrospect, 2021 has been as near-certain a year as an equity investor could imagine,” Goldman’s David Kostin remarked, earlier this month.

Note that if you used Vanguard’s S&P 500 index fund, you could’ve enjoyed this ride for a mere three basis points.

That brings me to Bill Stromberg, outgoing CEO of T Rowe Price. I should state the obvious: T Rowe is a good firm. However, Stromberg’s remarks to the Financial Times, published Monday, came across as yet another example of sour grapes. Or at least in my opinion which, as far as I’m aware, I’m still entitled to.

“Over [the] last two years there has been a way above-average amount of speculation,” Stromberg told FT, in an interview. “We’ve been in a cycle where there has been very free-form risk-taking.”

That quote is cherrypicked. Stromberg went on to make some of the very same points I’ve made about concentration risk in the benchmarks and the extent to which index-level gains belie trouble lurking just below the surface.

But Stromberg’s argument — that concentration risk suggests active management will be more valuable going forward — is self-serving. As FT wrote, “actively managed fund houses such as T Rowe have been buffeted over the past 10 years as a bull market and low-cost index-following products made it easy for retail investors to outperform active managers for a fraction of the cost.”

T Rowe may be an exception, but for as long as many investors have been adults, the rule has been that active management loses, either due to underperformance, fees or, in most cases, a combination of the two. And that’s to say nothing of hedge funds, whose record over the same period is even more dismal depending on how you slice an extremely heterogeneous universe.

Ultimately, Stromberg delivered another version of the standard warning. “I can’t tell you when [this] period of speculation will end, but it won’t be sustained,” he told FT. Replace “period” with “humdinger” and it’s a Grantham quote.

The fact is, scores of regular people have scored big since the pandemic lows in March of 2020 on everything from Stromberg’s “free-form risk-taking” to simply buying an S&P index fund and watching it go up. And while I don’t think this necessarily applies to Stromberg, what I can say with something approaching certainty is that the vast majority of industry heavyweights, legends, titans, hall of famers and, in some cases, their acolytes who write for public consumption, are aggrieved at the prospect of other people making money by speculating in capital markets.

I have, of course, participated in derision aimed at the Robinhood set and, relatedly, the Reddit crowd. But, in my defense, it was impossible not to lampoon the meme stock mania. You can’t fancy yourself a gifted satirist who spends his days musing about capital markets and not have a laugh at the expense of someone calling themselves “Roaring Kitty” engineering a frenzy in shares of a left-for-dead video game retailer which, in recent years, became synonymous with hollowed-out strip malls.

As regular readers know, I don’t have a “method” when it comes to what I write or publish on a given day. Outside of scheduled data releases, there’s no “plan.” I go where my digital pen takes me, and that often manifests in articles which, by the end, are nothing like what I set out to write. This is one such article.

I get emails every month asking for tips and advice, not just on markets, but on writing and, in some cases, on life in general. On pensive days (which, in my current incarnation, is most days) I think carefully about my answers, especially when the questions are existential.

In the film Boiler Room, Ben Affleck’s abrasive character Jim famously tells new recruits, “Anybody who tells you money is the root of all evil doesn’t have any. They say money can’t buy happiness? Look at the smile on my face. Ear to ear, baby.”

The pensive me will tell you that’s all nonsense. On some days, though, smug comments from people who want you to believe that making money in capital markets is the sole purview of a select few members of society, and that everyone else who wants to make money should invent something those select few people can take a piece of or invest in, compels me to “mean revert,” as it were, to who I was in another life. That person would channel Adolph Robert Thornton Jr., and tell every meme stock hero, Reddit trader, crypto HODLer and OTM call option buyer to, “Run it up. Run it all the way up ’til you can’t run it no more. I’m talking about up-up. To the ceiling.”

Druckenmiller, Buffett and their ilk shouldn’t be the only people in the world allowed to get richer simply by coaxing more money out of the money they already have. Everyone will tell you they agree with that, but how many times have you heard some former trader or financial journalist or other industry veteran implicitly warn you against flying too close to the sun? Or tacitly suggest that you, the little guy, are forever condemned to being a proverbial bagholder?

They’re all saying the same thing. They’re all telling you that eventually, you’ll lose, because that’s the natural way of things. And, unfortunately, they’re right. In a tragic testament to the notion that the “little guy” almost never wins, the above-mentioned Mr. Thornton was killed while buying cookies for his mother last month. According to media speculation, his death may have been the direct result of being an independent entrepreneur who “ran it up” and subsequently refused to kneel before the legends in his own industry.