- Wall Street billionaires have little intention of re-entering the stock market despite its strong rally.
- Carl Icahn’s failed $1.5 billion bet on Hertz shows why billionaires are cautious.
- Big cash-buffer at a time like this is necessary to rescue struggling businesses.
Carl Icahn is the latest billionaire to be on the wrong side of the stock market rally as his big bet on Hertz crumbled. U.S. stocks are continuing to climb, and ultra high net-worth investors are not re-entering the market.
The U.S. stock market increased by 7.5% since May 13, within less than three weeks. Tech, biotech, and semiconductor led the market uptrend, as Apple, AMD, NVIDIA, Microsoft, Vertex Pharmaceuticals among other stocks outperformed expectations.
Why Are Billionaires Cautious About the Stock Market?
Since April, many billionaire investors and Wall Street barons were cautious about the U.S. stock market.
The sentiment around stocks dropped due to a confluence of rising geopolitical risks, uncertainties around the pandemic, declining business productivity, and decreased consumer spending.
While billionaires increasingly moved to hedge their assets in case of another downtrend, retail investors continued to buy stocks aggressively on E-Trade and Robinhood.
According to investment strategist Lyn Alden, the major airline stocks sold by Berkshire Hathaway’s Warren Buffett were bought by Robinhood traders.
Billionaire investors clearly predict a renewed downtrend in the U.S. stock market in the near-term.
But, even if a correction does not occur, high net-worth individuals have sufficient incentive to maintain a large cash-buffer as seen in the situation of Carl Icahn.
Big Investors Need Cash, Carl Icahn’s Situation Shows That
The Wall Street Journal reports Carl Icahn invested $1.5 billion in car rental giant Hertz since 2014.
In February 2020, less than four months ago, Hertz was valued at over $2 billion.
After the company announced bankruptcy in May, its valuation fell to $79 million as its stock fell 80.46% in a single session.
Icahn’s total investment in the stock was valued at $700 million by the end of 2019. Now, the billion-dollar investment is worth tens of millions of dollars.
At the annual Berkshire Hathaway meeting, Warren Buffett raised a similar issue. The market may go up, but Berkshire needs to maintain a decent-size cash-buffer to deal with a potential correction.
Like Icahn, Berkshire holds major shares in many companies across various industries.
When businesses start to struggle due to the economic consequences of the pandemic, enough cash is needed to offset the losses and help companies in need.
Emphasizing that $128 billion is not a lot of money in a situation like this, Buffett said this month:
Our position will be to stay a Fort Knox.
Other business-owning billionaires are seemingly adopting the same mindset.
If business owners allocate cash into the stock market to catch an uptrend and businesses start to struggle, it could lead to bankruptcies.
The reward to risk ratio (R/R) of the U.S. stock market is poor at the moment, as many top stocks are nearing their record highs.
The combination of uncompelling R/R of stocks and the real possibility of another market pullback is preventing billionaires from allocating their capital to the stock market.
Still, some investors like Robeco Asset Management head of multi-asset Jeroen Blokland sees room for the stock market to see more positive returns in the near-term.
Last modified: September 23, 2020 1:58 PM