Robinhood investors continue to pile into a frothy stock market as billionaires like Warren Buffett sit on cash. That's not a good sign.
With the Wall Street sharks sitting on the sidelines, Robinhood trading activity suggests that millennial investors continue to dive into a corner of the stock market where even billionaires don’t dare to swim.
The waves may appear deceptively calm, but a rip current can strike at any time. And history shows us that these waters are dangerous for investing guppies.
As the stock market recovery enters its third month, it’s not hard to see why many experienced investors are still hiding behind a pile of cash.
Warren Buffett is sitting like a wizened dragon on Berkshire Hathaway’s vast hoard of wealth. It’s clear the Oracle of Omaha doesn’t see any opportunity anywhere, and he’s not the only one.
But perhaps encouraged by a stimulus check, reduced personal expenditure, or the rants of Barstool boss Dave Portnoy, millennials continue to pile into the stock market.
And more than that, their favorite targets appear to be the very stocks that billionaires like Buffett and Carl Icahn are avoiding like the plague. Cheap airlines, defunct car rentals, and gaming stocks increasingly clutter their portfolios.
Take Hertz, for example. Carl Ichan lost $1.8 billion after dumping his shares in the company that just filed for Chapter 11 bankruptcy.
But millennials still wanted more of it, even as the company pulled its cars from auctions and practically admitted the game was over, days before the weekend announcement.
It’s astonishing to see this incredible demand spike for a stock whose value that could disappear after reorganization. That is not hyperbole.
Bankruptcy can often see shareholder value reduced to practically zero, not that many of those rolling the dice on Robinhood seem to care.
The simple fact is that they probably just don’t know.
It seems to be all about buying stocks near their lows, and that’s about it.
That’s also true about younger investors’ fascination with airline stocks.
The industry is somewhat optimistic about a future rebound, but executives are pretty resigned to the fact that travel will be subdued for some time.
Robinhood bulls like them because, to paraphrase their quality of analysis: “line goes down far.”
Assumptions can be dangerous things, but I also might be being unkind. This isn’t investing, it’s gambling at its purest.
So perhaps it makes sense that millennials are placing big bets on stocks connected to the U.S. gambling industry.
Over the past month, only two stocks have been more popular on Robinhood than DraftKings.
Millennials love it because they use it, but its revenue has been smashed by the sudden suspension of sports leagues across the world.
To put the size of the DraftKings bubble in context, Wynn Resorts (who owns all those big casinos, and – shocker – a bunch of tangible assets) is worth $9 billion, while DraftKings is valued at a whopping $12 billion.
So if you are going to take the plunge into this frothy stock market that has value investors shaking in their boots, please understand one thing.
The closest comparison to this kind of activity is probably the dotcom bubble:
Maybe this time is different.
But history hasn’t been kind to that line of thinking.