Market Masters: There is a Bubble in Opinions, Noise and Bubble Talk

bubble in stocks, 2014by Howard Lindzon     Earlier this week, David Einhorn – the famous short-seller of Lehman Brothers Holdings Inc., said in a quarterly letter to clients that “we are witnessing our second tech bubble in 15 years.” He announced that his fund is short a “basket of bubble stocks”.

Last year, David also shorted the ‘overvalued’ Chipotle’s $CMG at $300 (now $520) and in his recent quarterly letter said he covered the loss at $420 and as per the position – quote – ‘It Gave Us Gas!’. I am not picking on David. He is wicked smart and he understands risk management. I am just thinking out loud.

The definition of bubble is an unsustainable valuation that could not be justified by any future scenario. There is ginormous difference between being in a bubble – think 1999 and being expensive. Many of the younger cloud, big data and social media stocks are expensive by all traditional valuation measures, but calling them a bubble is a huge exaggeration.

Historically, the formation of bubbles requires the involvement of a big portion of the population. CNN recently came out with a piece stating that 73% of Americans do not trust the Stock Market. I read it and I don’t really know what it means for the market and I for sure do not trust the data.

Last week, many railroad stocks hit all-time highs. These were the bubble stocks of….wait…1870! Confused yet? No wonder ’73 percent’ of Americans do not trust the stock market. Even if they trusted it, and they should, they just do not want to take the time to learn the language. That is great news for those that do.

I believe in reading the tape (prices). I believe in following smart people, which is still so new a concept for investors/traders in 2014, that it remains an incredible edge. How many great investors are really digging into the new data sets and the ability to connect the dots between public and private markets? How many people really believe that Crypto Currency, The Sharing Economy and Crowdfunded Companies will all be large public market themes in the next three years? None of these themes have good investment proxies in public markets yet, which explains why big institutional money is so price insensitive at the moment.

High Frequency cheaters? Inside information? Problems I can’t solve. They are also problems I decided I could deal with because I believe in the concept of investing in growth.

If you are investing today, you have the tools at your disposal to trounce the averages, not just beat the 73 percent that ignore the markets.

About Howard Lindzon:  Howard is the Chairman and co-Founder of StockTwits. He is also an angel investor and creator of Wallstrip. Catch Howard on his blog or social streams via StockTwits and Twitter: @howardlindzon.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

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