Fool's Gambit

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

You can also listen to a professional narration of this article on iTunes, Google & online.

This is an excerpt of the summer letter I wrote to IMA clients.

The stock market is in a bubble; this is not a secret to market participants. Investors are ignoring it and are infatuated with the ride. They are playing Fool’s Gambit – waiting for a greater fool to buy their overvalued stock from them. And why not, greater fools have been showing up in droves for years. Low interest rates inflated the prices of all assets forcing everyone to take greater and greater risks.

Then there is pure, unadulterated greed. This market bubble is filled with this “get rich fast” attitude and the fear of missing out; all bubbles are. This time the market has been further deformed by social media, which is an enormous amplifier and prolonger of that behavior, bringing an endless supply of incremental buyers (bigger fools).

Companies like GameStop make Tesla’s valuation look rational (Tesla’s valuation is anything but rational, as I wrote before, it discounts a temporal wormhole into the future). But at least Tesla is a company of the future. GameStop is a struggling retailer of video games where the future – digital downloads – make its business model obsolete one download at a time. As of this writing it is valued at $17 billion dollars.

Initially GameStop’s ascent may have started as financial nihilism by “have nots” trying to blow up the haves (“greedy hedge funds”) that were short the stocks. Short sellers left GameStop stock months ago.

GameStop’s stock is completely divorced from the underlying business it is supposed to represent. If the company never files another financial report shareholders won’t notice or care. It is just a meme, a speculative gambling instrument used by one fool in search of an even greater fool. Though it may seem that the supply is endless, at some point you are going to run out of fools. You just don’t know when.