While mom-and pop investors and day traders have outperformed the Wall Street pros this year, at least one billionaire investor says this will all “end in tears” for the novice investors.
It may be funny to see a brand-new day trader compare himself to Warren Buffett in a tweet by saying that “I’m better than he is. That’s a fact.”
But Leon Cooperman says when it is all said and done, “this kind of stuff will end in tears” for the mom-and-pop investors.
Cooperman appeared on CNBC yesterday and said that while novice investors have had a great run these last few weeks, they are far too inexperienced to know what they are doing and will eventually get hurt.
Look no further than investors buying shares in Hertz, the bankrupt car rental company, that has now issued $500 million in new shares that even the company said are worthless.
The “Robinhood markets are going to end in tears,” said Cooperman during his interview, referring to the free-trading app that has added more than three million accounts this year, and whose median age of account holders is 31.
Cooperman joins a growing chorus of critics who warn that a large part of the volatility in the markets is due to work-from-home mandates. This meant that millions of Americans, either employed or unemployed, suddenly had the ability to sit home all day and gamble – perhaps with their unemployment checks – in the stock market.
At least for now, those mom-and-pop investors have the last laugh. According to research from a Goldman Sachs analyst, since the low on March 23, a basket of stocks that are popular with individual investors has returned 61%, compared with returns of 45% for a portfolio of investments owned by mutual funds and hedge funds.
Cooperman stated that Robinhood is essentially its own component of the market right now, separate from the tech-heavy FAANG market and the unloved value investing market.
“Barron’s did a nice article on them over the weekend I think they said they had 13 million clients, the average age was 31, but you know they are doing stupid things. And in my opinion this will end in tears.”
What Novice Investors Lack
He adds that the novice investors aren’t at all familiar with how to value a stock, they are simply following the momentum and a fear of missing out.
“The notion that American Airlines has an enterprise value today higher than pre-COVID because the debt they have issued doesn’t make any sense. The fact that Carl Icahn, who is as smart as they come, liquidates his position (in Hertz) at $0.72 a share at the end of May and this thing trades up to $6 makes no sense.”
For all his disdain for the Robinhood market, he does understand why day trading has become so popular.
“The government is giving you more money to stay at home than go to work, the gambling casinos are closed, the Fed is promising you free money for the next two years, so let them speculate. So let them buy and trade, I think from my experience this kind of stuff will end in tears.”