Warren Buffett has warned about the dangers of speculating for years. Day traders aren’t listening.

warren buffett

Day traders have recklessly bought into bankrupt and distressed companies in recent weeks.
Billionaires Mark Cuban and Howard Marks compared the buying frenzy to the dot-com bubble.
Warren Buffett has warned against speculating and discussed market bubbles many times.
“Normally sensible people drift into behavior akin to that of Cinderella at the ball,” he said.
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Day traders have piled into bankrupt and distressed companies in recent weeks, thumbing their noses at experts and proclaiming that “stocks only go up.”

Warren Buffett, perhaps their favorite punching bag, has warned for years about the dangers of mindless buying.

Taking on the ‘suits’

Thousands of people, stuck at home during the coronavirus pandemic with casinos closed and live sports suspended, have turned to playing the stock market on Robinhood and other zero-commission trading platforms.

They have sent shockwaves through the investment community with their contrarian moves. Those include plowing cash into struggling businesses such as airlines and cruise lines, and snapping up shares in Hertz, JCPenney, and other bankrupt companies despite the high risk of getting wiped out.

These irreverent amateurs have also taken swipes at industry veterans. Dave Portnoy, their self-proclaimed captain, has dismissed Buffett as “washed up” and wrong in his decisions. The “suits” who whine about him and his followers are just jealous of their success, he says.

Read more: A high-growth fund manager is tripling her peers’ returns in 2020 while targeting nontech industries like beer and restaurants. She breaks down how she picked out 5 of the most innovative companies.

Billionaire investors and market commentators have rushed to sound the alarm on the trend.

“Shark Tank” star Mark Cuban and Oaktree Capital chief Howard Marks both said the buying frenzy reminds them of the dot-com bubble.

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Meanwhile, “Mad Money” host Jim Cramer, Omega Advisors boss Leon Cooperman, and Wealthfront investment chief Burton Malkiel have all warned the new market entrants that wildly speculating will almost certainly lose them money and might accelerate a market crash.

‘One helluva party’

Buffett hasn’t publicly commented on the day-trading boom, but he’s discussed similar behavior in the past.

The billionaire investor and Berkshire Hathaway boss defined speculation in his letter to shareholders in 2000 as focusing “not on what an asset will produce but rather on what the next fellow will pay for it.”

Speculators may knowingly pay more than what a stock is worth in the hope of selling it for an even higher price, he said in his 1992 letter.

Buying Hertz shares with the goal of dumping them before the stock becomes worthless fits that description.

Read more: Aram Green has crushed 99% of his stock-picking peers over the last 5 years. He details his approach for finding hidden gems — and shares 6 underappreciated stocks poised to dominate in the future.

Amateur traders who cashed in during the recent stock rally may also be overconfident and greedy for more profits. Buffett described the phenomenon in his 2000 …read more

Source:: Business Insider


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