Richard Bernstein, CEO and CIO of Bernstein Advisors and an expert in corporate investing, warns that retail investors will pay a huge price if they get deep into speculative trading.
Bernstein, who has been playing on Wall Street for decades, pointed out that the plebeianization of the market is a key factor in this bout of overheating. He worries that excessive naivete about the stock market will eventually get amateur investors into trouble.
Bubbles usually come in all different forms, and now this one is a classic,” he said. “Investors are basically playing with fire.
He attributed the cause to the Federal Reserve Board (Fed) policy and the huge liquidity brought about by increased leverage in a high-risk context. According to Bernstein, the frenzy reflects a discrete stock market in which one part is absurdly speculative and the other is, in fact, completely ignored.
The volume of trading has increased significantly,” Bernstein said. “There is indeed a bubble in that half of the stock market.
This year, a handful of stocks, including GameStop, staged epic runs. But due to a brief short sale, their stock prices went against the fundamentals.
If you are really worried about what is happening in front of you, you should be on the sell side,” Bernstein said. “Fundamentals are the truth? That’s right.
The Reddit chat room encouraged retail investors to quickly push the prices of a few stocks against those who were shorting them, and a short-selling phenomenon occurred. As a result, the hedge funds that shorted these stocks were forced to come in and buy to cover their losses.
In the case of GameStop, as of the close of trading on the 27th, the stock has risen more than 1,700% so far this year.
Bernstein argues that this frenzy is not a phenomenon of the overall stock market and says that short-rolling has sparked huge business opportunities in lesser-visited areas. The key, he believes, is to have patience.
He prefers stocks most relevant to economic recovery, especially energy stocks, “the most attractive class of stocks on the global stock market right now is energy. If the global economy recovers, I believe most people would agree that demand for fossil fuels will increase in the next year or so. Energy stocks are currently heavily under-invested.
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