Risk investments and overheat in the stock market

The coronavirus pandemic brought a series of intensive changes in patterns of behavior throughout society. Quarantine caused many people to find money in their hands and nowhere to spend it. This has led to young people starting risk investments in the stock market.

These young people have discovered how to invest money without moving from their home, from the tip of their fingers. The ease with which you can now invest makes it a kind of game for young people. Moreover, these young people are aware of how some of the investing can ensure a better future.

Instead of spending money on a movie entrance or a trip, many young millennials are preparing to take Wallstreet. The first demonstration of the case of Gamestop and Wallstreetbets from which we will speak later. But this is no longer just a punctual case, but a trend that worries regulators.

Today we will analyze the pros and cons of this trend and what are the concerns of the regulators.

 

What are you spending the money you used to get out on the street, travel and enjoy? It’s not all about “risk investments”.

Money in the hands of people who cannot spend it caused an avalanche of purchases in unconventional sectors. Some of the sectors that were benefited by this money that could not be spent on the street were:

• Streaming services grew dizzying.
• Video game sales grew significantly because it was a way to get distracted at home.
• Digital assets began to become relevant. In many video games the trend of microtransactions has increased spending on video games. This has been a headache for video players because they now spend money on buying a game and then acquire expansions and objects.
• Videoconferencing services grew both in the home and business sectors. Start a cycle where visits, work, and family and business conversations took place at a distance.
• There are two tendencies that begin to be consolidated, such as the metaverse services and the NFT (non-expendable token). These two tendencies involve spending money on digital assets. Some directly for the digital world or metaverse. The others as digital collectibles.

All these options are presented to spend money on connections and virtual objects. But some people have decided they’re going to spend the extra money on their future, investing. Today we will see how “risk investments” have become the favorite sector of the young millennials.

Risk investments and investment applications

Young people start to have a strong presence in the investment sector. Thanks to the investment apps, young people have the stock exchange, crypto actives, and all kinds of options to invest.

A sample was the case of the WallStreetBets and GameStop. GameStop is a chain of store selling physical video games that has had problems adapting to new times and selling digital games.

Reddit social network users affiliated to subreddit WallStreetBets began a stock purchase maneuver against the trend. In this way they have brought up the quotes temporarily causing losses in investment funds that were betting in short against companies like Gamestop.

This was the first demonstration of strength among the young millennials using the Robinhood application against Wallstreet. This showed that young people have mass power to invest. Since then, the tendency of young people to do “risk investments” has only increased.

During this whole situation the application Robinhood closed the quote of GameStop to limit the scope of the move. However, the actions of Robinhood were in vain. This also generated a lot of controversy among the young investor millennials, realizing that the market is not as free as they appear.

Even so, young people have begun to spend video game money to bet on the stock market and invest. This has led to an increase in invested capital and is overheating the stock market. The fear of the regulators is that there will be a stock market bubble, like the one that occurred with the “dot com”. Is the bubble a real risk? Let’s see below.

Stock prices cannot rise unlimitedly.

Behind the shares on the stock exchange are real companies. These companies show increases in their value thanks to patents, and their profits. However, there are cases where “stock market fever” drives stock prices beyond their “real value.” Therefore, risk investments must consider which is the real company behind.

We cannot say that a company has a 100% measurable “real value”, but there are certain parameters that can help us. However, a company produces intangibles such as processes, patents, technologies, and the monopoly of certain markets. This can make the mathematical assessment not correct in the future.

However, there are already many investors who have spoken out about the valuation of shares on the US stock exchange. One of them is Warren Buffett, the most famous investor today. Warren Buffett has repeatedly mentioned that the stock market’s shares are overvalued. By its investment firm Berkshire Hathaway currently owns 150 billion in liquidity. Buffet’s firm is waiting for the stock market crash to make the purchases it deems appropriate.

Inflation in the United States is already starting to become a problem, which is why the Federal Reserve is considering raising interest rates. Rising interest rates are considered by many investors to be the turning point for the bubble to burst. It is estimated that this situation will occur in March of this year. What could happen to all these young investors after the bubble burst? We’ll look at it below.

How much do you have invested in the stock market?

Investing in the stock market is a long-term process. One of the things regulators have looked at is that young people have a propensity for risk, but they don’t have the patience to invest for the long term. The investments of young millennials can boost the stock market bubble, but they can also end up stripping it of its resources.

Great investors do not recommend investing the money you need but investing the money you have left over. Many of these young people may be committing the money they need to function on a day-to-day basis: money from rent, transportation, food, etc. That is why the bursting of the financial bubble can devastate your desire to invest and your savings.

Stock prices are overvalued, according to Warren Buffett

Since 2020 Warren Buffett, the most famous investor today, claims that the US stock market is overvalued. To do this, it uses what the media calls the “Buffett Indicator”.

This indication was revealed to the media by Warren Buffett as a measure of the proper valuation of the stock market. The “Buffett Indicator” is calculated by dividing the “Wilshire 5000” index, which the investor considers a representative indicator of the total market, and the GDP of the US.

Historically the “Buffett Indicator” has been around 1. However, as of 2020 this indicator is at 1.7, 70% higher than its natural price. As an analogy we can say that today the indicator is at the same level as when the collapse of the Internet bubble occurred in the year 2000.

Currently in 2022 it was reported that the “Buffett Indicator” is at a value above 2. This implies that the indicator is 100% overvalued. During the month of January and February 2022 there was a strong correction of 10% which has been recovering since mid-March. However, the market is still overvalued and there are those who are taking advantage to make short-term gains in the middle of this situation.

Everything seems to indicate that micro-investment apps and the craving for utility are overheating the capital market. It is best to look cautiously and proceed carefully in the face of the overheating of the US stock market.

An important indicator is that for years Buffett has significantly increased Berkshire Hathaway’s liquidity. These are waiting for the definitive correction to invest in stocks when the market overvaluation situation decreases.

Invest or wait?

This is the question that many people are asking themselves according to the overvaluation of the market. Should I invest or should I wait for the long-awaited market correction? The truth is that two years have passed, and this correction has not been given, but neither does this imply that this correction will not occur. Some are opting to buy dividend-paying stocks to guarantee some of their profit in the present.

There are those who speak of an inverse correlation between the value of bitcoin and the stock market. However, this is not proven. Some analysts speculate on the possibility of using bitcoin as a store of value in the event of a stock market crash. But we must clarify that due to the volatility of Bitcoin this could be catastrophic if there were a sharp fall or a sharp regulatory change.

Starting a business is not easy but it is also an alternative during a rising capital market. Starting a business is to grow GDP and with it the imbalance in the “Buffett indicator” can be corrected. Not only with the correction of the value of the shares can the market equilibrium be restored. It can also be recovered by increasing production. Production can improve with the reduction of the impact of Covid. If this can represent a hope for the US economy, perhaps this can put the valuation of the market on a better path.

The most convenient thing seems to wait and meditate very well on the investments to be made. We must consider alternatives to grow our money without risking it too much.

What can we do about it? We recommend studying the market and aiming to invest with great restraint. This is the recipe applied by Berkshire Hathaway, maintaining liquidity to take advantage of opportunities.

What is causing the overheating of the market?

Young people currently have money available due to lack of where to spend it due to the pandemic. This generated what in theory of the capitalist economy a “primary accumulation”. The primary accumulation is the “seed capital” that will allow the young person to make his investments.

This can be dedicated to an enterprise of its own certainly. But most of these young people are choosing to invest in the stock market. This flow of money is not being invested by the analysis of the company, it is being invested for the sole purpose of making money, without the investment itself having been analyzed.  In addition, that capital does not go to the company but to the investors who sell their shares. This implies that the money added by the investor will not be converted into cash flow that the company can use to produce more but will be a profit for the differential between buying and selling.

That is why it is so important to look at the “buffet indicator”. The Buffett indicator tells us about a generalized overheated market. If we wanted to particularize the analysis to a specific action, we would have to analyze the financial statements of the company and divide it by its market value. With long-term analysis, we should be able to see when this factor is in its average ratio and when it takes off.

If we analyze the stock market today, we will find that there is a divergence between the average rate between the value of the company and its income. We can intuit this due to the divergence between the rate between the value of the stock market and GDP.

Too much money to invest and low productivity are overheating the market.

Is the overheating only due to the investments of young people?

If young people start investing, money is transferred from consumption to risk investments. The money invested only has the capacity to be transformed into goods and services when there is a demand, that is, consumption. Without consumption, investing would be meaningless as it makes no sense to invest in a market without demand.

In this way the elements that are causing the overheating of the stock market are:

• Decrease in consumption and demand due to the forecast of the effects of the pandemic.
• Decrease in consumption and demand because many activities that absorbed working capital are not being carried out.
• Increase in the flow of working capital towards investment as a forecast for the future.
• Decreased productivity due to rest due to the coronavirus disease.

In short, there is a drop in productivity and a drop in demand due to the coronavirus. But the effect of young people trading consumption for investment, without evaluating the investments they make, has a duplicate and significant effect.

We must “bet” that young people receive adequate financial training to invest in the stock market. The current situation will surely make financial education a compulsory subject of basic education in the coming years.

On the other hand, it is also important to promote entrepreneurial education. In this way, instead of investing in overheating the stock market, we will have more entrepreneurship and innovation. The latter can have a positive impact on increasing competition and productivity.

Investing doesn’t just mean investing in the stock market, it also means entrepreneurship. We need to encourage this kind of thinking more in young people rather than the idea of making money doing nothing. This can only lead us to have a generation of “young parasites”.

How are apps like Robin Hood putting our young people’s capital at risk?

The first thing we need to look at is the general profile of young people. Young people are in the process of formation and maturation. In addition, something that is always associated with youth is the need to see quick results. With age it is understood to achieve our goals involves time and knowledge.

If young people are characterized by something, it is by believing that when they reach adolescence they know everything. It is natural that reaching the age of majority and hormones transmit to them an absolute certainty of their beliefs. Investing requires poise and maturity that few young people take the time to develop.

Many begin to invest by intuition or by what the internet gurus tell them. They look for certainties in people who only give certainties to sell their product and make money. The interested party cannot give you good advice.

The lack of patience of young people leads them to look for quick solutions. This can lead young people to take deceptive financial offers or fall into pyramid schemes. This is why we must emphasize values, patience and knowledge.

Apps like Robinhood invite young people without financial knowledge to play with their money as if it were a casino. In addition, they do not provide them with an emotional intelligence to enter the game of financial speculation.

These apps make risk investments easier and shouldn’t go away. As a society we must take responsibility. We must promote the necessary financial education and train in emotional intelligence so that our young people know how to invest.

Preventing young people from falling victim to “financial trends” and “risky investments”

Investing is not a fad or a way to “beat the system.” Trends like “Wallstreetbets” are not ways to beat the market but ways to manipulate young minds.

Companies like GameStop are destined for closure. Its great strength is the sales of physical video games. However, in a “collective” effort it was concretized to avoid the closure of these stores and their collapse in the stock market.

WallStreetBets, a feed on the social network Reedit, brought together hundreds of “RobinHood investors” to avoid the crash. This caused losses to many investors who saw the reality of a company that does not get in tune with the future.

Currently the video game market has ceased to be physical to be virtual. Online video game stores account for more than half of sales. Among them we find giants such as:

• Steam
• Epic Games
• GOG
• Nintendo eShop
• Microsoft Store
• Playstation Store.

Not to mention the latest trend of video games in the cloud. Some with their own games and others using the games purchased in these stores. In this trend we find:

• Xbox Cloud Gaming.
• Ps Now
• Nintendo Switch Cloud
• Nvidia Geforce Now.
• Amazon Moon
• Google Stadia.

And finally, we have the subscription services of video games

• Game Pass.
• Playstation Plus.
• Netflix: this competitor begins to peek into this trend.

As we see, unless GameStop changes its business model, it is destined to go bankrupt. WallStreetBets is not going to avoid the inevitable. Maybe it will give them a break and make a profit for some while generating huge losses for others.

We’ll take a look at the topic below.

Is WallStreetBets as innocent as it seems?

If we think innocently, we can say that WallStreeBets is a group of rebels who want to subvert the “established order”. Being suspicious we think they are collusion strategies to increase the value of a stock and have speculative profits through privileged knowledge.

The truth is that WallStreetBets does not help the real economy with these “risky investments”. A company must be valued according to its contributions to society and the utility it generates to its shareholders. Currently GameStop does not comply with any of them.

If GameStop were to convert its market focus to video game collecting and preservation, it might have a chance. There are niches in which you could have opportunities by having a large infrastructure and distribution network. But the approach of continuing as a company selling physical games is not going to lead them to anything. In addition, GameStop’s market valuation will also not make the company more resources, only its shareholders.

Therefore, if we evaluate the situation objectively, GameStop would be suspected of generating WallSteetBets’ campaign to inflate its shares and allow its current shareholders to dispose of part of them with profits.

Could WallStreetBets be an organized crime organization dedicated to manipulating the stock market? We traded stockbrokers for “non-hierarchical” organizations that manipulate the market for “unknown” goals. The troop of “young robinhood investors” can be a useful tool for those who want to make quick profits.

“Follow the money” reads a saying of journalistic researchers. Perhaps there we will get the answers to a group led by “anti-wallstreeet populists” who seek the same thing as them, profits.

In the face of so many questions, we only leave reasonable doubt. Let’s see how the cryptocurrency market follows this same trend.

Prudence when making “risk investments”, the advice of Gustavo Mirabal

Prudence is recommended with risk investments. Know that in case of a crisis it is best to leave early or not leave the investments and wait for them to recover. Diversifying the portfolio is a recommendation made by all large investors.

Gustavo Mirabal’s gaze is always conservative. this ensures that your customers get performance without sacrificing their security. Analyze your perspectives and decide what is best for you and your future. We don’t tell you to buy worthless digital assets. We recommend that you prepare yourself to make good investments and that you do not invest the money that you are not willing to lose, a tip from Warren Buffet that applies to all investments.

Even risk investments must be made with market knowledge. The knowledge of the company in which we will invest, and the financial knowledge is important so as not to be victims of manipulation by “financial gurus”. We advise you to acquire the necessary financial knowledge or go to a financial advisor before making risk investments.

The bursting of the stock market bubble will be inevitable, we can only advise you to protect your money and resist the crisis. If that money can’t be there more than 5 years, then it’s better not to invest it. We leave you with warren Buffet’s tips for investing… The last video is in Spanish, but you can activate the subtitles and place the automatic translation into English. Until next time.