How To Invest In The Market Responsibly When Everyone Else Is Gambling

The pandemic has ushered in a new generation of retail stock market speculators. FOMO traders and gamblers have flooded into the market in an effort to get rich quick, and coordinated buying efforts by Reddit's WallStreetBets community and other social media groups have sent the stock prices of some questionable stocks soaring in recent months.

Despite a global pandemic, the SPDR S&P 500 ETF is up nearly 80% from its March 2020 lows.

During cycles of stock market euphoria in which gamblers and speculators are seemingly grabbing all the headlines and attention, it’s easy for investors to lose sight of what responsible long-term investing looks like.

Tilson’s Take:Former hedge fund manager Whitney Tilson recently outlined two simple things every investor should do during times like these to avoid making bad investments due to FOMO.

• First, Tilson said investors should remember the market has been through periods of irrational exuberance many times before, and what's happening in 2020 is nothing new. Most recently, the mortgage market experienced this type of euphoria back in 2007. Before that, there were buying frenzies in tech stocks during the dot-com bubble in the late 1990s.
• The second thing Tilson said investors need to remember is that investors shouldn’t feel pressured to invest in anything they don’t understand or don’t believe in. He said Bitcoin(CRYPTO: BTC) is a perfect example.

“I'm not interested in investing in any cryptocurrency for the same reason I'm not interested in buying a Rembrandt: because I can't value it,” he said.

Tilson also said he's not shorting cryptocurrencies because human emotion is extremely difficult to predict.

“If the price of something isn't connected to any sort of reality (such as future cash flows), then it could literally trade anywhere,” Tilson said.

Dividends, Value And Commodities: Michael Wilkerson, executive vice chairman of Helios Fairfax Partners, recently wrote a story for Barron’s in which he discussed what investors can do to protect themselves during the current speculative bubble.

Like Tilson, Wilkerson said investors’ first goal should be to resist the FOMO temptation.

“If one has to stay invested, avoid the temptation of high-flying tech and growth equities, which are the most overvalued, in favor of diversifying among recently abandoned dividend-paying value stocks and emerging markets,” Wilkerson said.

He also said inflation-sensitive commodity producers, such as companies that produce food metals and energy, should also perform relatively well.

Wilkerson also agrees that bitcoin is particularly risky at this point.

“Cryptocurrencies have no intrinsic value, and, like fiat currencies, are worth whatever the market happens to believe. When the euphoria wears off, they may be hit hard,” he said.

Benzinga’s Take:Just because you recognize that a stock market is in bubble territory doesn’t mean you can’t make a lot of money owning stocks as the bubble inflates further. The critical part of trading during a bubble is maintaining discipline, not getting caught up in the FOMO and cashing out somewhere near the top.