Don’t Let This Cult of Personality Derail Your Profits

On Saturday, I showed you how, based on price-earnings (PE) values, the S&P 500 Index is now trading at the loftiest level of its 95-year history.

A traffic light flashes green in front of Wall Street.

Source: Shutterstock

Then on Tuesday, we took a look at some of the anecdotal signs of stock market froth, such as the Reddit buying frenzies and a new ETF that contains companies with the most social-media juice and goes by the ticker symbol “BUZZ.”

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I also showed you some empirical signs, like high-yield bonds — aka “junk” — paying the lowest interest rates ever recorded in that market… and heavily shorted stocks racking up a 300% gain in little more than a year, compared to a gain of 80% for the overall S&P 500 Index.

Those are definitely phenomena that you’d never see at a stock market low.

Today, in keeping with the bullish zeitgeist that BUZZ epitomizes, let’s investigate how personality cults always pop up during ripsnorting bull markets, such as the one that’s formed around Elon Musk.

We’ll get to Musk in a minute — but first, let’s talk about an investing legend whose cult dates back decades…

From Buffett Boosters to Musk Mania

No one worships hedge fund managers or other stock market “celebrities” when the stock market is falling. That only happens during bull markets.

Past bull markets, for example, produced and nurtured the “cult” of Warren Buffett. His enraptured fan base expanded greatly throughout the bull-market phases of the 1990s and 2000s.

The chart below tells the tale. The number of attendees at the Berkshire Hathaway Inc. (NYSE:BRK-A,NYSE:BRK-B) annual shareholder meeting in Omaha, Nebraska, exploded from a mere 15 individuals in 1981 to about 40,000 people 20 years later.

Upon observing this remarkable trend back in 2012, I wrote:

If you always wanted to belong to a cult but didn’t want to deal with the threat of a federal raid or the hassle of raising dozens of children who may or may not possess your DNA, Berkshire Hathaway may be your ticket. In fact, Berkshire may be the most “cultish” cult since the Branch Davidians.

Let’s pull back the sacred shroud to examine the evidence…

Once a year, you get to join your fellow cultists in Omaha for Berkshire’s annual shareholder meeting — the “Woodstock for Capitalists.” Additionally, you get to quote the utterances of your leader as if they were holy writ.

Buffett’s popularity swooned a bit after 2012, but as stocks soared anew, so did the fanaticism of his followers. The chart below shows the winning bid to purchase a lunch for eight with the Oracle of Omaha.

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That price tag has skyrocketed from $25,000 in 2000 to a record $4.6 million for the most recent lunch. If this “lunch with Warren” were a stock, its value would have increased at a compound annualized growth rate of more than 30%!

But during the most recent phase of our booming bull market, no personality has attracted a more fanatical cult following than Elon Musk. His adoring fan-disciples hang on his every word as if they were tweeted in stone. Sometimes his cultish followers pay tribute to their leader in bizarre ways.

In March, the share price of a small-cap Canadian miner named Musk Metals Corp. doubled in one day, simply because the company announced a deal to acquire a prospective lithium property called “Elon.”

The cryptocurrency world, itself a hotbed of bull market mania, is also paying homage to Musk. An influential cryptocurrency platform called BitClout enables “investors” to buy crypto coins tied to the reputations of folks like Musk, Snoop Dogg, Justin Bieber, Kim Kardashian and even Donald Trump.

Which one is the most “valuable”? The Elon Musk “creator coin” tops the list at $68,200, which is roughly the same as the base price of a brand-new Tesla Model S.

For additional perspective, the Musk coin goes for seven times the price of Donald Trump coin, and 13 times more than the Tom Brady coin.

Again, you don’t see phenomena like these near a stock market low. So, what should we investors do with these insights? How should we respond to the overwhelming collection of empirical and anecdotal evidence that stock prices are closer to a peak than to a low?

Buy Only the Best

Successful investing always requires a balance between trimming some risks, while still embracing others.

Most likely, the stock market will yield gains more grudgingly over the next 12 months than it has during the last 12 months. And it might even deliver losses, as it has over the last week or so.

That said, we must seize new opportunities as they present themselves, knowing that we might encounter some unpleasant turbulence for a while.

At times like these, it’s helpful to remember that financial markets are cyclical creatures. They cycle through bull markets and bear… through episodes of greed and fear.

At the moment, FOMO is the dominant investor mood. But FOMO is a fickle and unpredictable stock market ally. Once a stock market tops out and slips into a bear market, FOMO becomes a cicada that simply vanishes and does not reappear until years later.

In the absence of FOMO, the fear of losing money — FOLM — becomes the dominant investor sentiment. Folks start to fear the downside so much that they insist on buying lowly valued stocks, if they buy any stocks at all.

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But no matter the overall market conditions, we should continue applying the same disciplined investment strategy we use in all market conditions — both bullish and bearish. We should insist on buying only the best opportunities we can find and never settle for ones that are merely “fine” or “decent.”

Making a “decent” investment doesn’t seem so bad, until you consider what that word implies in other contexts. Would you go to a nice restaurant and order a “decent” salmon fillet? Would you solicit a “decent” surgeon to conduct your brain surgery?

The same principal applies in the stock market. Decent is problematic at best and disastrous at worst, especially when stocks are trading at century-high valuations.

Today’s stock market offers no lack of dangerous highfliers. Risk is higher than average. That’s clear. But many great opportunities remain in select portions of the market.

Such as the travel technology company I told my members about in the new issue of Fry’s Investment Report.

It is still languishing 40% below its pre-pandemic levels… even though the company’s business is clearly gathering steam.

I’ll tell you more about this opportunity in the next Smart Money.

But if you want to learn about it now as a member of Fry’s Investment Report, click here.

Regards,

Eric Fry

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On the date of publication, Eric Fry did not own either directly or indirectly any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls —in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.


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