Tuesday, June 16, 2020

Hertz v. Avis

Never confuse being lucky with being brilliant.

There have been some articles in the paper recently about individuals speculating on stocks. As I've noted time and time again, stock-picking is for chumps. The game is rigged from the get-go against you. They'll let you win just often enough to let you think that you got the hang of this. And then they pull the rug out from under you and you lose it all.  I was fortunate not to have the rug pulled out from under me, but that doesn't make me an expert.

Some have compared the stock market to the world's largest casino, and there is a nugget of truth to this. Speculating on the price of a stock is just that, speculating. It used to be that people bought stocks for the long haul.  They bought stock in companies that were making profits and paying dividends. You bought a stock for $10 and maybe it gave you $0.50 in dividends over the year. And after 10 years the stock might be worth $20 and the dividend up to a dollar.  You might not get fabulously rich with stocks like that, but you would make money over time - and the risks were relatively low.  Such is no longer the case.

Today, we see people investing in ridiculous things that don't make a profit and have no promise of making a profit.  People look at the share price and its direction of travel or some other specious metric and then argue that the price can only go up. The latest trend in this nightmare scenario has been with Hertz stock.

I noted before that during the last recession 2008 I drunkenly bought a thousand shares of Avis stock for $0.74 a share, cleaning out my stock trading account with e-Trade. Months later, I logged on, only to find out that the price was now several dollars a share and I'd made a nice profit. The stock ended up going up several thousand percent and I was convinced I was a genius.   If only I had bought 10,000 shares or a 100,000 shares!  That pesky time machine - always in the shop when you need it!

But then reality sobered me up. The money I made on the Avis stock neatly offside my losses and General Motors stock and Fannie Mae, both of which went down to zero in value. That's the problem with stock investing - you can lose every single penny you invest. And if you go into options trading, not only will you lose the money you invested, but other money as well.

I realized in retrospect that this Avis trade was sheer luck. I happened to hit the stock on the very day the stock market was at its nadir. I had timed the market perfectly, but not through shrewd investing strategy but by sheer dumb luck. And you can't count on sheer dumb luck to bail you out every time, or even occasionally.

Fast forward 12 years in this time it's Hertz that is going bankrupt.  The reason I made money on Avis stock is that the company was rumored to be going bankrupt but never did.  In this case, however Hertz has actually declared bankruptcy and the stock is essentially worthless.  And yet people are buying it, knowing that it has absolutely no value.  And Hertz, being no fool, is talking about issuing more of this worthless stock – it actually is branding it is worthless - knowing that people will buy it because they're freaking idiots.

I opined recently that with this coming recession, there could be opportunities to buy stocks that could go up in value. The problem is in timing when the nadir of the recession occurs.  Many people feel that it has already come and gone, and that we are already on the path to recovery. This is hard to tell for sure. They are just as many signs of distress is there are of growth.  We may be living in an era of false hope - like the "phony war" in 1939 before the Nazis got serious.  It was all fun and games until Dunkirk.

Due to pent-up demand, car sales are on a tear, as supplies are short due to closed factories.  People want to get out of the house and are visiting vacation spots and bars and restaurants. Our little island is positively crowded with people, few of which are practicing social distancing.

Meanwhile, we hear reports everyday of yet another company declaring bankruptcy. Billions if not trillions of dollars of debt are being wiped out, not to mention the value of the corresponding stocks. People are being laid off in droves and are being temporarily propped up by government economic assistance. But this government assistance is poised to end very soon.

And when that happens there will be two messy problems to clean up. All these unemployed people will find their unemployment running out and no jobs. And the government will find that it now has some staggering debts to pay back. Maybe Donald Trump would be smart to lose the next election, otherwise he'll be charged with cleaning up the mess that he partially is responsible for.

My take on this is not optimistic. After the crash of 1929, the economy didn't unravel all at once.  And in fact, there were several false recoveries in the stock market before it finally plummeted. People hoped, against all logic, that perhaps the falling stock prices on Black Friday were a mere blip on the radar and that things would turn around.  But as long-term unemployment and chronic financial problems in the market ground on, it became clear that recovery was not going to be a simple process.  It didn't help any that a Republican President, Herbert Hoover, started a trade war with our international trading partners and slapped tariffs on everything. Stop me if any of this sounds familiar.

People were declaring that capitalism was dead and proposing that we switch over to socialism or communism. Again, stop me if any of this sounds familiar. We could be in for a long haul depression at this point. Because when you get right down to it, we never really fully recovered from the recession of 2008, or the earlier recessions in the 90s or even in the 80s. There were fundamental structural flaws in our economy, starting with government deficit spending and trickling down to deficit spending by individuals.

I could be wrong about this. Let's all hope that I am. I tend to be wrong about most everything. But I can't imagine that as so many companies can go bankrupt and all of this commercial real estate sits empty for so long and there won't be any ancillary effects to our economy.

And when people start buying the stock of a bankrupt company just because some asshole on the internet said it was going to go up in value, you know you're in for a lot of trouble. This is the same sort of irrational exuberance it drove housing prices up through the roof in 2008. People think they're going to make money because they have to make money and because somebody on the internet told them they would make money.

When the inmates are running the asylum, it's time to leave the asylum.