FNArena’s Weekly Insights – July 06 2020

Dear time-poor investor: the bull market of 2020 has created a whole new generation of enthusiastic share market participants

-Class of 2020
-Bitcoin, The Share Market Omen?
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Class of 2020

By Rudi Filapek-Vandyck, Editor FNArena

There are two key characteristics embedded inside the share market and human investors are not well-suited to deal with either of the two; randomness and irrationality.

Most investors look at daily price moves and try to make sense of it through the framework of an intelligent, well-considered, structured, long-term investment strategy.

This then leads to oft used expressions such as “the market is telling us” but such approach belies the fact not every participant in the share market fits in that same mould.

As a matter of fact, it is very well plausible there are times when, and specific places in the market where rational decisions with a focus beyond the immediate are not at all front of mind among those buying and selling stocks.

Most of you, I assume, have by now heard about the recent inexplicable rise in popularity of US listed companies that are but one step away from corporate failure, with failing car rental company Hertz Global Holdings the poster boy for this new market craze.

Under US legislation, companies in deep trouble (usually burdened by too much debt) can seek court-approved Chapter 11 protection, which allows business operations to continue while trying to find a solution to the financial problems.

Such a solution regularly involves wiping out shareholders and starting anew. A scenario investors in Australia can relate to as this is how Virgin Australia is being saved from the corporate graveyard.

One would think, logically, that anyone with a sense for risk would draw a long bow around such companies, but that’s not what happened recently.

After shares in Hertz staged an eye-catching rally despite the company being all but broke and in deep debt, money started pouring into stocks of similarly hard hit, bankrupt companies including JC Penney, Whiting Petroleum, Pier 1 Imports, Chesapeake Energy and GNC Holdings.

All the while, corporate debt linked to these companies continues to trade at a discount, indicating bondholders, who rank above equity owners, don’t expect they will receive all the money they are due.

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