The Market Can Stay Irrational Longer Than You Can Stay Solvent

“The market can stay irrational longer than you can stay solvent.”

John Maynard Keynes

Here’s a couple examples. Hertz Global declared bankruptcy on May 26th. causing the stock to plunge to 40 cents.

Bankruptcy usually means that common shareholders get nothing. The stock becomes worthless and is eventually delisted.

Yet today Hertz has rocketed to over $3 …. above where it was before it declared bankruptcy.

Part of this is likely a “Robin Hood” effect. There’s been record numbers of account openings among many brokers including Robin Hood, and people have been piling into any stock that moves. Robin Hooders indiscriminately buy anything that looks cheap or is moving. I don’t use Robin Hood, but I’ve heard that when you log on it will show you the most popular stocks…which likely just leads to people piling into them without understanding what they’re buying.

Second example. GSX has been accused of massive fraud by multiple reputable firms, with very good evidence. Evidence continues to be uncovered. Yet the stock has climbed from around $30 (around when the fraud was exposed publicly) to over $40. It is likely that there is an SEC investigation going on (SEC doesn’t announce that it is doing investigations) and there’s a high probability that the stock will be halted and collapse just like the recent fraud exposure of Luckin Coffee (LK). But people just keep buying it.

These conditions create great shorting opportunities as these moves aren’t sustainable and eventually collapse. However, you need to pick your spots carefully and make sure you’ve got good risk management and appropriate position sizing. Otherwise you’ll find yourself run over by the herd.

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