The Good News is That When These Crash It Will Have Little Impact on The Overall Market

WSJ reports that brokerage firms are seeing a large increase in new account openings, Many of these investors are drawn in because of interest in cryptocurrencies and cannabis stocks,

Lured by Market Records and Hot Bets, Individual Investors Finally Dive In

Discount brokerages report surging trading volume, particularly among younger clients, in part due to interest in cryptocurrencies and cannabis

After retreating from the market in recent years, investors have piled into stocks in recent weeks. They put $33.2 billion into global stock mutual funds and exchange-traded funds in the week through Wednesday, the biggest inflows for any comparable stretch going back to 2002, according to Bank of America Merrill Lynch. Further demonstrating an increasing euphoria, investors have put almost $258 million combined into 10-day-old ETFs that buy companies that have invested in blockchain, the technology behind cryptocurrencies.

At Ameritrade—among the first to give retail clients access to bitcoin futures—new account openings hit a record at the end of its latest quarter, driven by a 72% rise in new business among millennials. Chief Executive Tim Hockey said in an interview that most of the influx of younger, first-time investors was due to interest in the highly speculative areas of cryptocurrencies, including bitcoin, and cannabis.

“It’s all correlated,” said Mr. Ryan, as the 35-year-old-and-younger crowd wants to get in on the bull market before it ends and is more versed and interested in cryptocurrencies and “pot” investments than older investors.

The head of etrade reportsL

 Mr. Roessner said about a 10th of daily average revenue trades—a key metric for brokerages—has so far this month been blockchain- or pot-related.

CNBC reports

Investors rush into new 'blockchain' ETFs, pouring in $240 million in a single week

• Amplify Transformation Data Sharing ETF leaped to $164.9 million Wednesday from just $2 million a week ago.
• The Reality Shares Nasdaq NexGen Economy ETF multiplied just over nine times in a week to $86.27 million.
• "It is rare for new ETFs to pull in such a large amount of cash," Todd Rosenbluth of CFRA writes in an email, "but there has been pent-up demand for a thematic approach to gain exposure to Blockchain."

I have little doubt that these stocks fall into the category of shooting star" stocks. Stocks that generate lots of buzz and deal with a technology or product with lots of buzz (like cannabis).

And bitcoin, is neither a security, a currency or even a metal regarded as precious for 100s of years..also with an industrial use.

The government of India was the latest to make this clear:

“The Government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system,” Jaitley said Thursday in his 2018 budget speech. “The Government will explore use of block chain technology proactively for ushering in digital economy.”

The news likely contributed to a 6.5% drop in Bitcoin’s value over the last 24 hours, leaving the most popular virtual coin at the $9,625 mark.

Bitcoin, which briefly neared $20,000 in early December, has had a dreadful time since then, partly thanks to regulatory moves against it in South Korea. Its slide made cryptocurrency investors $44.2 billion poorer in January alone.

As for the stock market itself and cannabis stocks in particular...

The comparisons to the tech and dot.com bubble are, in my view misplaced.

The dot,com bubble was characterized by a wave of initial public offerings with the sponsorship of major "reputable" brokerage firms. And these firms at the time did not have a restriction on engaging in research, trading and underwriting of the same securities..and often the research turned out to be merely materila to promote the ipo.. The research and underwriting functions can no longer be combined at the same time. A large propostion of he companies going public in the dot.com boom  had no track record or cohesive business model, profits or even revenues.

In the current environment there has actually been a dearth of ipos. Many of the most highly vallued dot.com type companies such as airbnb,dropbox and uber have not gone public. These companies are "unicorns" valued at $1 billion or more based on their venture capital funding, But they have resisted going public likely because their valuation when they go public would not be at much of a premium if any to their current valuation as private companies.

As for the publicly traded companies...even the top performers Apple Microsoft and Facebook (Amazon is a bit of a different case)they are not only veteran companies. They have large profits, and billions of cash their earnings have strong growth and when bring the cash home will most likely engage in dividend increasses, stock buybacks and acquisitions. In fact some of the largest tech stocks incuding Apple, Oracle, and Intel trade at a valuation discount to the overall market.

All of this is a far cry from the triple digit p/e valuations and large string of ipos of companies with no profits at all and weak business plans that characterized the tech bubble of the late 1990s.

And the investments in these companies are either outside the traded equity markets (cryto currencies) or a tiny part of the market's capitalization (blockchain and canabis). It would take a far larger market capitalization for these stocks for a crash in these sectors to take down te overall market.

In fact given the accelerating earnings growth it is quite likely that the valuation of the market measured by p/e could fall or remain the same even with a single digit gain this year. And a gain of 7 -10% after the double digit gains of recent years shouldnt be disappointing to the long term investor. Those that are late to the party but investing in broad indexes may be late to the party but not necessarily about to take large losses in a market crash.

If the younger investors are opening accounts to buy cannabis and blockchain stocks it could lead to a painful lesson. They are at a time when they could hold a long term portfolio with a relatively large allocation to global stocks. They have time to ride out short term market movements and benefit from the benefits of long term compounding. Instead they are putting what should be money invested broadly through an index instruement into speculative portfolios concentrated in two sectors.